The Future of the Automotive Value Chain
The automotive industry has historically been highly cyclical. Car manufacturers buy components from suppliers and leverage their scale and operational ingenuity to sell millions of cars per year at competitive prices. Manufacturers compete not only on price, but also on brand perception, safety ratings, as well as innovative features that persuade consumers to purchase one car over another (for example, GM’s OnStar service). Ignoring the automotive financing and service revenues generated by car manufacturers, their revenue formula has largely been: “Number of Cars Sold times Average Selling Price of Car”.
However, like clockwork, Silicon Valley startups are targeting this market for a major disruption. There is no question that the automotive industry will be markedly different by 2030, but at this point it’s unclear which level of the value chain will capture the lion’s share of the profits.
By introducing these innovations into the marketplace, the revenue formula will change drastically- and it will likely look much more complicated. With these innovations changing the automotive landscape, there is a new turf war between startups and manufacturers for industry control.
One way to categorize the major innovations in the automotive industry is with the “CASE” acronym which stands for “Connectivity, Autonomous, Sharing, Electrification”. All have their own promises and risks, and depending on the adoption rate of each of these innovations in the marketplace, we are likely to see a different scenario play out.
In my opinion, there are two likely scenarios to watch for as this industry evolves.
1. Auto Manufacturer Commoditization & Fleet Operators Rule
The first is a scenario in which the automotive manufacturers’ business is highly commoditized. Companies like General Motors and Ford will sell “white-labeled” cars to fleet operators like Uber, Lyft, and Waymo. As car ownership becomes a less compelling option in urban centers and shared mobility becomes the norm, it’s the fleet operators that will be able to charge a premium and operate a high-margin business. These fleet operators may also monetize data if connectedness is well-received by consumers.
2. Auto Manufacturer Evolution & Fleet Operators Compete
The second scenario will be one in which the automotive manufacturers leverage their foothold in the supply chain to continue controlling the final product. The manufacturers will no longer just sell vehicles, but offer next-generation services and features to drivers via existing infotainment systems that monetize vehicle connectedness and related innovations. Fleet operators will continue to operate and purchase cars from automotive manufacturers, but due to the complexity and protection that manufacturers have on the vehicles, they will be unable to purchase them for cheap. Not only will raise their fixed costs, but manufacturers will continue to generate revenue from the vehicle as it operates as opposed to the fleet operator (which will only get the fee per ride revenue).
In conclusion, paying careful attention to which levels of the value chain appear to be gaining a foothold and control of the final product, as well as consumer adoption of various services, will be key in getting ahead of the next generation of this exciting market.
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