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HOME NRI JOURNAL Digitalization and Corporate Management

NRI JOURNAL

Innovation magazine that generates hints for the future

Digitalization and Corporate Management

Hisao Nakajima, Senior Managing Director

Feb. 19, 2018

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Dealing with digitalization has become a major management challenge for Japanese companies. Especially, the automotive industry faces a serious challenge in handling the “connected car” phenomenon (the digital linking of vehicles to the outside environment to enable new onboard services) and the self-driving trend, and the very survival of auto makers depends on whether they can adapt to these changes.

With Digitalization, the Consumer Needs are “Evolving” Toward Smart Features

Let’s start by looking at digitalization from the customer’s viewpoint. Digitalization significantly accelerates the shift in consumers’ needs from “ownership” to “usage”. NRI’s “Surveys of 10,000 Japanese Consumers (August 2017)” found that as many as 20% of consumers now feel that it’s acceptable for cars to be shared. Of course, some major factors here include the difficulty of finding parking spots in urban areas, and the costs of purchasing as well as maintaining and servicing vehicles. However, another reason is that the popularization of smartphones and the progress of digitalization has made it much easier and cheaper to use services such as car sharing. The average operating rate for vehicles in Japan is only 1.9-2.6% (28-37 minutes per day). By making the unused assets in society reasonably available to others through sharing, digitalization has a considerable power to guide consumers toward the “usage” rather than the “ownership” of such items.

Now then, when digitalization progresses even further, what keyword will we use to describe the needs of consumers in the stage that comes after “usage”? I think “evolution” could well be that word. The president of a Chinese electric vehicle manufacturer whom I met the other day declared that “Telephones made a huge shift from feature phones to smartphones. From this point on, we’ll be seeing a similar transition for automobiles to smart cars.” What he was getting at is that, instead of shopping around before purchasing products that come preloaded with a lot of services and features, consumers are now looking to add the services and features they want after buying a product, so they can customize it as they see fit. In other words, the next stage in consumers’ needs will be the need for “smart” products that are intelligent enough to evolve in line with the user’s desires. This Chinese auto manufacturer is pursuing automotive development with just such a focus, based on the concept of the “smart car” that evolves with the driver.

Companies Must Also “Evolve” Their After-Sales Services

That said, how should the business world respond to the digitalization trend and the changes to the consumer side that it brings? It’s essential for companies to transition from manufacturing models to service-based models, and this is already coming to pass. If the electric vehicle trend continues to grow concurrently with digitalization, automobile makers in particular will find it increasingly tough to obtain added value in the manufacturing field as they have so far. Moreover, as the previously mentioned shift from “ownership” to “usage” ramps up, it will mean a stagnation in vehicle sales. There truly is no time to waste in this situation.

It will become increasingly vital for manufacturers to maintain and deepen their interactions with customers after selling their products, and to earn their revenues through these services. Car manufacturers have already expanded the peripheral services they offer in areas such as maintenance, financing, and insurance options. They’ve also ventured into new services including push-type advertisements and music delivery through automotive-specific media like car navigation systems.

Digitalization offers a powerful tool for making your interactions with customers much more intimate. It makes it possible to gather a wealth of data on the “who, when, where, and how” of driving, and to provide new kinds of value to consumers based on the analysis of that data. An example of this would be pre-maintenance services, whereby your driving history or vehicle condition is used to predict any faults so that timely maintenance can be provided in advance, or telematics insurance, whereby your car is outfitted with a telematics box that predicts the likelihood of an accident and provides customized auto insurance services. Going forward, drivers who take care to drive safely will find their inspection costs and auto insurance premiums go down. These will become services that “evolve” in keeping with the consumer’s own behavior.

The Co-Creation of “Data Assets” Will Be the Key to Realizing Your Strategy

Going forward, a company’s ability to stay competitive will hinge on how many profitable and differentiated “data assets” it has, meaning those which it can amass for itself. Data assets concerning the relationship between driving histories and accidents, as I mentioned earlier, are the sort of information that non-life insurance companies would surely be desperate to get their hands on. It’s conceivable that we’ll see companies emerge which make their revenue by providing these very data assets.

Can these data assets, with their great competitive potential, be created by a single company? And can the development of new services for analyzing such a wealth of data and attracting consumers successively take place in the closed environments of large corporations? From what we see happening in the U.S. and Europe, there are many companies that are not only forming strategic partnerships for effectively “sharing” data among themselves, but are also using open innovation environments for skillfully “co-creating” new services.

Given the global nature of the digitalization phenomenon, Japanese companies will surely need to work on bringing their data standards in line with international standards (something which hasn’t always been their strong suit), as well as strategically pursuing innovation activities that transcend individual enterprises. For Japanese companies, this is a huge challenge that must be met.

 

NRI Research Paper Knowledge Creation and Integration December, 2017 (Japanese)

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Nomura Research Institute, Ltd.
Corporate Communications Department
E-mail: kouhou@nri.co.jp

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