Digital Paradox: Unlocking Auto Industry ROI

• New research reveals digitalization in the auto industry boosts asset efficiency immediately but takes over two years to impact profitability.
• Patience and employee training are key to unlocking long-term financial returns.

The long-standing economic paradox of digitalization, where organizations invest heavily in new technologies but fail to see anticipated returns like increased productivity or savings, has puzzled experts for years. However, a recent international research collaboration is shedding light on this phenomenon. A team comprising researchers from Babeș-Bolyai University in Cluj-Napoca, Corvinus University of Budapest, and Aalborg University in Denmark has delved into the intricacies of digitalization’s financial impact, specifically within the intensely competitive global automotive industry. This sector, characterized by its relentless pursuit of innovation, offers a prime environment to study the effects of technological adoption.

Short-Term Efficiency, Long-Term Gains

The research team meticulously analyzed the financial implications of digitalization initiatives across 54 major and successful automotive companies over varying timeframes. Their recently published findings reveal that the impact on profitability does not materialize even within a two-year horizon. However, the efficiency of asset utilization shows a significant and almost immediate increase. A mere one percent rise in digitalization can boost the turnover rate of tangible assets by over half a percent. This suggests that while companies increasing their digitalization efforts experience tangible operational improvements quickly, they should anticipate a longer wait for improved financial returns overall.

“Our data indicates that when investing in new technologies within the automotive sector, company leaders need to exercise patience,” stated Krisztina Demeter, a professor at Corvinus University and head of the research team. She explained that the financial returns from digital technologies, particularly the latest innovations, typically become apparent only after at least two years. Demeter emphasized the importance of a sober and cautious approach to digitalization investments. She also highlighted that such investments might be driven not solely by financial returns but also by other factors, such as competitive pressures or partner expectations.

Strategies for Profitability Enhancement

The researchers propose two key recommendations to help accelerate the return on investment from digitalization. Firstly, companies must prioritize ensuring that employees acquire and actively apply the knowledge necessary to effectively use new technologies. Secondly, organizations need to allow sufficient time for these changes to mature. Financial results will only emerge once the technologies and their application become fully developed and widely adopted across the enterprise.

The study also specifically examined two distinct segments of the automotive industry: car manufacturers and their suppliers. An unexpected finding emerged: suppliers were found to be slightly ahead in implementing digital technologies. This might suggest that suppliers are more agile in their digitalization efforts, although this difference could diminish in the future as new technologies become more widespread throughout the industry. The research sample included well-known companies such as Volkswagen, Toyota, and Mercedes. Using annual reports from 2012 to 2022, researchers employed text mining methods, keyword-based analysis, and a machine learning algorithm to calculate digitalization indices for Industry 3.0 and 4.0 digital technologies. These included industrial robots, automation, telecommunications technologies, sensors, cloud computing, artificial intelligence, and nanotechnologies. Financial indicators like EBITDA margin, asset turnover, and return on equity were extracted from the companies’ audited financial statements.

The Broader “Productivity Paradox” in the Digital Age

The findings from this study in the automotive industry resonate with a much broader economic phenomenon known as the “productivity paradox,” often associated with Nobel laureate Robert Solow’s famous 1987 quip: “You can see the computer age everywhere but in the productivity statistics.” This paradox describes the apparent contradiction between rapid technological advancements, particularly in information technology, and the relatively slow growth of aggregate productivity. While individual firms or industries might experience significant gains, these don’t always translate into economy-wide improvements as quickly as expected.

One prevailing theory for this lag is the “implementation lag” or “adjustment costs.” This suggests that new technologies, especially transformative ones like digitalization, require significant time for organizations to adapt their processes, train their workforce, and restructure their operations to fully leverage the new capabilities. It’s not enough to simply install new software or machinery; businesses must fundamentally rethink how they operate. The research on the auto industry’s digitalization supports this by showing immediate gains in asset efficiency but delayed profitability. This implies that the initial phase is about optimizing existing operations, while the longer-term phase involves deeper, more systemic changes that eventually drive financial returns. This delayed gratification underscores the need for strategic patience and comprehensive change management when embarking on digital transformation journeys.