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Automotive Industry Gearing towards Digital Transformation with AI

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Artificial intelligence (AI) has become an integral part of almost every industry, and the automotive sector is no exception. From self-driving cars to predictive maintenance, AI is evolving as a major disruptor in the auto industry, slowly transforming how automobiles are designed, manufactured, and sold. This digital swing is driven mainly by increased competition, consumer preferences for smart mobility, and the benefits of AI. However, AI adoption in the automotive industry is not mainstream yet, with the technology deployed only at the pilot level and in selective business segments. As the world gears toward an era of digital transformation and automation, AI is expected to be part of various business processes in the automotive industry in the coming years.

Artificial intelligence in the auto industry is typically associated with autonomous and self-driving cars. However, the technology has increasingly found its way into other applications over the last few years. Leading auto OEMs are showing an interest in deploying AI-driven innovations across the value chain, investing in tech start-ups, partnering with software providers, and building new business entities.

For instance, a venture capital fund owned by Japanese automaker Toyota, Toyota AI Ventures (rebranded as Toyota Ventures now), with US$200 million in assets under management, invested in almost 35 early-age startups that focus on AI, autonomy, mobility, and robotics between 2017 and 2020. Similarly, in 2022, South Korean automotive manufacturer Hyundai invested US$424 million to build an AI research center in the USA to advance research in AI and robotics. In the same year, CARIAD, a software division of the Germany-based Volkswagen Group, acquired Paragon Semvox GmbH, a Germany-based company that develops AI-based voice control and smart assistance systems, for US$42 million.

Changing consumer preferences, competitive pressures, and various advantages of AI are driving this transformation. According to a 2019 Capgemini research study, nearly 25% of auto manufacturers in the USA implemented AI solutions at scale, followed by the UK (14%) and Germany (12%) by the end of 2019.

There are numerous applications of AI in the automotive industry. Some of the more common and innovative uses of AI include virtual simulation models, inventory management, quality control of parts and finished goods, automated driver assistance systems (ADAS), predictive maintenance, and personalized vehicles, to name a few.

Automotive Industry Gearing towards Digital Transformation with AI by EOS Intelligence

AI-based virtual simulation models used for effective R&D processes

Due to changing customer preferences, increasing regulations concerning safety and fuel emissions, and technological disruption, OEMs are finding it more expensive to make cars nowadays. A 2020 report by PricewaterhouseCoopers says that conceptualization and product development account for 77% of the cost and 65% of the time spent in a typical automotive manufacturing process.

To make R&D cost-effective and more efficient, some auto manufacturers and tier-I suppliers are turning to AI. AI enables the simulation of digital prototypes, eliminating a lot of physical prototypes, thus reducing the costs and time for product development. One interesting concept that is emerging and catching attention in this area is the “digital twin”. The concept employs a virtual model mimicking an entire process or environment and its physical behavior. There are numerous uses of digital twins – in vehicle design and development, factory and supply chain simulations, autonomous driving simulations, etc. In vehicle design and development, digital twins make simulations easier, validate each step of the development in order to predict outcomes, improve performance, and identify possible failures before the product enters the production line.

For instance, in 2019, Continental, a Germany-based automotive parts manufacturing company, entered into a collaboration with a Germany-based start-up, Automotive Artificial Intelligence (AAI), to develop a modular virtual simulation program for its Automated Driver Assistance System (ADAS) application and also invested an undisclosed amount in the company. The virtual simulation program could generate phenomenal vehicle test data of 5,000 miles per hour compared to 6,500 miles of physical test driving per month, reducing both time and costs.

Many leading automotive companies are also looking to utilize this innovative concept in streamlining the entire manufacturing operations. For example, in early 2023, Mercedes-Benz announced that the company is partnering with Nvidia Technologies, a US-based technology company specializing in AI-based hardware and software, to build a digital twin of one of its automotive plants in Germany. Mercedes-Benz is hoping that the digital twin can help them monitor the entire plant and make quick changes in their production processes without interruptions.

General Motors, Volkswagen, and Hyundai use AI for smart manufacturing

Automation processes and industrial robots have been in automotive manufacturing for a long time. However, these systems can perform only programmed routine and repetitive tasks and cannot act on complex real-life scenarios.

The use of AI in automotive manufacturing makes these production processes smarter and more efficient. Some of the applications of AI in manufacturing include forecasting component failures, predicting demand for components and managing inventory, using collaborative robots for heavy material handling, etc.

For instance, General Motors, a US-based automotive manufacturing company, has been using AI-based design strategies since 2018 to manufacture lightweight vehicles. In 2019, the company also deployed an AI-based image classification tool in its robots to detect equipment failures on pilot-level experimentation.

Similarly, a Germany-based luxury car manufacturer, Audi, has been using AI to monitor the quality of spot welds since 2021 and is also planning to use AI in its wheel design process starting in 2023. In 2021, Audi’s parent company, Volkswagen, also invested about US$1 billion to bring technologies such as cloud-based industrial software, intelligent robotics, and AI into its factory operations. With this, the company aims to drive a 30% increase in manufacturing performance in its plants in the USA and Mexico by 2025.

In another instance, South Korean automotive manufacturer Hyundai uses AI to improve the well-being of its employees. In 2018, the company developed wearable robots for its workers, who spend most of their time in assembly lines. These robots can sense the type of work of employees, adjust their motions, and boost load support and mobility, preventing work-related musculoskeletal disorders. Thus, AI is transforming every facet of automobile manufacturing, from designing to improving the well-being of employees.

Companies provide more ADAS features amidst increasing competition

Automated Driver Assistance System (ADAS) is one of the powerful applications of AI in the automotive industry. ADAS are intelligent systems that aim to make driving safer and more efficient. ADAS primarily uses cameras and Lidar (Light Detection and Ranging) sensors to generate a high-resolution 360-degree view of the car and assists the driver or enables cars to take autonomous actions. Demand for ADAS is growing globally due to consumers’ rising preference for luxury, better safety, and comfort. It is estimated that by 2025, ADAS will become a default feature of nearly every new vehicle sold worldwide. ADAS is classified into 6 levels:

Level 0 No automation
Level 1 Driver assistance: the vehicle has at least a single automation system
Level 2 Partial driving automation: the vehicle has more than one automated system; the driver has to be on alert at all times
Level 3 Conditional driving automation: the vehicle has multiple driver assistance functions that control most driving tasks; the driver has to be present to take over if anything goes wrong
Level 4 High driving automation: the vehicle can make decisions itself in most circumstances; the driver has the option to manually control the car
Level 5 Full driving automation: the vehicle can do everything on its own without the presence of a driver

At present, cars from level 0 to level 2 are on the market. To meet the growing competitive edge, several auto manufacturers are adding more automation features to the level 2 type. Companies have also been making significant strides toward developing autonomous vehicles. For instance, auto manufacturers such as Mercedes, BMW, and Hyundai are testing level 3 autonomous vehicles, and Toyota and Honda are testing and trialing level 4 vehicles. This indicates that the future of mobility will be highly automated relying upon technologies such as AI.

Volkswagen and Porsche use AI in automotive marketing and sales

There are various applications of AI in marketing and sales operations – in sales forecasting and planning, personalized marketing, AI-assisted virtual assistants, etc. According to a May 2022 Boston Consulting Group (BCG) report, auto OEMs can gain faster returns with lower investments by deploying AI in their marketing and sales operations.

Some automotive companies have already started to deploy AI in sales and marketing. For instance, since 2019, Volkswagen has been leveraging AI to create precise market forecasts based on certain variables and uses the data for its sales planning. Similarly, in 2021, a Germany-based luxury car manufacturer, Porsche, launched an AI tool that suggests various vehicle options and their prices based on the customer’s preferences.

Automakers integrate AI-assisted voice assistants into cars

Cars nowadays are not only perceived as a means of transportation, but consumers also expect sophisticated features, convenience, comfort, and an enriching experience during their journey. AI enhances every aspect of the cockpit and deploys personalized infotainment systems that learn from user preferences and habits over time. Many automakers are integrating AI-based voice assistants to help drivers navigate through traffic, change the temperature, make calls, play their favorite music, and more.

For instance, in 2018, Mercedes-Benz introduced the Mercedes Benz User Experience (MBUX) voice-assisted infotainment system, which gets activated with the keyword “Hey Mercedes”. Amazon, Apple, and Google are also planning to get carmakers to integrate their technologies into in-car infotainment systems. It is expected that 90% of new vehicles sold globally will have voice assistants by 2028.

Integration and technological challenges hamper the adoption of AI

The adoption of AI in the automotive industry is still at a nascent stage. Several OEM manufacturers in the automotive industry are leveraging various AI solutions only at the pilot level, and scaling up is slow due to the various challenges associated with AI.

At the technology level, the creation of AI algorithms remains the main challenge, requiring extensive training of neural networks that rely on large data sets. Organizations lack the skills and expertise in AI-related tools to successfully build and test AI models, which is time-consuming and expensive. AI technology also uses a variety of high-priced advanced sensors and microprocessors, thus hindering the technology from being economically feasible.

Moreover, AI acts more or less like a black box, and it remains difficult to determine how AI models make decisions. This obscurity remains a big problem, especially for autonomous vehicles.

At the organizational level, integration challenges make it difficult to implement the technology with existing infrastructure, tools, and systems. Lack of knowledge of selecting and investing in the right AI application and lack of information on potential economic returns are other biggest organizational hurdles.

EOS Perspective

The applications of AI in the automotive industry are broad, and many are yet to be envisioned. There has been an upswing in the number of automotive AI patents since 2015, with an average of 3,700 patents granted every year. It is evident that many disrupting high-value automotive applications of AI are likely to be deployed in the coming decade. Automotive organizations are bolstering their AI skills and capabilities by investing in AI-led start-ups. These companies together already invested about US$11.2 billion in these startups from 2014 to 2019.

There is also an increase in the hiring pattern of AI-related roles in the industry. Many automotive industry leaders are optimistic that AI technology can bring significant economic and operational benefits to their businesses. AI can turn out to be a powerful steering wheel to drive growth in the industry. The future of many industries will be digital, and so will be for the automotive sector. Hence, for automotive businesses that are yet to make strides toward this digital transformation, it is better to get into this trend before it gets too late to keep up with the competition.

by EOS Intelligence EOS Intelligence No Comments

Local Sourcing – It’s The New Global Sourcing

Not long ago, the buzz term for the automotive world was global sourcing. OEMs aimed to standardise product offerings and pricing by producing in select emerging countries that offered low production costs. This rendered the supply chain long and complex, but equally justified in the name of cost saving. Recently, however, global sourcing seems to be on the reverse gear, with local sourcing gaining momentum among OEMs globally.

Localisation brings cost-savings across the supply chain, especially in light of climbing costs in traditionally low-cost regions. According to a study by BCG, manufacturing costs in previously low cost sourcing locations like China, Latin America and Eastern Europe that for many years attracted global vehicle manufacturers, are reaching parity with manufacturing costs in developed countries, once productivity, energy prices and currency conversions are factored in.

To continue reading, please go to the original article on Automotive World.

by EOS Intelligence EOS Intelligence No Comments

South Korea – At the Crossroads!

South Korea is the world’s fifth largest automobile manufacturer, behind China, Japan, the US and Germany. Automobile sales in South Korea breached the 8 million units mark for the first time in its history in 2012. The surge was mainly on account of strong overseas demand for locally-made models – exports accounted for 82% of these sales while domestic sales (accounting for the remaining 18%) actually contracted 4.2% to 1.4 million units in 2012.

Contracting domestic demand for local companies is mainly due to lack of real income growth, increased debt repayment burden and slump in the housing market in Seoul Special City (houses are often bought in South Korea for investment purposes). Meanwhile, overseas sales, cars exported from South Korea and vehicles assembled in overseas plants, expanded 7.9% to 6.8 million units in the same year.

The South Korean market is dominated by Hyundai Kia Automotive Group which accounted for 82% of domestic sales and 81% of exports in 2012. GM Korea, Renault Samsung and Ssangyong (acquired by Indian company Mahindra and Mahindra in 2011) account for 10% of the domestic sales while rest of the market is catered to by imports. BMW, Daimler (Mercedez-Benz), VW, Audi, Toyota, Chrsyler and Ford are the leading importers.

Free Trade Agreements

South Korea has aggressively pursued FTAs, with the provisional enforcement of an FTA with the EU from July 2011 and the full enforcement of an FTA with the US from March 2012. In the automotive industry, tariffs on parts and components were abolished as soon as the agreements came into force, whereas tariffs on vehicles will be abolished between South Korea and the EU over a three-to-five-year period and those with the US in the fifth year after enforcement of the agreement.

As a result of the FTA, exports to the EU sky-rocketed and the double-digit growth trend continued until March 2012. However, as the EU economy weakened, exports declined and returned to pre-FTA levels. In case of the US, exports surged around the time of the enforcement of the FTA in March, even though the tariffs on vehicles are yet to be scaled down. This phenomenon was labelled as ‘announcement effect’.

An interesting trend that has emerged is that whereas the domestic sales of South Korean cars declined by about 6.3% in 2012, domestic sales of imported cars increased by 24.6% in the same year. Moreover, for the first time, imports accounted for 10% of domestic sales, which is in sharp contrast to the 2% share about a decade back. European automotive OEMs have benefitted the most from this surge in demand for vehicles. This increased market share for European vehicles is mainly due to the fall in prices; as part of FTA between South Korea and the EU, the tariffs on large vehicles reduced from 8% to 5.6%.

Thus it can be said that while the enforcement of FTAs has been effective in boosting exports, it has brought about structural changes in South Korea’s domestic market.

Labour Strife

After an almost 4-year gap, strikes by the labor union returned to plague automotive manufacturing in South Korea in the summer of 2012. The industrial action, which also hit car parts manufacturers and some other industries, revived memories of the days when strikes were chronic in South Korea. Workers went on strike in 21 of the first 22 years since the unions’ formation in 1987; however, unions’ political influence has dimmed in recent years with declining memberships.

Hyundai, Kia and GM Korea were affected by the strikes and suffered record losses – Hyundai alone is estimated to have lost more than USD 1 billion. The main points of contention were the abolition of graveyard shift, wage increase and to confirming of permanent positions to the high proportion of contract workers. Although the companies agreed to most of the demands of regular workers, discussions with contract workers are still ongoing.

To offset the loss suffered from such strikes, OEMs are diversifying their production bases. Hyundai for one has moved to reduce the dependence on domestic manufacturing plants by expanding production in the US, China, India, Brazil and Turkey during the last decade. South Korean plants accounted for 46% of Hyundai’s capacity in 2011, down from 60% in 2008, when the last strike took place and 93% in 2000. Although another objective for establishing a global production network is to make inroads into the global markets.

Another consequence of strikes is that production costs are expected to shoot up, mainly on account of increased wages and also due to the additional investments that the OEMs will now have to undertake to make up for the reduced working hours per day; along with the abolition of the graveyard shift, another demand of the workers was to reduce the number of hours being worked in the two shifts from 20 to 17 hours.

Currency Uncertainties

The Won has been strengthening against the Yen and the US dollar since mid-2012, increasing production costs while adding to currency conversion losses, as sales in foreign markets translate into fewer Won. This has significantly eroded South Korean automotive OEMs competitiveness; companies such as Hyundai and Kia have consequently ceded market share to Japanese OEMs which are enjoying resurgence on the back of a brightening export outlook.

The Yen is also on a two-year low against the US dollar while the Won was at the highest level against the dollar since August 2011 in January 2013. Toyota can now in principle offer a discount of more than 10% to its US customers whereas South Korea’s Hyundai Motor has to raise the dollar price by over 5% to keep up with the Won.

A December report by the Korean Automotive Research Institute (KARI) states that South Korean export would shrink by 1.2% annually for every 1% drop in the Yen against the Won.

Over the years, the strategy of the South Korean Automotive OEMs has revolved around exports and the companies have established global production network to cater to geographies around the world. However, the recent upheaval in the foreign exchange markets have raised serious doubts about the company’s short-medium term prospects.


With increasing competition from global OEMs both in the domestic and global markets (resulting from FTAs) and currency uncertainties nullifying cost advantages that the Korean car makers have traditionally relied on, it is perhaps time for country’s OEMs to shift focus from quantity to quality – stressing superior design and engineering over sales growth.

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In our fourth discussion in this series, we understand the automotive market dynamics of Turkey. Its proximity to Europe and cultural affinity to Asia has seen a growing presence of both European and Asian OEMs. Is Turkey a long-term growth market for automotive OEMs, or is the market as developed as most western countries?

Part I of the series – Mexico – The Next Automotive Production Powerhouse?
Part II of the series – Indonesia – Is The Consecutive Years Of Record Sales For Real Or Is It The Storm Before The Lull?

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Mexico – The Next Automotive Production Powerhouse?

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As the first of our five part automotive market assessment of the MIST countries – Mexico, Indonesia, South Korea and Turkey, we discuss the strengths and weaknesses of Mexico as an emerging automotive hub, and the underlying potential in this strategically located gateway to both North and South America.

Emergence of Mexico as a major automotive production hub is the result of a series of events and transformations over the past decade. The most important of which is the growing trend among automotive OEMs and auto part producers to have production bases in emerging economies. And the earthquake in Japan in 2011 tilted the tide in favour of Mexico just as ‘near-shoring’ was already becoming a key automotive strategy in 2011.

Automotive production in Mexico increased by 80% from 1.5 million in 1999 to 2.7 million units per year in 2011, largely thanks to a significant boost in investment in the sector.

Between 2005 and 2011, cumulative foreign direct investment (FDI) in the automotive sector amounted to USD10.3 billion. In the last year, several automotive OEMs have initiated large scale projects in Mexico; some of these projects include

  • Nissan – building a USD2 billion plant in Aguascalientes; this was the single largest investment in the country in 2012 and should help secure the country’s position as the eighth largest car manufacturer and sixth largest car exporter in the world

  • Ford – investing USD1.3 billion in a new stamping and assembly plant in Hermosillo, New Mexico

  • Honda – investing USD800 million in a new production plant in Celaya, Guanajuato

  • GM – investing USD420 million at plants in Guanajuato and San Luis Potosi

  • Daimler Trucks – investing USD300 million in a new plant to manufacture new heavy trucks’ transmissions

  • Audi – has decided to set-up its first production facility across the Atlantic in Mexico; with planned investment outlay of about USD2 billion, this move by Audi represents a significant show of trust by one of the world’s leading premium car brands

  • Mazda – building a USD500 million plant in Guanajuato; it has reached an agreement to build a Toyota-branded sub-compact car at this facility and will supply Toyota with 50,000 units of the vehicle annually once production begins in mid-2015

Bolstered by this new wave of investment, Mexico’s vehicle production capacity is expected to rise to 3.83 million units by 2017, at an impressive CAGR of 6% during 2011-2017.

Why is Mexico attracting such large levels of investment from global automotive OEMs? Which factors have positively influenced these decisions and what concerns other OEMs have in investing in this North American country?

So, What Makes Mexico A Favourable Destination?

  1. Trade Agreements – Mexico has Free Trade Agreements (FTAs) with about 44 countries that provide preferential access to markets across three continents, covering North America and parts of South America and Europe. Mexico has more FTAs than the US. The FTA with the EU, for instance, saves Mexico a 10% tariff that’s applied to US-built vehicles, thereby providing OEMs with an incentive to shift production from the US to Mexico.

  2. Geographic Access – Mexico provides easy geographical access to the US and Latin American markets, thereby providing savings through reduced inventory as well as lower transportation and logistics costs. This is evident from the fact that auto exports grew by 12% in the first ten months of 2012 to a record 1.98 million units; the US accounted for 63% of these exports, while Latin America and Europe accounted for 16% and 9%, respectively (Source – Mexican Automobile Industry Association).

  3. Established Manufacturing Hub – 19 of the world’s major manufacturing companies, such as Siemens, GE, Samsung, LG and Whirlpool, have assembly plants in Mexico; additionally, over 300 major Tier-1 global suppliers have presence in the country, with a well-structured value chain organized in dynamic and competitive clusters.

The Challenges

  1. Heavy Dependence on USA – While it is good that Mexico has established strong relations with American OEMs, it cannot ignore the fact that with more than 60% share of its exports, the country is heavily dependent on the US. The country needs to grow its export markets to other countries and geographies to hedge against a downturn in the American economy. For instance, during the downturn in the US economy in 2008 and 2009, due to decline in sales in the US, automotive production in Mexico declined by 20% from 2.17 million in 2008 to 1.56 million in 2009. Mexico has trade agreements with 44 countries (more than the USA and double that of China) and it needs to leverage these better to promote itself as an attractive export platform for automotives.

  2. Regional Politics – Mexico is walking a tight rope when it comes to protecting the interests of OEMs producing vehicles in the country. In 2011, Mexican automotive exports caused widespread damage to the automotive industries in Brazil and Argentina and in a bid to save their domestic markets, both the countries briefly banned Mexican auto imports altogether in 2012. Although, later in the year, Mexico thrashed out a deal that restricts automotive imports (without tariffs) to its two South American neighbours rather than completely banning them, it does not augur well for the future prospects of automotive production in Mexico. One of the reasons automotive OEMs were expanding their capacity in the country was to be able to cater to the important markets in Latin America, particularly Brazil and Argentina. Now the Mexican government has the challenge of trying to keep everyone happy – its neighbours, the automotive OEMs and most importantly its own people for whom it might mean loss of jobs and income.

  3. Stringent Regulatory Environment – The Mexican government, the Mexican Auto Industry Association and International Automotive OEMs are locked in a tussle over the government’s attempts to implement fuel efficiency rules to curb carbon emissions. Mexico has an ambitious target of cutting greenhouse gas emissions by 30% by 2020, and 50% by 2050. The regulations are similar to the ones being implemented in the USA and Canada, however, the association has complained that the proposal is stricter than the US version. Toyota went as far as filing a legal appeal against the government protesting the proposed fuel economy standard. Although the government eased the regulations to appease the automotive OEMs in January 2013, the controversy highlights resistance by the country’s manufacturing sector to the low-carbon regulations the government has been trying to introduce over the past few years. Such issues send out wrong signals to potential investors.

So, does Mexico provide an attractive platform for automotive OEMs? From the spate of investments in the country so far, it seems so – over the past few years, the country has finally begun to fulfil that potential and is now a key driver in the ‘spreading production across emerging economies’ strategy of companies looking to make it big in the global automotive market. However, there are still a few concerns that need to be addressed in order for Mexico to become ‘the’ automotive manufacturing hub in the Americas.

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In our next discussion, we will assess the opportunities and challenges faced by both established and emerging automotive OEMs in Indonesia. Does Indonesia continue to be one of the key emerging markets of interest for automotive OEMs or do the challenges outweigh the opportunities?

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