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The new realities of premium mobility

Several trends are reshaping the premium-automotive market. New research lays out pragmatic actions that can help players craft a winning strategy.

It’s no secret why consumers have been drawn to premium cars for decades. These globally recognized brands project sophistication and style. With precision engineering, sleek design, and well-appointed interiors, their vehicles offer a sublime experience.

Such features have made premium automobiles not only coveted by drivers but also immensely profitable for OEMs: in 2017, this segment made up 13 percent of vehicle sales but 40 percent of profits. Year after year, premium OEMs have waged a battle for dominance in the familiar realms of performance and styling in an effort to delight buyers.

The backdrop is a tightening market environment. Prospects for the premium segment are reassuring in the near term: global growth is forecast to be around 2 percent a year through 2021 before increasing significantly until 2030. However, changing market dynamics are beginning to be felt.

Our latest report, The new realities of premium mobility, sheds light on the seismic shifts afoot. It breaks down the trends that will upend the premium-automotive market and recommends pragmatic actions, relying on our experience, analyses, and industry expertise. This knowledge was augmented with insights derived from a survey of more than 2,000 consumers and interviews with more than 200 experts and executives in the premium-automotive segment across China, Europe, and the United States.

The rest of this article lays out highlights from our research.

Five trends shaping the premium-automotive market

After years of strong sales and steady growth, the premium-car segment is cruising into a bumpy stretch of road. Our research identified five overarching trends that will upend the auto industry in the coming years and force OEMs to respond with decisive action:

  • Divergence across the triad: China, Europe, and the United States. Premium automakers historically have developed models for a global market. However, our research reveals that consumers in the segment’s primary markets—China, Europe, and the United States—vary widely on what they value most in a premium vehicle (Exhibit 1).
  • Premium customers driving digital disruption. Far more than customer journeys in other segments, the premium-ownership journey is increasingly digital, and consumers are engaging with brands through a range of digital channels. The influence of digital has also helped to fuel the appetite of premium consumers for shared-mobility solutions.
  • New differentiating factors in premium. Differentiating premium-car metrics range from Nürburgring lap time to design and connectivity. The rise of electric power trains will turn auto performance, once a distinguishing factor for premium brands, into a commodity. Going forward, superior connectivity and interior design will become decisive factors for premium consumers (Exhibit 2).
  • Brand remains king—but evolves. The concept of a monolithic brand will face challenges from the non-OEM companies behind the proliferation of mobility services, which are beginning to compete directly with OEMs on brand. In addition, OEMs that add more products, services, and partnerships will be challenged to maintain their brands amid increasing complexity.
  • Driving disruptive force: regulation. In markets around the world, governments are establishing more stringent emissions standards. At the same time, the rise of autonomous vehicles is forcing elected officials and policy makers to implement regulations that balance consumer adoption with public safety.
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How players might respond

Collectively, these trends are forcing premium OEMs to reevaluate every facet of their approaches to auto design and manufacturing. Incumbent OEMs are well placed to unlock new opportunities and bring innovation to their strategies. In this shifting environment, we believe several areas hold the key:

  • Know and embrace your customer. With market growth for premium cars slowing down and partially stagnating, premium OEMs have to find new opportunities in smaller pockets of growth to continue their success story. This, however, means that they will need to innovate their offers along three dimensions. One, they will need to find new ways to address granular customer needs and create demand without always adding massive product complexity with the new, costly product derivatives. Two, they will need to widen their spectrum from being a sheer car manufacturer to being an end-to-end premium mobility provider that is able to address widely differing customer needs. And three, they will need to rethink their relationship to customers, from primarily focusing on one-time transactions toward becoming a relevant partner in a true lifetime relationship with continuous interactions beyond servicing the car. If premium OEMs are able to do this, they will tap new opportunities for growth and profitability. And to do so, they will need to step-change their understanding of customers and complete a mind-set shift from driving their business from an engineering lens toward challenging the way of doing business through a true customer lens.
  • Be agile. Flexibility and agility in design, engineering, and manufacturing are critical to reduce time to market and adapt to changing consumer preferences. Given the different pace of advancements in car manufacturing and technology, traditional manufacturers in the premium space must embrace agile principles to synchronize the widely disparate development times of vehicles and connectivity services.
  • Strengthen and differentiate the brand. The future role of brands for premium OEMs cannot be overemphasized. With sheer product differentiation becoming more and more difficult with the advent of electromobility, and brands becoming more and more stretched through mobility offers, premium OEMs need to overinvest in their brands and translate their brand essence into all elements of their offer. As our research has shown, customers are willing to “fight” for their brands even when using third-party mobility providers. Yet this preference for the brand needs to be nurtured constantly across all customer segments, including the increasing segment of noncar owners, so OEMs need to double down on developing a clear “brand design language” that includes signature elements that can be found across all mobility offers. Finally, with the increasing number of offers and the multitude of available channels, OEMs need to implement rigid brand monitoring and management to keep the brand promise across offers and channels.
  • Become a premium-mobility provider. As mentioned earlier, OEMs can generate additional value from mobility by focusing on service-based business models that provide access to a pool of vehicles. The key will be to leverage the desirability of their products, as well as to provide a premium experience to keep third-party mobility providers at a distance and make demand for the products so distinctive that the success of premium mobility providers will depend on offering the OEMs’ products. Beyond the sheer offer aspect, OEMs should also leverage their ability to generate distinctive insights about customer behaviors that inform the development of high-potential services and how to monetize them. To do so, OEMs will have to embrace a larger and more complex ecosystem that involves technology partners and other third parties.

Premium OEMs need to rethink their approach to develop the right products and services for the right customers in the right places. The most successful automakers will commit to the belief that the sale of these products and services is just the beginning of a long and valuable relationship with their customers, supported and sustained by software-enabled customization and a superior end-to-end customer experience.

Download The new realities of premium mobility, the full report on which this article is based (PDF–1MB).

About the author(s)

Jan-Christoph Köstring is a senior partner in McKinsey’s Munich office, where Andreas Tschiesner is a senior partner; Simon Middleton is an associate partner in the London office; Timo Möller is a partner in the Cologne office; and Asutosh Padhi is a senior partner in the Chicago office. The authors are members of the McKinsey Center for Future Mobility.

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