Car Industry Breakup: A Natural Progression in Personal Transport
In this article, I propose that there are 3 major inflexion points that will see the natural breakup of the existing car industry. I provide examples of similar changes in recent history.
The Car Industry — No Longer Business as Usual
There are 3 major changes that will force the car industry to change:
1. Electrification — Tesla started it; the dominos are falling. Electrification of the vehicle platform in all forms of transport radically change what is possible
2. Software — the car industry is finally recognising that they do this poorly. Mobile apps today define what people expect. Deliver or die a slow & painful death
3. Social Change — the new generation no longer expects nor wants to own a vehicle
Car Manufacturing Model Changes Over Time
The vehicle industry has vacillated between various states of vertical integration. Ford is credited with starting the first production line. It extended this in to complete vertical integration — from controlling the source of raw material & energy, their transformation, to production, sales & marketing & distribution. Then overtime the vehicle manufacturers concentrated their efforts on vehicle design & production with many specialised partners providing the various vehicle components. They left the sales & distribution to car dealerships. Tesla has in many ways reinstated the original Ford model, i.e. securing raw mineral access, designing/manufacturing practically all the vehicle components, production & distribution.
Social & Demographic Changes
Without doubt, rapid technological changes & user connectivity has changed our society. Social interactions &sharing are more & more internet/digital medium driven. The rapid greying population is changing demographics. The new generation are no longer interested in owning a vehicle & the older generation is getting too old to drive them safely in an ever more complex & dense driving environment. The younger generation are wondering why they should “babysit” 2 tonnes of metal to get from A to B. The older find the tech is getting too complicated. The vehicle industry is in turmoil & self-doubt.
New Players Are Changing The Rules
We are seeing many new players entering the transport market. They are bringing a new experience as well as new modes of transport. Examples are:
Google & their Google Car
Apple & their Titan Project
Uber & the Autonomous Vehicle Project
GM & Lyft
Personal Air Transport from the likes of Lilium, Airbus, Boeing & EHang
Personal electrical transport such as scooters (BMX, Piaggio), skateboards, mono & dual wheeled devices
We also have market dominating online sales structures such as:
Amazon
Yandex
Alibaba
They too are investing in vehicle transportation for their own use as well use people transport.
If the existing car industry doesn’t adapt quickly & bet on the right horse, they will most likely end up the Nokias of the mobile world.
The Search For New Revenue Models
Existing car companies are actively looking at alternative revenue models, i.e. rental, leasing, carsharing/car-pooling. They are also looking at the impact of ML/AI on the actual driving process & how it affects the expected vehicle experience. They are investing in just about any company involved in transport, e.g. carshare companies (ex. Lyft/GM), autonomous delivery fleets (ex. Volkswagen/Renault & last mile pods), electric bikes, scooters etc. They are even looking at renewable energy to repurpose electric batteries & blockchain to resell/store power on & off the grid. Anything at all the try & get a toe-hold on the future.
The New Model
To provide a foundation to my arguments, it is important to look at other industries that have gone through similar turmoil & changes:
· Fintech & banks — The challenge is possible due to software, connectivity & social media; startups such as Revolut & N26 are challenging existing banks & winning the support of the new generation.
· Apple & the mobile phone industry — The challenge was possible due to software; people were excited by a new intuitive interface
· Amazon/Online & retail market — The challenge was possible due to software & connectivity; people were given an enormous choice of products & the convenience of at home/work delivery
· Tesla Motors & Electric Vehicle Industry — maturity of electric technology, money & vision; forcing the car industry to adapt & change vehicle propulsion
· SpaceX & Rockets — Money & vision to change
· And the list goes on, ever expanding & accelerating
With this in mind, I believe that the car industry:
1. Will initially resist change
2. It will then be decimated by the new players, i.e. Tesla, Apple/Google, Amazon/Alibaba/Yandex…
3. And eventually breakup in to several specialised domains
The first 2 stages are obvious; however, it is the 3rdstage that is the most interesting. In the natural breakup scenario, the car industry will breakup in to 2 major parts:
1. Refocus on its core competency — highly evolved, large volume automated manufacturing
2. Splintering in to other highly specialised domains, i.e. vehicle transport modules as “Lego” components, high tech advanced research & design, advanced safety systems etc.
Let us now look at these 2 areas.
Core Competency — Intelligent Automated Manufacturing
The biggest challenge to entering this market is the cost of setting up a highly efficient, rapid & automated production line. It takes billions. However, it is not impossible. With the right amount of market traction, there are investors ready to provide the capital if the offer is compelling enough — just look at Tesla Motors as an example. So, using this argument to limit competition from new player is long longer a given. Any of the top 10 tech companies could finance such a venture.
To simplify the car market today, it is broken in to 3 layers.
Any new player with deep pockets will shatter this. As a precursor, we can take Tesla Motors as an example. They have completely removed the middle sales & distribution layer. They are even looking at entering the Client later by with the idea of robotaxis & robofleets.
However, I do not believe that this will be the final model. Innovation & other start-ups will challenge the 3 to 2-layer progression. I believe the market will develop a 4-layer model that will allow for more specialisation & value add at each layer. The following figure provides a 4-layer example with some probable payers at each layer
Car Manufacturers — Specialisation
It is predicted that car manufacturers will migrate to customisation, design & manufacture of the vehicle modules. These will involve vehicle modules that can be customised. However, the value-add will no longer be exclusive to car manufacturers. Competitive forces will create other design & customisation houses. As manufacturing re-orientates itself to deal with modules, module assembly & integration, 3RDparty houses will create customised vehicles & “fashionable” designs. No longer based on year & model, they will be selected by features, methods of interaction, software style, safety, affordability & style.
For the car industry, the pairing-down will allow for greater profitability. They will no longer need to pay for cost of sale, marketing, distributor discounts, advertising, branding etc. Overall margins may even stay at similar levels. With drastically reduced operational overheads, profitability will improve. Similarly the R&D & design & testing departments can become their own subsidiaries generating their own profits.
There are similar examples (simplified):
· Electronic industry — i) chips are created by design houses (e.g. ARM); ii) foundry house make the chips (e.g. TMSC); iii) a brand designs the product (e.g. Apple); iv) assembly companies put it all together (e.g. Foxconn); v) online stores sell the product (e.g. Amazon, Alibaba); vi) users/consumers buy, rent, lease, & resell the product.
· Telecom Industry — i) monopolies ran & owned all telecom services & infrastructure (B2B + B2C); ii) deregulation forced operators to allow equal access to infrastructure; iii) new arrives built some & leased most of their infrastructure; iv) new arrivals spent money acquiring, maintaining & servicing new clients while providing value-add services (B2C); v) monopolies concentrated on infrastructure, drastically reduced their operational costs due to no longer needing to deal with mass market, i.e. changed from B2C to B2B; vi) operators become profitable without the pain of mass market pressure.
Distribution & Sales — New Global Brands
It is predicted that existing car brands will no longer matter. With sales moving to the big online stores, people & companies will order what they need. Some vehicles maybe completed products, others will be “designed” online, i.e. choose, colour, style, feature set etc. The online store i) takes care of the order process by interfacing to the manufacturing & design houses; and ii) delivers the vehicle to wherever it is needed. Global brands & associated social media networks will drive customer loyalty, e.g. Gucci car to go with those glasses, Amazon to buy online.
Clients — B2B, B2C & Value-Added Services
Following-on the discussion in the move to buying online, as mentioned before, customers will no longer buy vehicles. They will be bought by fleet management & brands to rent, lease, share etc. with the end users whether they are businesses or people. This has become blatantly obvious with the explosive growth of i) ride-hail companies such as Uber; ii) scooter/bike/electric bike rental companies such as Lime; iii) leasing packages by car manufacturers & fleet management companies; and more recently iv) other alternatives such as Care by Volvo[1]. For car companies, it means changing from 1-off sales to ongoing incremental revenue. This implies that for car companies to survive the breakup of the status-quo, they will need to create a separate financing entity to take advantage of this trend.
Conclusion
The proposed breakup & transformation of the car industry is based on observation of the rapid market & social changes in the last 30 years. The industry has hit a tipping point with i) the maturity of the electrification of vehicle drive trains; ii) car industries finally adopting best of class 3rdparty software (AI, UI/UX, services etc.); and iii) demographic & social changes brought on by an aging population & the ubiquitous availability of connectivity (social & internet).
The trillion-dollar high tech companies such Tesla, Apple, Google, Amazon, Alibaba have started this change by changing peoples’ expectations. People & companies expect usage-based services when they want it, where they want it. They identify with global brands & are influenced by social media. They can no longer afford to i) waste their time babysitting metal lumps to get from A to B; nor ii) try to find a place for this lump of metal to stay unused; nor iii) finance this lump of metal when this money is more useful in more immediate needs such as food, shelter & employment. Finally, they will expect greater flexibility & personalisation. Sophisticated entertainment & interactive systems are a start. Full environmental/ambient control + a vehicle that will intelligently try to anticipate your transport needs will eventually be “standard”.
It is now up to the car companies to see the writing on the wall & adopt radical changes. The first to do this will be the Amazon/Apple of the transport industry.
Dot-Reality
Dot-Reality specialises in strategy & innovation. With near 30 years’ experience in hi-tech & a passion for art & culture, Dot-Reality looks at disruptive design & decisions. Success is not only about resources & optimisation of costs; it is also about change of perspective — seeing beyond the obvious. Dot-Reality takes this change, models it in to economic sense & provides pragmatic advice & processes to get there.
