Why carmakers are fundamentally rethinking how they innovate
Car technology grabbed an outsize share of the spotlight at the Consumer Technology Association’s 2018 CES show in Las Vegas this week. Intel debuted an autonomous car; Lyft offered up self-driving taxi rides; and traditional automakers such as Ford and Mercedes were there as well, eager to frame themselves as innovators. The technology these companies use could reshape everyday life, from in-vehicle commuter experiences to major urban planning and policies.
As that future approaches, established car brands have been forced to reshape their approach to innovation. This means finding new ways to differentiate themselves among new competitors from non-traditional backgrounds, as well as looking past mere vehicle performance and understanding how to innovate as service providers as well. That’s not to say that automakers have always failed to innovate; but it’s important to understand where they have come up short.
For starters, let’s look at the clear gap between perception and money spent. According to a 2016 survey by PwC, only one original equipment manufacturer (OEM) appeared on its list of the 10 most innovative companies in the world. That company was Tesla Inc., which is really more of a tech company that makes cars than a traditional car OEM. Moreover, a similar survey conducted by Boston Consulting Group that same year found that two out of the top 10 (and seven out of the top 50) most innovative companies were car OEMs. These results may seem good for automakers on the surface. However, on a PwC-published list of the top 20 corporate R&D spenders from 2016, five out of the top 20 corporations that appear are car OEMs, including both Volkswagen (№1 for the fifth year in a row) and Toyota (№10).
This discrepancy can be explained by the fact that the automotive industry is often slow to deliver big innovation, both from technological and business standpoints. Tight regulation and low margins for error — both in terms of financial risk and human lives — make automotive R&D processes very long. For that reason, car OEMs traditionally preferred to be fast followers instead of first movers.
The innovation process is normally as follows: New technological features are being developed and tested in lab conditions. Following that, they are tested in numerous field tests that must adhere to the highest fail-safe standards. Then, before they are made commercially available, many new products are used in car racing competitions, such as Formula One. This allows companies to test new features in extreme conditions as well as gain an edge over other competitors.
Following successful trials, features are implemented in high-end models for differentiation. Finally, years after development, once hardware costs drop, they trickle down to mass market models. The problem is that in today’s tech environment, companies need to validate within months — not years — in order to be fast followers and remain relevant.
As a result — unlike big companies in other industries — car OEMs often failed to invest in the technologies and business models that are currently disrupting their industry. This is happening with software development, artificial intelligence, hardware sensors, big data, UI/UX design, car-sharing and ridesharing, among other areas. Electric vehicle (EV) technology in particular has been a space where Tesla has sought to carve out a growing slice of the market.
As car OEMs fall behind, newcomers threaten them from several directions. Most prominent is Tesla. Tesla made about $7 billion in 2016 and was on track to reach $10 billion in revenue in 2017. That year, Tesla became the second-largest U.S. automaker by market cap, surpassing Ford. This happened despite the fact that Tesla is still far from GM’s bar of $166 billion in revenue and Ford’s $150 billion, but it is a good start for a company with a starting price of $70,000 per car. Moreover, in 2017 Tesla launched its long-awaited Tesla Model 3, which comes at an initial price tag of $35,000, a much friendlier price point for the middle class, and which attracted more than 400,000 pre-orders. Once Tesla manages to fulfill these pre-orders, which thus far has been a challenge, the Model 3 will become a success.
In addition to Tesla, Faraday Future — even though it faces financial uncertainty — and NIO, already demonstrated their concept car — a 1,000-horsepower electric vehicle — at CES in 2017. Lucid Motors, which along with Faraday and NIO, is a Chinese-backed, U.S.-based, high-performance EV company, announced its first vehicle, named Lucid Air. All of them are expected to arrive on the market within the next few years.
One of the reasons car OEMs did not invest in EV technology is the lack of proper charging infrastructure that could provide the same experience for the customer that an internal combustion engine vehicle does. Tesla made this happen through deployment of its own infrastructure. This upstream integration allowed Tesla to make sure it provides fast charging customer experience in every new market. On this point, we do see upstream integration by companies such as BMW, VW, Ford and Daimler. These OEMs formed Ionity, a joint venture with Shell aimed at building fast charging infrastructure along Europe’s main highways. This is a good start, but nothing in the scale of what Tesla is doing.
To prepare for this changing environment, car OEMs are changing their overall strategy in order to remain relevant. They need to address the long-run changes caused by demographic changes, and the short(er)-run changes caused by technological innovation.
In a future world where customers (primarily) buy mobility services instead of cars, car OEMs need to differentiate themselves through the services that they provide, rather than their vehicles’ performance. For that, car OEMs seek new ways to get closer to their customers, such as products and services they can offer customers to enhance their experience, in-vehicle and outside. Since much of the innovation in technology, and particularly software and big data, comes from Silicon Valley, car OEMs sent corporate delegations to the area and are working with the Silicon Valley ecosystem to scout for new technologies and companies.
These new working practices developed into four main innovation pillars: R&D centers that develop core technology in-house; open innovation hubs that engage startups on Proof-of-Concept (PoC) projects; corporate development teams that seek to acquire startups to accelerate internal R&D and to acquire talent; and corporate VC arms that invest in startups for strategic and/or ROI purpose. Today, over 20 of the top car OEMs and tier-1 auto parts manufacturers have one or more teams who operate on one of the innovation pillars.
All of these pillars highlight new and evolving strategies for veteran car companies that want to retain market share and fend off emerging competition in an increasingly complicated landscape. Whether tomorrow’s automotive leaders differentiate themselves on software, service, vehicle performance, or all of the above, leaders right now have a once-in-a-lifetime opportunity to define what it means to be an automotive brand.
Disclaimer: The views and opinions expressed in this article belong to the author and do not necessarily reflect the position or views of Orange or Orange Silicon Valley.