Even with sales continuing to grow after the pandemic-led global slowdown in production, midsize businesses in the automotive sector must navigate a long list of challenges. These include the transition from combustion to electric engines, market demand for smart connectivity features, and a supply chain disrupted by shortages and geopolitical strife. All along the way, they face labor challenges and continual downward pressure on pricing from automotive customers.

Nevertheless, most midsize auto companies are intent on growth, according to recent research from SAP Insights, which found that 88.3% of midsize auto respondents say growth is a strategic priority for their business. To understand the challenges and priorities of midsize companies (companies having 250 to 1,500 employees) SAP Insights gathered 12,003 responses across more than a dozen industries. Of those responses, 854 were from the automotive sector.

A vital question is whether midsize automotive businesses can deliver on the innovation needed to meet their growth goals, as both customer demands and vehicle technology quickly change. According to a recent study by BCG, for instance, profitability from traditional automotive business models is set for a steady decline over the coming decade. More profitable business models will focus on “battery-electric vehicles (BEVs), autonomous vehicles (AVs), the software and components for BEVs and AVs, and on-demand mobility (ODM).” To find success, auto businesses will need to change their business models, as well as products, processes, and technology tools.

Here are six key findings from the survey, reflecting the priorities, challenges, and strategies at play for midsize automotive companies.

1. People and partnerships are key for growth

Automotive companies are counting on talent development and stronger partner networks to reach their growth goals. In the SAP study, development or expansion of skills and talent earned a top-three ranking from the greatest percentage of respondents at nearly 42% and was the most common number-one choice at 13.7% of respondents.

This isn’t surprising considering the labor costs and skills shortages the industry is facing. It also aligns with other research on companies of all sizes in this sector. According to the survey by  Automotive Manufacturing Solutions  (AMS) magazine, “labour issues overtook supply chain disruption as the most pressing obstacle for the industry.”

New talent, knowledge, and skills will be needed to keep up with the fast pace of change in the market, where current trends are often summarized by the acronym CASE, for connected, autonomous, shared, and electric.

Improving or expanding supplier and partner networks is almost tied with skills development as a top-three growth strategy. It ran as a close second behind talent as respondents’ number-one choice, at 13.3%.

Despite some improvements in the materials and components shortages of the past couple of years, supply chain disruptions and weaknesses continue to be an obstacle to growth. In fact, the supply chain was named by 36% of respondents as a top-three growth challenge. By diversifying suppliers, working with partners closer to their home base, or finding suppliers willing to collaborate on aligning plans, auto businesses aim to maintain a more durable supply chain. They may also need to identify completely new partners to bolster their position in a landscape shifting toward CASE technologies and business models.

Increasing systems integration (38.2%) and improving cost control (37.3%) were also top growth priorities. Auto businesses continue to face rising material and component prices, as well as higher energy costs, according to the AMS magazine study. Meanwhile, integrating disparate data sources will be important to discovering the insights needed for strategic decisions, especially as 33.2% of respondents named a lack of integration as a top growth challenge.

2. Change management and resistance to change are crucial challenges

Several data points indicate that the auto industry’s historical reputation of being slow to change is still warranted in places, and entrenched at the people and process levels.

SAP Insights respondents flagged a lack of change management processes, which was named by the largest percentage of respondents as a top-three challenge (37%). This is significantly higher than the cross-industry average of just 30.2%.

Additionally, over one-third (32.2%) of auto companies cited employees’ or managers’ resistance to change as one of their top three concerns.

3. Signals are mixed for product and service innovation

While producing new and updated products and services would seem to be a key factor for growth in this industry, respondents sent mixed signals about their plans for product and service innovation. Automotive companies were 3.4% less likely to cite this as a top priority for growth, compared to other choices (which included expanding distribution channels and partners or expanding existing market presence). Other industries were more likely to rate updated products and services as a priority.

The picture changed somewhat when respondents were asked about their efforts to simplify work and improve processes, which 9 out of 10 respondents (91%) agreed was a pressing need. In this case, auto companies focused on simplifying the processes for developing new products and services, with respondents being 5.1% more likely to cite this as a priority for process improvement than other choices, such as spend management and system integration.

To simplify innovation, however, midsize automotive businesses will need to overcome challenges such as supply chain disruptions, which was named by 38.4% of respondents as a top-three challenge to business and process simplification. They will also need to tackle the lack of quality data for decision-making (35.3% of respondents) and lack of change management processes (34.1% of respondents), among other issues.

Additionally, the number-one challenge cited by respondents for simplifying processes was outdated or inefficient technology systems. A substantially higher percentage of auto respondents named this as a challenge than did cross-industry respondents (13.4% compared to 10.3%).

4. Data and analysis tools top tech priorities

Technology and process always go hand-in-hand. When it comes to which technologies they’d use to simplify work and improve processes, respondents from the auto sector balanced their priorities between new analytics tools (50.8%) and investments in new or updated business software (48.1%). These two technology investments ranked several percentage points above all the other choices.

Significantly, these are the same two technology areas cited by the highest percentage of respondents as the top three technologies for growing the business, with 49.5% of respondents citing analytics tools to support business growth goals and 48.1% pointing to new business software.

For both growth and business process improvement, analytics will play a key role in areas such as understanding customer demand, forecasting and resolving supply chain issues, streamlining quality control, and enabling predictive maintenance, all of which will be vital for succeeding in the new automotive landscape. According to McKinsey & Co., “more than half of new cars sold globally offer some level of connectivity today… By 2030, 95% of new vehicles sold globally will be connected.” With the onslaught of data, automotive businesses will need to be prepared to take advantage of it.

Auto companies are somewhat more likely than other sectors to cite cloud migration as a key technology investment for business simplification and process improvement, with 39.8% of auto businesses citing this as a priority compared to 37.8% for the cross-industry average. This is also true when it comes to prioritizing cloud in order to realize growth goals, with 40.1% of auto respondents naming this as a key technology to support growth compared to 38.5% for everyone else.

This difference could indicate that other sectors have already moved in that direction, with automotive playing catch-up. Continued cloud migration will be essential for auto companies to effectively access, integrate, and use all the data spurred by connectivity, whether in the car or on the factory floor.

5. Environmental effects remains a big concern

Whether due to internal goals or external regulatory pressure, midsize auto companies place a strong emphasis on making products and services more environmentally sustainable. Of automotive respondents, 54.6% rated sustainability as a high priority; this is more than two percentage points higher than the cross-industry average of 52.2%.

Consumer demand for electric vehicles can wax or wane in the short term in any specific country—notably in the United States—but the long-term trend is clear. Electric vehicles sales accounted for 18% of global market volume in 2023, up from a mere 4% in 2020, according to the International Energy Agency.

Still, the transportation sector overall accounts for a large percentage of global greenhouse gas emissions. For example, it accounts for roughly 28% in the United States, according to the US EPA.  The automotive’s intensive use by millions of commuters worldwide may contribute additional pressure on auto companies to reduce emissions and improve sustainability of both products and operations.

While an interest in sustainability spans all industries, it adds another layer of complexity for midsize auto companies, which are already managing technological, supply chain, and operational challenges.

6. AI has potential—but most investments today are focused on efficiency

AI adoption is helping auto companies streamline operations. Given the industry’s issues with complicated processes, this is a positive development. The interest in AI also makes sense given respondents’ desire for better decision-making.

And compared to other sectors,   the automotive industry is a frontrunner in the adoption of AI. The question is whether these companies will be able to go beyond applying AI primarily to efficiency improvements to more radical innovation.

Automotive companies do express a high level of interest in AI’s potential for higher-impact use cases. For example, they rate AI as a high priority for numerous areas, such as enhancing data security and privacy (49.5%), creating new business models and revenue streams (48.5%), enabling more accurate decision-making (48.0%), optimizing supply chain and logistics processes (48.0%), and providing personalized customer experiences (47.3%). In all areas, these percentages were close to or higher than the cross-industry average.

Time will tell which companies will be able to overcome the barriers to change and accelerate their movement toward these larger, more ambitious changes—positioning them to outrace slower competitors.

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