The automotive industry is in a turbulent period, with disappointing shareholder returns and poor return on capital. All of this is happening in the midst of huge transformational pressure brought on by three megatrends of electric powertrains, connected and autonomous vehicles and Mobility-as-a-Service – and exacerbated by uncertainties like Brexit and potential trade wars.
With so much funding required for vital strategic initiatives, it’s time for the automotive industry to reconsider zero based budgeting or zero basing.
The zero basing approach requires all costs and expenses to be reassessed and justified in terms of their contribution to the business’ overall value. Zero basing makes businesses more agile, enabling them to swiftly allocate resources to the most strategically-important areas – rather than burdening them with historic costs related to outmoded activities. In the automotive industry, this can release funds to finance key strategic imperatives such as autonomous electric vehicles, mobility services and connectivity.
To do this effectively, businesses should address five important principles:
- Prioritizing human factors over a technical process
- Focusing ruthlessly on value creation
- Injecting tension into the system
- Tackling attitudes to risk head on
- Focusing attention on driving long-term value from zero basing
Sectors like consumer goods and retail have long embraced zero basing, whereas automotive has been relatively slow in its adoption. Tomorrow’s automotive winners are likely to be those companies that can adapt business models swiftly and reallocate resources to areas of greatest strategic need.