Analysis of practical adoption problems of blockchain in the German automotive industry
Since the extreme Bitcoin hype in 2017, most people have heard about this new technology called blockchain. It is a highly controversial technology; some say it will solve child labor worldwide, while others see it as an overly inflated buzzword with no real-life value.
For an academic project, I sat down (via Zoom, of course) with several leading managers of the German automotive industry (e.g., OEM, OEM supplier, mobility startup) and talked to them about the current state of the blockchain in the automotive industry.
For me, it is interesting why we still don’t have a blockchain service or application in an automobile, although the automotive companies have been talking about it for four years and are working on these POCs even longer. The only live project is a supply chain that tracks cobalt production, but we do not have a customer-oriented blockchain product from these companies despite this small project. What are the practical problems and challenges that need to be addressed?
In this article, you will see the actual problems that cannot be learned from a blockchain textbook because they are deeply connected to the organizational structure and incentives of these multinational companies. In addition, I also show you how these companies are currently solving these problems.
Throughout the article, I cannot mention any names, projects, or companies because of the NDAs.
Opportunities:
Before I show you the actual problems of these automotive companies, I would like to briefly outline what they see as the greatest opportunities of this technology for the future. This list is not exhaustive and represents only a selection I have chosen.
1. New business models
Blockchain develops its full power when a new project is started on a greenfield site. Some models are then possible, which are unique in terms of scalability, degrees of freedom, and level of trust. These are new, promising, future-oriented projects. However, they always start very small, no matter how exponentially they may grow in the future. They always begin flat and take time to reach a relevant size.
2. Chance for new Supplier
Blockchain unfolds its added value when it is a new business where many different parties interact, and there is a high number of contracts and dependencies. Today, as an OEM, you have existing suppliers that are always the same. It is complicated to add new ones because the trust is not there, or the processes are not there. Using the blockchain technology, the coordination with a supplier could be much more flexible and dynamic, and the supplier can have more access to different OEM products.
3. Cost Reduction
A majority of automotive managers believe that this technology will lead to some cost savings. Today, sometimes processes and supply chains are unnecessarily long and transparent, especially in cross-border transactions and operations. There is currently too much manual paperwork involved. Therefore, blockchain could strongly support digitization in the supply chain.
4. More Trust
The diesel crisis has partially shaken the worldwide confidence of customers in the German automotive industry. Blockchain could be the right way to restore lost confidence in software updates. The goal should be to be able to prove at any time exactly which version of the software is active in a car.
5. Increased Quality Management
Another strong field of application is quality management. Due to the increased transparency, one will know exactly which screw has been installed in which vehicle by which supplier. Each part has specific specifications (there are always slight deviations in production). Here you can then combine components in such a way that negative specification deviations are compensated by other positive specification deviations to increase the overall product quality.
6. IoT Building Block
Automotive companies are also working very hard on the combination of IoT and blockchain. Data has value, and if they make it available to someone, they should pay for it. There will definitely be this kind of micropayment from different services of the car and between cars.
Real and practical problems:
If you read about blockchain technology problems, you will almost always find only some discussions about technical issues and limitations. These are important, but many practical problems are hard to detect from the outside. The technical issues like security concerns, scalability, or integration into existing IT landscapes are explained in many other articles and are not the focus of this analysis.
Based on several interviews with leading project managers of various OEMs, OEM suppliers, and startup companies, I present a list of their main problems that prevent us from seeing blockchain technology in a consumer product.
Regulatory issues (DSVGO)
Nearly all the experts’ main problem regarding blockchain products has always been that there is currently significant uncertainty regarding legal and regulatory aspects. As there are no concrete laws and no important court decisions, it is presently not clear whether blockchains, for example, meet all the requirements of the DSVGO. It is also not clear who is liable if there are problems or incorrect application of the blockchain.
Even if some POCs work well, they are entirely held back by the legal department because blockchain is for them still risky and problematic.
Solution: The automotive industry must continue to do some lobbying for this particular technology. The German government’s blockchain strategy was the first step, but at some point, legal certainty must be increased much further.
2. High uncertainty about ROI
While blockchain projects in automotive companies are mainly driven by IT employees fascinated by the possibilities, there is often a certain resistance from the business departments, as a certain return cannot be guaranteed at this early stage. Especially in such difficult COVID-19 times, such rather long-term oriented projects are hard to justify.
Solution: The uncertainty regarding the return on investment cannot be reduced at the current stage. Therefore, it is very important that the top management supports these kinds of projects. In almost all the companies I’ve talked to, this has been the case where someone on the board of directors supports these projects, and thus capital is provided for these projects despite an uncertain return on investment.
3. Negative Image
Another non-negligible problem is that the entire blockchain sector has a very negative image due to problems with digital currencies and fraudulent ICOs. As a result, the communication strategies of larger companies have changed, especially in this area. Projects using this technology are no longer publicly announced as they used to be. For example, communication has been shifted more to some scene websites. This technology’s bad image could ultimately lead to customers not being willing to use this type of new services and products.
Solution: It is essential to strengthen communication further and educate the media and the end-user. Further efforts must be made to show a clear distinction between technology and individual fraudsters in this sector.
4. Lack of Ecosystem
All company managers agreed that a decentralized solution makes only sense if collaboration between companies exists and almost an entire ecosystem uses the same technology. This is not the case today, and many companies try to build their blockchain solution and then fail to get others to participate. If this continues, no solution will be widely adopted, which means it will not deliver the desired benefits.
Solution: The Mobility Open Blockchain Initiative (MOBI) was found to precisely solve this problem. The main goal of MOBI is to create blockchain industry standards that are widely accepted. Nearly all relevant German automotive companies are part of this organization and they have working groups for vehicle identification, supply chains, and charging infrastructure. All these areas define how data is transferred in an interface. This allows different blockchain solutions of companies to work together and exchange data, and the silo problem is solved.
5. Too high Expectations
In some cases, the expectations of blockchain technology are far too high and unrealistic. It is often said that a blockchain supply chain will help to end child labor because all physical goods are fully traceable. The big problem, however, is the initial input of data. If it can’t ensure that the data entry is correct at the beginning, the rest process is useless. Blockchain is only a technology and cannot solve all these problems alone. Especially suppliers in Africa and South America do not have a digitalized supply chain, and as long as this is not the case, blockchain will not be able to establish full trust.
Solution: First, the digitization of the supply chain must be increased in the less developed countries. In addition, many additional problems for the physical goods in a supply chain blockchain need to be solved. Perhaps it should be implemented for non-physical goods first.
6. Bootstrapping Problem
For large companies with a well-known brand, it is, in most cases, better to be a fast follower than a first mover. This is because you can learn a lot from a first-mover experience and then offer the service or products in better quality and cheaper. If everyone thinks like that, nobody is willing to bring out the first product and test the actual usage together with the customer. This problem is known as the bootstrapping problem.
Solution: There are two solutions to this problem. First, you can simply wait until a more disruptive thinking company like Tesla, Google, or Amazon offers its customers this service. Second, you can make some mutual assurance with other large companies, i.e., if one company provides a service, the other companies will also join this approach and offer the same or a slightly different solution.
7. Problems with cooperation with startups
For a large number of blockchain projects, large automotive companies join forces with specialized startups to work on new use cases. These combinations are often a win-win situation for both sides, as the companies benefit from the speed and agile way of working, and the startup benefits from the company’s established brand and customer base. This collaboration can also lead to problems, as requirements in terms of security, testing, and release cycles can be very different. In addition, it often happens that changes can occur within the startup and that some joint projects in the automotive industry have failed due to internal startup conflicts.
Solutions: To make such a product a success, mutual understanding must be further developed, and the thin line between early integration and important independence must be mastered. There is still much to learn on both sides in the future until we see the first startup service in a German car.
Conclusion:
Despite all the problems mentioned above, all automotive managers in this field are very optimistic that blockchain technology will come and that it cannot be stopped because the benefits are too numerous. It is only a matter of time before we see customer-based blockchains service in an automobile. The time will depend on whether there is a bold pioneer in this field and whether there are bold regulatory adjustments. Especially the last point will decide whether the German automotive industry will take on a pioneering role or not. However, the industry is well prepared and is already a leader in MOBI. I am very excited about new developments in this area and look forward to the first application.
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