Dec 10, 2015
Rebuilding Car Companies in The Cloud
Big automakers are undergoing a period of incredible change. As autonomous driving takes center stage across product roadmaps, the value of traditional features is taking a backseat (pardon the pun) to software-driven ones. Gone are the days when car companies could take seven years to take a product from concept to production. In a world ruled by software, rapid iteration is key.
There’s already evidence that this value shift is taking place. One report from Morgan Stanley estimated that while 90% of the value of today’s vehicles comes from hardware, this would fall to about 40% in an autonomous car environment. Based on the size of the global car market in 2016 alone, that represents a shift of over $5 trillion towards installed software and digital experiences. As this value composition shifts, automakers will need to effect major business model changes to adapt their products and capabilities accordingly.
Uber has undoubtedly been a major catalyst in this pending transition by making it far more efficient to access transportation as a service. With its mobile app and seamless payment system, Uber elevated the transportation industry to real-time performance standards more commonly seen in e-commerce or social networking. The result was annual revenues of over $10 billion within five years of company inception, and a rapid erosion in the value of traditional operators. While we are still some years away from a fully-functioning autonomous system, Uber’s offering has already set the minimum consumer expectations for a service-based transportation economy. Any automaker that fails to adapt risks falling behind.
The gap between analog and digital is likely to get even wider as autonomous vehicles make transportation as a service far cheaper and more accessible. With an automated fleet, not only would Uber be able to lower the percentage of fares paid out to drivers (currently ~80% of collections), but also dramatically increase utilization rates per vehicle. If on-demand services cost a fraction of today’s rates, why pay a steep premium to own? In order to preserve consumer sales, auto manufacturers will have to not only meet, but exceed the service standards set by rideshare operators. Even low-end auto manufacturers will have to redefine themselves as “premium” in order to prevent the loss of existing market share.
Given the increasing prioritization of digital features, the role of premium in this scenario probably has just as much to do with luxury interiors as anticipating the needs of the owner and finding more ways to provide value in context. The “Rolls Royce” of autonomous cars might be more personal assistant than chauffeur. From a business model perspective, this represents a massive shift from long term R&D and passive hardware sales to real-time data analysis and frequent product iterations. It also means a much closer role between manufacturers and consumers, at the expense of dealerships.
The magnitude of change to automakers’ operating models will increase exponentially over the next decade. In the short term, manufacturers will need to evolve new competencies focused on entertainment and connectivity. This includes ensuring consistent internet coverage in vehicles, while maintaining that (1) vehicle safety is not compromised by external software, and (2) passenger data can be used to personalize experiences (within accepted privacy limits). In the longer term, a core priority will be monitoring the collective performance of all vehicles on the road in order to improve network performance.
Tesla already has a major head start with its Autopilot program — benefiting from ongoing user feedback to train its vehicles for a wide variety of driving conditions. Similarly, Google’s driverless cars have logged over 2 million miles on the road. Although we tend to think of this as an aggregate statistic, each and every one of the company’s cars benefits from those collective learnings.
This type of distributed feedback is absolutely critical to scaling a product with exceptionally high safety standards and consumer expectations. However, no traditional automaker currently has the capability to incorporate real-time feedback in product development decisions, let alone push software updates which can remotely improve navigation or performance. In fact, the skills required to do so would be more commonly found today in a job description for Cisco or IBM than BMW.
Reaching the changes described above requires far more than just an investment in fancy cloud infrastructure. While vehicle hardware has advanced significantly in the past several years, it hasn’t nearly reached the exponential rate of improvement expected of the computer or iPhone.
Today’s luxury car market doesn’t follow Moore’s law. Taking the first step in that direction requires auto manufacturers to embrace data-driven services, rather than physical hardware, as the core value proposition behind new products. Along with that transition will come a need to move toward product release cycles measured in days rather than years, and an employee base more interested in hacking luxury cars than driving them.
While today’s vehicles might be “born electric,” tomorrow’s car companies will need to be reborn in the cloud.
The stakes for winning the software race are incredibly high. When auto manufacturers finally embrace the full extent of these changes, we’ll likely see a major wave of acquisitions (for both talent and tech) sweep the industry. The companies that survive will be those that use these acquisitions as a means of promoting sustained cultural change, and emerge looking more like today’s software companies than yesterday’s hardware behemoths.
Thanks for reading! If you enjoyed this post, you may also like my earlier piece: Tesla Will Challenge Uber In Rideshare
