A few of Ford Motor Company’s recent recruits are a good indication of where the legacy auto company is headed. The hirings of former Apple and Tesla execs lay bare the company’s ambition to move away from internal combustion engines (ICEs) and to electric vehicles (EVs) – and even more so, to a technology- and software-focused company. Ford’s head, Jim Farley, says the changes he’s implementing – such as developing a new EV platform for release in 2025 – are “not an EV revolution” but instead are “a digital shift to a digital product.”

But already in 2024, the company has cut back production of their flagship electric truck, the F-150 Lightning, because of lower-than-predicted demand.

In their cohort of older original equipment manufacturers (OEMs), Ford is far from alone in struggling to remake its business.

The automotive industry can be divided into two eras: Before Tesla and During Tesla. That’s a reflection of how much has changed in auto-land in the past two decades. Consumer buying habits, vehicles technology, and mobility options – Uber, car sharing, e-bikes – have all changed, and Tesla stands as the leading example of how automaking and marketing are also changing. As a vertically integrated, direct-to-consumer (DTC), native electric company, Tesla is currently the most valuable vehicle manufacturer in the world. Its valuation in 2023 rose to as much as three times that of Toyota – long in the top spot, but now in second place – despite Toyota selling roughly five times as many cars as Tesla in the first half of that year. Farley noted that Ford’s current distribution model costs an estimated $2,000 more per vehicle versus Tesla’s integrated approach, with most of that extra cost attributed to advertising and inventory.

For traditional automakers, as Ford’s experience shows, keeping up has been a challenge. The fragmentation of every step of the old-school process, including the relationship structure between OEMs and dealers, means siloed systems and data, which hamper automakers’ abilities to adapt and compete.

Thriving in this new era of electrical vehicles and other modes of transportation requires new ways of making, selling, and servicing cars. Accepting these changes first and foremost means getting a better handle on the data. With that data, they’ll be able to make informed business model choices, streamline production, understand who is buying their product and why, and how it’s being used. Oh, and of course, all of that will add up to making more money. Making these changes won’t be easy, but there are strategies to make it more efficient.

Stuck in neutral

In the United States, the traditional dealership system hasn’t changed much over the years from what’s considered to be the first-ever dealership in Detroit in 1898 to the legal morass that exists today. Florida, for example, recently banned DTC sales, but only for legacy automakers; non-dealership brands are allowed. Adherence to this model differs around the world. For example, many Asian countries, such as Malaysia, have long allowed direct sales; Japan sees a mixed model, with OEMs owning varying stakes in dealerships. But for the largest Western brands, changing the established, independent dealer-distribution model has been challenging.

In the late-2000s, Tesla rolled up with its completely owned DTC sales model, with fixed prices and Tesla-employed sales staff. It’s a streamlined, vertically integrated operation in which Tesla has access to all the data about all their vehicles and customers.

Other upstarts in the automotive space, such as electric truck pioneer Rivian and China’s fast-growing BYD, are also DTC. DTC auto companies don’t work with independent dealerships, so they don’t have that extra dealership margin on top of the cost. They have stores (Tesla), “hubs” and “spaces” (Rivian), and “studios” (Lucid) – all names for brand-owned places where vehicles are displayed. Plus, they have data.

“That ownership of the customer experience, it’s the ownership of the customer preferences, the demand profiles, patterns, the market insights,” says Neil Ganguli, senior managing director at U.S.-based FTI Consulting.

Not that Tesla is without its own challenges and, to be fair, it did start up in a vastly different auto environment in which it was almost the only game in town for a premium EV, points out Steve Young, managing director at UK-based automotive consultancy ICDP. Young says the comparison between old and new isn’t fair. Tesla had a cost advantage because it was spending less money – on advertising, for example, and as much as $35 less per employee hour in labor costs, according to reports. But for years, it also lost money on each vehicle sold. Tesla’s competition has increased even as the company added capacity, Young notes, leading to price discounts, lower third- and fourth-quarter 2023 earnings, and a big market capitalization hit. Then there was that end-of-2023 recall of almost all Teslas sold in the U.S. to address autopilot problems.

Nevertheless, Tesla owns the customer data and, in that vital regard, older companies are playing catch-up. OEMs don’t have the “muscle memory, this is not DNA that they have already,” Ganguli says, whereas the newer automakers have DTC built into their standard operating procedures and are strategizing completely differently. “Their systems, their processes, their governance are wired that way. There is no legacy and changing the mentality and needing new skills,” he says.

To illustrate the extreme silo-fication conventional OEMs must combat, consider the issue of sales incentives.

Anyone who’s shopping for wheels is aware of incentives for lease or purchase. Auto companies budget billions of dollars every year for those incentives, which are often stacked (i.e., offered one on top of the other). OEMs lacking full visibility across the sale process may end up selling the car at a loss and not even realize it. And they don’t understand the customer network because they don’t have access to the data about their customers. But the dealerships do.

OEMs making gas vehicles also have the pressure of EV deadlines in several states in the United States, in Canada, and in the EU, where most countries are mandating 100% EV new car sales by 2035. So they’re adopting aggressive changes to transform their businesses into leaner, meaner, greener machines that can compete with Tesla and its DTC kin.

• Volvo is going all in with a full DTC sales model like Tesla’s, starting in the UK, to be followed by Sweden, then other European countries.
• Volkswagen’s parent company, VW Group, is aiming for major operational changes to improve competitiveness.
• GM wants to be considered a tech company – a refrain heard from CEO Mary Barra as early as 2018 – by providing software platforms and more EV models.
• Ford’s Jim Farley, speaking at a June 2022 strategy conference, also said, “We’ve got to go to non-negotiated price. We’ve got to go to 100% online … no inventory, it goes directly to the customer, 100% remote pickup and delivery.”

Unfortunately, inefficient infrastructure and systems mean they’re driving uphill.

Tech in park

Underpinning these business model challenges is a high degree of technical debt. OEMs are relying on decades-old technology systems that are on their last legs – if they’re walking at all.

“The issue is that the legacy manufacturers have got legacy – it’s in the label,” as Steve Young puts it. Legacy covers a lot of ground in this case: products, production equipment, distribution agreements, and IT systems. “They’ve got existing networks, they’ve got combustion engine product lines still and they need to have them because that’s what’s funding their EV development, and still what consumers want to buy,” says Young.

And buying trends, changed by e-commerce and accelerated by the pandemic, have meant an increase in the number of car and truck buyers who are fine with doing the entire transaction online. Instead of wandering through a dealer lot to see what’s available, shoppers do their research online, test drive one or two of the best options, then go back online to configure and finalize the sale, notes Peter Wells, professor at Cardiff University’s Centre for Automotive Industry Research (CAIR). “They know what they want; they don’t need to be ‘sold’ in that sense. And I think a lot of U.S. dealerships are still selling,” he says.

“It’s going to be more and more prevalent that, at least for software-defined vehicles (SDVs), sales are going to be more DTC-oriented," says Ganguli, noting that SDVs are basically computers with wheels, which supports a simpler buying process: the customer chooses a few options and that’s it, because a single car can be customized, and later upgraded, quite easily via software updates. It’s the proverbial win-win: simpler for the customers, much more efficient for the OEMs. According to Wards Auto, the only established automakers that are making a showing in that regard are Mercedes-Benz, Volvo, and BMW. When OEM systems can’t meet customer expectations, or keep up the pace of software development, it leaves the door open for even more competition. Even Amazon is getting in on the act with a recent agreement to sell Hyundai cars through Amazon.com.

Driving modernization

To keep up, automakers must speed up the modernization process, taking better advantage of the data they have while making changes to get their hands on more. They will need to take simultaneous steps in changing internal processes and IT systems, while exploring options for new distribution models. The following are key ideas and options in each of these areas.

Change strategies

Put change management first

Auto companies might think modernizing is an IT project, says Steve Young, but that’s the wrong approach: it’s really a gigantic change-management project. Large, outdated legacy systems can’t be changed at the flick of a switch, he says, and neither can the behaviors of thousands of employees across OEMs and dealerships. “To get that degree of data and process integration and the alignment of objectives, the alignment of goals, the lines of thinking, is a huge change-management program,” he says.

Prepare for privacy and the Right to Repair

“It’s Official: Cars Are the Worst Product Category We Have Ever Reviewed for Privacy,” is the title of a Mozilla Foundation 2023 vehicle privacy report. There’s a massive amount of data being brokered back and forth between the vehicle and the OEM, and there are no fully developed privacy standards applicable to this data yet. OEMs will need to make this issue a priority so changes to systems and dealer models don’t run into roadblocks later on.

Vehicle data is also part of the conversation around the Right to Repair Act. Currently, repair data is completely separate from vehicle data, which includes personal info such as driver behavior, subscription choices, and connected cellphone data, along with more general data such as road and weather conditions. Dealers have their own systems to get data, and OEMs have theirs.

Additionally, vehicle data needs to be available to independent repairers so they can fix a vehicle. In the U.S., if a repairer isn’t sponsored by an OEM or OEM certified (which is expensive for the repair shop), they won’t have that data. In Europe, they have the right to that data, but that doesn’t mean they’re able to get it easily.

One solution is to create applications that keep personal data and vehicle performance data entirely separate. Then privacy considerations for the former won’t impede upon using the latter for maintenance.

Change technology

The one-application-at-a-time approach

This method means building around the exterior of existing technology systems. Companies first identify specific problems, then those problems are separated and updated. That way, particular processes can be modernized without disturbing the integrity of the remaining legacy environment, which can shuffle along until all of it has been replaced or retired.

This cautious approach results in a long path of interoperability between old and new, but it’s the most cautious approach. On the other hand, it buffers – but doesn’t really reduce – legacy technology. The idea is that it will see itself out eventually.

Nobody’s doing wholesale revamp, says Ganguli, but they are milking their legacy technology. “[They’re] harvesting it until it’s not needed, and then building this new capability on the back of the new business,” he says.

The greenfield approach

Another option OEMs can choose is the greenfield approach, which is treating a new plant – for EV batteries or semiconductors, for example – like a startup, where they can build new systems and experiment with new operating models.

In this way, companies reduce their technical debt not by rewriting old systems, but by gradually making them less of the overall portfolio as new assets come online. Unlike the one-at-a-time approach, integration with older systems is minimized. It’s a gradual approach, but reduces the risk associated with turning off manufacturing lines and systems to do hard switchovers.

In a variation of this idea, some OEMs are increasingly partnering with specialist companies, not just for automotive parts but for software components and platforms. They won’t own the entire vehicle ecosystem, and farming some of that out is a quicker path to modernizing.

“They do need to keep a foot in both camps – the ICE world and the EV world – for at least some time to come,” says Young. “I think that the way to handle the ICE world as that declines within their total portfolio is probably more through joint ventures and alliances.”

Explore dealership and distribution models

Dealers as service centers

Because of the steady increase in DTC sales, the data roles of the OEM and the dealership will likely be switched. The dealer will be the customer-facing contact, but the OEMs will have the data, which it will share (or not) with their dealer network, says Young.

Ganguli notes that disruption is inevitable and expects some dealerships will close up shop. There will be a bifurcation, he says; sales and advertising will happen at OEM-owned showrooms, and former dealerships will operate mostly as independent service centers.

The fee-based agency model – which means a single fixed price and a fixed dealer fee for every car – is gaining some popularity, particularly in Europe. But it also has a data problem, says Young. The OEMs don’t have the skills or relationship with customers to customize deals, he says, so they end up painting with a very broad brush in terms of promotions, incentives, and customer communications. “Everybody gets $5,000 off, but actually half of them would have bought with $1,000 off,” Ganguli offers as an example.

“Dealership salespeople today are practicing dynamic pricing on a deal-by-deal basis, pitching an offer at the highest [price] level they think the customer will accept.” Under the agency model, OEMs take on that responsibility, but will be challenged to do a better job than the dealers – without the benefit of being face to face, he says.

Dealerships-as-a-service

This isn’t necessarily a bad thing for dealers, however. Consider the EV: compared to the thousands of moving parts in an ICE vehicle, EVs have just a handful. A Tesla car, for example, has about 24 parts – total. While that means less work and money for maintenance, EV repairs could be more expansive and expensive. According to a joint SAP/Reuters report, The Dealer of the Future, almost half a dealer’s revenue already comes from service and parts.

“This is a case where tighter alignment between OEM and dealer could benefit both. If OEMs can share connected-car data on performance with their dealers, dealers could offer predictive maintenance to their customers before a fault or breakdown occurs,” says the report.

And, ironically, this is also a case in which old meets new: GM dealers have been repairing Teslas. If vehicle data is portable, as suggested by the Right to Repair discussion, then dealerships may become less obligated to a single automotive brand and may switch allegiances or add new brands in a fluid manner.

Driving into the future

How the industry will shake out is very much still to be determined. As car brands plan for the future, sustainability is, of course, a prime consideration. Volkswagen, for example, is aiming for a complete circular strategy, says Peter Wells of CAIR. The company’s goal is to maintain ownership of their cars beyond the first lease term and through the vehicle’s entire lifecycle – from manufacturing through to sales, aftercare, and beyond. At the end of a vehicle’s usefulness, it gets deconstructed – also by Volkswagen.

“What the Volkswagen Group is currently trying to do is basically own the circle,” says Wells. “They’re trying to control the entire lifecycle of the vehicle. That’s a huge kind of data exercise there because they’ve got to track those vehicles.”

Digital twins, autonomous vehicles, networked roadway infrastructure, even flying vehicles – whatever current or future technologies you can envision, odds are someone is exploring it.

“The underpinning technologies are changing really fast,” Wells says. “That’s an extra layer of uncertainty on top of the global restructuring that’s going on. And so you have this perfect storm of electrification, digitalization, and global restructuring, and a huge uncertainty as to the future kind of role of the car in our lives.”

Better collection, use, and sharing of data is the way forward for all automotive companies. The old-school OEMs need to address their data deficiencies to be competitive in this new world. And they need to step on it.