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Manufacturers rethinking the meaning of 'premium'

January 24, 2020
As the automobile industry undergoes major shifts in coming years, manufacturers will have to rethink their definition of "premium," according to McKinsey, a business consultancy keeping tabs on trends in the industry and the emerging mobility sector.
 
Ben Ellencweig, a New York-based McKinsey partner specializing in mobility, said the definition of premium is expending beyond the product to include features such as connectivity, the retail experience and how service is provided. Looking ahead, it likely will include access to other mobility services.
 
Customers for premium services will be treated differently, he predicts, as manufacturers and dealers work to create services that meet all their mobility needs.
 
The changes in the automotive sector are being driven by several long-term trends: urbanization, regulatory actions that are placing tighter controls on vehicles, new technology and a revolution in consumer expectations, Ellencweig said Jan. 14 during a McKinsey presentation to the Detroit Automotive Press Association.
 
Eighty-eight percent of executives surveyed by McKinsey agree some manufacturers and suppliers will disappear by 2030 amid industry disruption, but even that view may be too complacent. More will need to be done to prepare for future changes, he said.
 
Ellencweig said connectivity and design are the new benchmarks for luxury, especially for navigation over short distances. Premium customers want vehicle communications with smart roads and traffic services, as well as the ability to communicate with other vehicles, integration with smartphones and full integration with media subscription services.
 
Exterior and interior styling are top differentiators for manufacturers and consumers alike. The greatest values are interior functionality, space and human-machine interfaces, all of which will play major roles in differentiating vehicles and winning customers, Ellencweig said.
 
Though powertrain remains one of the top three differentiators, non-classic features such as battery performance are becoming more important.
 
In a challenge to traditional notions of brand appeal, 40% of premium customers say they would switch brands to gain better connectivity.
 
As dealer profits face increasing pressure, parts and services will be critical to dealers’ economic viability. Franchise parts and services businesses should be aware of new digital players with aggressive price points. Online sales represent a growing share of the $54 billion auto-parts market, Ellencweig noted.
 
Inga Maurer, a McKinsey partner based in Chicago who consults on mobility issues, said the increasing popularity of electrified powertrains will significantly impact dealer repair work. But dealers can take advantage of increasingly available vehicle data and sell upgraded maintenance services.
 
Used-vehicle sales likely will become less profitable for dealers because of intense competition from online services, she said. At the same time, captive-finance companies are becoming more active in the used-car market as cars that are one to four years old become more popular in reaction to the rising price of new vehicles.
 
Dealers and manufacturers struggling with the question of residual value are looking for more accurate data, which could help free up more financing for used vehicles.
 
Maurer also said one issue the mobility sector will have to face is cities taking greater control of their road networks through tighter regulation in a bid to control congestion.
 
McKinsey studies indicate the amount of time spent commuting could increase 10% over the next decade, putting more pressure on regulators.
 
"Cities have to come to terms with regulations when there are too many vehicles on the road," said Maurer, who notes Chicago is limiting the number of ride-sharing vehicles operated by companies such as Uber and Lyft in the center of the city.
 
 

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