The promise of industrial innovation — disrupting value chains
GM recently announced that it would launch an autonomous, ride-sharing service by 2019. This marks yet another chapter in the slow but accelerating and certain demise of the auto industry as we know it.
GM is not the first auto maker to see where the industry is headed. Daimler was first, building out a mobility business (Moovel) that today controls or has interests in a host of services, including MyTaxi, GlobeSherpa, FlixBus, and RideScout. Since then, auto OEMs have invested significant amounts of money into autonomous driving, connected cars, electric vehicles and related technologies. Examples include GM’s partnership with and investment into Lyft, Ford Motor Co’s investments into Zoomcar (an Indian self-drive rental startup) and Argo AI, and Jaguar Land Rover’s InMotion unit’s investments into Synaptiv (a connected-car data marketplace).
At the core of these moves by auto OEMs and their suppliers, such as Bosch, is an understanding that their business is likely to change significantly in the coming years. Indeed, developments in technology both pose an existential threat and offer a generational opportunity to anyone in the automotive supply chain. To survive they must understand the emerging industry landscape, acquire new capabilities and position themselves for growth from new services.
Acceleration of technology innovation
The auto industry is not alone in seeing a substantial disruption of its dominant model. Within the energy industry, for instance, utilities and power producers face significant challenges from distributed energy storage and generation; wind turbine OEMs face challenges adapting to a market in which turbine sales will flatten while O&M service revenue will continue to grow; equipment manufacturers across various verticals face commoditization as the source of competitive advantage moves from the machine itself to the data that it generates.
In this transition, a set of new technologies has captured significant attention and investment dollars. Industrial IoT, for instance, saw an estimated $178bn in spending in 2016, while spending on robotics was $71bn in 2015. Companies invested $26bn into AI technologies in 2013, 3 times more than in the prior year, while the blockchain technology market is expected to reach $7.7bn by 2024.
Increased spending is bringing the cost of component technologies down rapidly towards critical inflection points: the levelized cost of solar and wind energy (LCOE) fell 86% and 67% respectively over the last 8 years; the cost of delivering the self-driving car feature fell 4x over the last few years; McKinsey estimates the cost of stationary energy storage will fall by half between 2016–2024, to $200 per kWhr.
The threat — and opportunity — from new technologies
While these technology developments are important, to truly understand the opportunity one must look at what this trend — of lower cost and higher adoption — leads to. In essence, it enables a host of new services that were previously too expensive to be imagined and delivered. That new set of services and business models is where the money lies.
Take the automotive industry for example — once a relatively staid industry where only 2 new OEMs emerged over the last 15 years. Today, in contrast, auto OEMs compete with a host of new OEMs, such as Tesla and NIO (a Chinese EV startup), unconventional players such as Deutsche Post which has forayed into EV transportation, mobility service providers such as Uber and Lyft, and the likes of Intel, Google and Apple, who seek to capture the most profitable elements of the industry. As this new landscape matures, the share of industry profit going to auto OEMs and their suppliers will fall by half, according to Roland Berger — from 70% to 36%, while mobility providers will capture 40% of industry profit!
The same dynamic is at play in other industries. In telecommunications, for instance, even as mobile traffic increased 400 million times, in the last 15 years, the share of profit captured by telcos fell from 58% in 2010 to 45% in 2018, per the World Economic Forum, while content aggregators’ share grows by 37%.
Reimagining value chains and business models
Therein lies the true potential of industrial innovation. The aforementioned technologies are interesting not because they represent large pools of spending, but because they flatten otherwise separated value chains.
Through the application of these enabling technologies, incumbent and emerging players have the ability to provide services in those parts of a value chain that they previously had limited access to. This is what allows, for instance, an equipment manufacturer such as GE or Schneider to capture data on machine usage to deliver business intelligence — taking on roles previously reserved for O&M service providers, consultants, or IT enterprise providers. It also enables the opposite — encouraging IT enterprise providers such as SAP to build platforms (Leonardo / Hana) that connect to machines and eventually seek to control them within an overall business engine.
In some cases these technologies also create new value chain segments, while affecting adjacent verticals. McKinsey estimates that the emerging personal mobility and related services could expand automotive revenue pools by up to 30%, adding $1.5tn by 2030. Simultaneously, they will also impact the market for parking, after-market maintenance, and rail and bus travel; as EV adoption grows, it will impact the energy and utility sectors.
To thrive in this environment, everyone should ask themselves a basic question: what business am I (investing) in and who are my customers going to be in 5 years? For practical reasons, investments should then be directed to business models that present the highest top-line or bottom-line potential, and where the adoption curve of the underlying enabling technologies is the steepest.
GM has shown that it recognizes the transforming industry landscape, just as Daimler did before it. This latest move, however, is also a recognition that investing into technologies is not sufficient. To survive and to thrive, one needs to also adopt business models that those technologies enable and that are rapidly becoming profitable.