The automotive industry is in the midst of a profound transformation.
Driven by the rapid shift to electric vehicles (EVs), evolving customer expectations, reduced revenues and margins, supply chain vulnerabilities, and increasing regulatory demands, the sector faces unprecedented disruption.
Major automakers are recalibrating their strategies to navigate these challenges while preserving profitability and fostering innovation.
At the center of this transformation is the Chief Financial Officer (CFO), whose role has expanded beyond traditional financial management to encompass strategic leadership in tackling these disruptions.
At the same time, the aftermarket is stepping forward as a major player in this transformation effort. No longer just an afterthought, it’s a powerful new source of business value in its own right that can deliver new revenue streams and also powerfully deepen customer relationships, satisfaction and loyalty.
In this blog, we will explore 5 major challenges the CFO faces in the coming time of disruption and transformation and how new, strategic aftermarket approaches can be a powerful support.
1. Shrinking margins due to pricing pressure
A combination of high inflation, a flood of Chinese-built vehicles entering the market, and increased financial incentives to encourage consumers are starting to significantly erode profit margins.
Ford’s CFO, for example, has stated that he expects a 2% decline in industry pricing in the second half of 2024 due to increased incentive spending. And Tesla has noted how they had to launch “attractive financing options to offset the impact of sustained high-interest rates”.
CFOs are facing pressure to protect margins while maintaining customer value and experience. A tricky proposition!
Suggestion: leverage AI and demand forecasting to optimize prices, margins, and inventory
AI and predictive forecasting are powerful tools for wringing extra profit and margin out of your existing workflows.
AI-driven pricing strategies can automatically take into account market demand, competitor pricing, historical data, customer behavior, and many other variables in order to optimize prices for maximum margin and profitability with incredible accuracy. In this way, optimizing aftermarket spare parts pricing can significantly alleviate pressure on margins.
Businesses that leverage AI-driven parts pricing find they are able to automate up to 80% of pricing workflows—saving time and energy—and see an uplift in profit of 5-10%.
AI can also be used to optimize inventory management, using historical data to predict future demand and automatically optimizing inventory levels to reduce the costs of carrying excess stock, stockouts, and last-minute emergency orders.
Syncron customers have found an average reduction in carrying costs of 40% as well as a 20% increase in parts availability.
By utilizing real-time data in this way, you can ensure optimal profitability, cost reduction, and risk management—regardless of changes in demand, supply or market conditions.
2. Rising production costs and intense competition in EV market
The EV market continues to grow, accounting for 25% of new car registrations worldwide in 2023.
In this market, European luxury automakers are facing severe challenges due to increasing competition from Chinese EV manufacturers, supported by new Chinese government subsidies for EVs. These incumbent manufacturers are reporting significant declines in EV sales from 10% to even up to a third, while China’s new electric vehicle sales, by contrast, captured 52% of the market in November 2024.
At the same time, the average selling price of a new vehicle is falling. In Ford’s Q2 earnings call, the company stated the need to “match the cost of the Chinese OEMs and Tesla, especially on affordable EVs”.
The pressure is on automakers to respond. Several major automakers have announced significant production facility closures, workforce reductions and salary cuts as part of a significant restructuring to remain competitive while it restructures towards EVs.
But what other options are there?
Suggestion: pursue competitive advantage further down the value chain (i.e. the customer experience)
As we have seen above, leveraging AI to optimize prices, margins and inventory can create powerful results. But you can go further.
You can use the extra profits from those optimizations to fuel longer-term strategies. Specifically, taking advantage of fresh sources of competitive advantage further down the value chain, closer and closer to the customer.
By focusing on delivering a seamless, stress-free customer experience, you can differentiate yourself and drive a level of customer loyalty that goes beyond price alone.
This means offering opportunities to deliver exceptional service when customers need you most: rapid repair turnarounds, high availability for spare parts, quickly responding to claims on warranties, offering replacement vehicles and so on. The opportunities are endless.
This is where the aftermarket can be a massive boon to drive up lifetime customer value and reduce price elasticity: not just selling parts but providing an experience that means that customers will come back to you time and time again. Even when it’s more expensive than going to a competitor because they trust your brand and value the experience they receive.
3. Supply chain vulnerabilities and disruption
Supply chain disruptions, ranging from semiconductor shortages to logistical delays, have underscored the fragility of global production networks.
Inflationary pressures further exacerbate these challenges, driving up material and transportation costs. One major automaker cited “a difficult operating environment” as a reason for poor quarterly results—alluding to supply chain difficulties—while another is experiencing cash flow difficulties due to a “force majeure at a supplier plant”.
CFOs are pivotal to addressing these vulnerabilities through enhanced cash flow management, strategic scenario planning and closer integration with operational teams to better respond to unpredictable market conditions.
Suggestion: AI-driven inventory management, end-to-end supply chain visibility, and scenario planning
Aftermarket operations can enhance supply chain resilience in three main ways.
Firstly, leveraging AI to optimize inventory management. Predictive analytics and real-time monitoring can predict demand for different parts, accurately managing the parts lifecycle to avoid stockouts, running marketing campaigns to clear excess stock and aging items, and leveraging automation to improve cost efficiency. With accurate demand forecasting, you can also avoid costly last-minute orders and expensive expedited shipping.
Secondly, you can increase end-to-end visibility from suppliers through your own operations and onto your dealers and end customers. With a single system—and portals to include these key stakeholders—you can facilitate communication across the supply chain, integrating dealers and suppliers into planning decisions to better align incentives and goals.
Thirdly, leverage AI-driven scenario planning by running sophisticated simulations of different market conditions to predict and prepare for disruptions and to forecast the impact of strategic responses to optimize responsiveness.
4. Declining revenue from traditional service models
The growth of EVs is significantly impacting service revenues for major automakers.
Traditionally, service revenues from Internal Combustion Engine (ICE) vehicles—maintenance, spare parts etc.—constitute around 20-25% of profits for large manufacturers. And EVs boast simpler and more reliable mechanical systems that require less maintenance and threaten to reduce this revenue stream by 40-60%.
Automakers have to respond by evolving their services in new directions to sustain profitability as the EV market grows.
In this context, the CFO plays a strategic role in terms of their capacity to evolve business models and direct investments towards technologies that unlock sophisticated new service approaches.
Suggestion: end-to-end real-time, data-driven, value-based services
The aftermarket is bursting with opportunities to deliver new high-margin, customer-centric services.
By leveraging advanced data technologies, such as AI, businesses can unleash much more sophisticated aftermarket strategies across the board—unlocking powerful new service-based business models.
Here are a few examples:
Leasing or Equipment-as-a-Service (EaaS): businesses can move towards business models based on leasing, rather than ownership, or even EaaS where customers pay for outcomes (e.g. uptime) rather than equipment—establishing substantial recurring revenue.
Warranty management: this function can be transformed from a cost centre into a source of revenue by enabling more complex services, such as extended warranties; a smooth warranty process also deepens customer loyalty and satisfaction.
Supply chain optimization: even as traditional service revenues fall, higher margins can still be squeezed out of what remains by optimizing prices, streamlining repair and maintenance and ensuring dynamic supplier cost recovery.
Customer-centricity: by leveraging AI to improve the customer experience as a whole, manufacturers drive customer loyalty, which makes the brand less susceptible to competition on price.
Data-driven services: transition from focusing on spare parts to delivering connected services, such as over-the-air software upgrades, digital platforms and diagnostics.
5. Increasing pressure to meet ESG and regulatory standards
Environmental, social and governance (ESG) priorities are growing rapidly in importance. And CFOs are now tasked with ensuring compliance with a swath of regulations while embedding sustainability into financial and strategic planning.
Meeting carbon reduction targets and regulatory requirements demands significant investment in sustainable practices, from production to end-of-life recycling.
Suggestion: circular economy principles and optimizing logistics
The aftermarket can play a key role in promoting sustainability and compliance.
By shifting to a business model that relies more on value-based services rather than cost-plus equipment, this opens the door to shift manufacturing from waste-generating ‘take-make-dispose’ logic and towards a value-generating ‘closed loop’ model.
In this way, businesses can start to embrace circular economy principles. For example, through remanufacturing and refurbishing parts to reduce waste and extend product life, or by offering advanced predictive maintenance services.
Similarly, data-driven inventory management can use accurate demand forecasting to ensure optimal part placement and reduce CO2 impacts by optimizing logistics and shipping.
With streamlined inventory management there is much less need for more CO2-intensive emergency orders, which are often shipped by plane instead of boat or train.
End-to-end visibility also enables transparent ESG reporting on aftermarket operations in order to demonstrate accountability and support compliance.
How to unlock aftermarket profits
The key to profitably adapting to these new aftermarket approaches is strategic investment in new technologies, especially data, analytics and AI.
In the past, advanced aftermarket strategies have been held back by inadequate data and limited analytic tools that could only handle so much complexity and risk.
Now, however, you can leverage the power of data to improve, automate and scale your decision-making and risk management. Here are three things you need to have in place to unlock these new service revenues:
End-to-end platform:
A cloud-hosted platform facilitates data sharing within the company and across boundaries to unlock data silos
Single source of truth for trustworthy data:
Ease of accessing and combining data from different sources (databases, sensors, logic controllers) enables you to leverage AI and analytics to find insights and opportunities at the crossroads of multiple datasets rather than only from a single one
Machine learning and artificial intelligence:
The engine room of your new business models is being able to leverage machine intelligence in order to do the heavy lifting around calculating risk, optimizing operations, predicting trends and simulating scenarios.
Conclusion
Automotive CFOs clearly face big challenges, but these also hide within them even bigger opportunities—opening up new sources of competitive advantage and revenue growth.
What’s needed is technological investment in data-driven platforms that can streamline operations, enable complex risk calculations and create the end-to-end control, visibility and transparency needed to unlock powerful, value-based and customer-centric business models.
And this doesn’t mean ripping out and replacing your entire tech stack. In our recent research report (Modernizing The Aftermarket) we found that 98% of CIOs and CFOs “strongly” or “slightly” agree that they want a tech solution that is modular and enhances their existing platforms.
Options exist for modular technologies that can be bolted onto your existing tech stack to enhance your processes, without wholesale transformation of your IT estate. And ensuring you get a rapid return on your investment so you can soon start seeing costs fall, margins rise and stress levels drop!
Find us on LinkedIn