When the late Chris Christensen from the Harvard Business School first used the term “Disruptive Innovation” in 1997 he was not thinking of the auto industry. Rather, Mr. Christensen was referring to companies that, in trying to protect their traditional business, fail to see the threat from upstarts, often poorly capitalized, offering cheaper products in seemingly insignificant markets. Once these companies move upmarket, they pose an existential threat to incumbents. Think of mini-mills in the steel industry or low-cost blades competing with Gillette’s over-engineered razor blades. However, as much of Mr. Christensen’s later research shows, the concept applies perfectly to the automotive world. First came the Japanese manufacturers challenging the US giants in the 1980’s and 90’s, then the Koreans in the early 2000’s, and more recently the Chinese OEMs, with competitive products at least in China and the emerging markets.
For a while, it looked as though in this highly competitive world all the main players were finding an accommodation. The Detroit big three lost share and are being pushed out from many parts of the world, but continue to dominate the highly profitable market for pickups, SUVs and crossovers in North America; the Japanese companies are unbeatable in the shrinking mainstream passenger car market globally, and have made considerable inroads in SUVs; German manufacturers are still associated with high quality, leading engineering and prestige; and some Chinese players have started to make passenger cars and commercial vehicles that attract the middle classes in China and the emerging markets. Even Tesla, until recently, appeared more as a potential threat than a real disruptor due to its low volumes, visible weaknesses in manufacturing and logistics, and constant management mistakes.
This seemingly peaceful world was rapidly coming to an end way before the Covid-19 pandemic hit. In the words of Mary Barra from General Motors “we are going to see more change in the automotive industry in the next five years than in the last fifty years”. Very often, technological disruption is not the result of one technology, but the convergence of several technologies that combine to enable a set of new competitors to emerge, and a different business model to establish itself as the new standard in the industry. In the case of the auto sector, there are four converging technologies which, while in different stages of development, scalability and commercialization, are transforming the industry beyond recognition and are likely to result not just in new winners and losers, but in a totally new approach to the business. The new technologies are: Connected, Autonomous, Shared and Electric (CASE), giving origin to Transport As A Service (TAAS) as the new business model. COVID-19 is only likely to accelerate this process. These four trends, in turn, have been enabled by huge strides in battery technology for electric vehicles (EVs); supercomputers, machine learning and AI for autonomous vehicles (AVs); smart phones for Shared Mobility (SM); and all of these technologies plus cloud services for connected vehicles (CVs).
The best way to understand what this means for the development and production of new vehicles is through a platform-based approach that looks at the product as consisting of four layers:
- The electric platform layer is a simple skateboard that replaces the old chassis. It’s modular, flexible, expandable and highly scalable. While OEMs are best positioned to develop these new architectures, given its simplicity, low-volume capabilities and relatively low investment, there are plenty of new competitors emerging in China, Europe and the US.
- The electronic platform layer enables data to be centralized, either in domain controllers or based on vehicle zones.
- The software platform layer, with software models that are based on machine learning (deterministic), or artificial intelligence (AI) and deep learning (stochastic). This is the essence of AVs, and It is here that the likes of Tesla, Google (Waymo), Apple and other tech giants have the edge, and where ride-sharing companies like Uber place their bets to become profitable in the long term.
- And the cloud platform layer, which moves data from traditional on-premises servers to the cloud (private, public or hybrid). AWS, Microsoft Azure and Google take the lion’s share of this business.
In its most simplistic version, traditional OEMs take a bottoms-up approach to the development of these platforms, in the sense that the hardware comes first and they seek to partner with others for most of the rest. The mind-boggling complexities of the supply chain and manufacturing processes are, perhaps, the best defense traditional players have against new entrants, as evidenced by the nightmare Tesla went through with the production of its high-volume model 3. Software players like Waymo, and to some extent Tesla, take a top-down approach where software development comes first and the skateboard and various top-hats that can be put on it to create different models are either contracted or developed in partnership with OEMs. In this view, the vehicle is but a collection of sensors and software, with the nuts and bolts of production and logistics considered commodities that can be easily outsourced.
The advantages of the new technologies may seem obvious, but it’s worth reminding why they are crucial from a consumer, Government and societal perspective. EVs are quieter, their maintenance cost can be up to 10 times lower than ICE vehicles and they can run in excess of 500,000 miles. EVs require fewer parts, offer much greater manufacturing flexibility and simplicity, and dramatically reduce emissions, depending on the energy source used for recharging. AVs will likely be used 24-hours-a-day seven days a week, instead of 10% of the time as today’s vehicles; they eliminate the need for drivers, which increases safety as well as reducing cost and a source of conflict for SM providers, though these advantages are less clear for companies such as OLA in India and Didi in China where labor costs are much lower. If run about 100,000 per year, AVs would have a cost per mile as low as 10-20 cents, while increasing productivity by allowing people to work on other activities during their commute. Even with today’s state of the technology, which experts call level 3 or level 4 autonomy in a scale of 1 to 5, accidents can be avoided or dramatically reduced, while the concurrent reduction in traffic would also lead to an increase in productivity, space and the quality of life. Combined with EVs, autonomous vehicles will bring about a significant improvement in the carbon footprint, as well as a potentially substantial reduction in oil prices (which, of course, means winners and losers). Last but not least, longer term the impact on urban development and planning could be of an unprecedented scale, with most of the space dedicated to parking available for other uses. For all its potential benefits, AVs may still be several years away from becoming a reality on a commercial scale. Even the apparent leaders and most aggressive companies in the space such as Waymo and GM’s Cruise have started to admit that the technology is not ready to be deployed, and the regulatory framework is moving at a snail’s pace in the US and elsewhere. Given its cost, at $100,000 plus per unit, the initial business model will have to be based on fleet companies owning many vehicles and providing both passenger and delivery services. The economics of this approach are not yet proven.
It is also worth asking what are the key elements of the new business model (TAAS), and why does it require that all the technologies in CASE be available for deployment on a commercial scale for it to become the new paradigm in the industry. Firstly, even with a large reduction in battery costs, the economics of EVs are more attractive when combined with AVs that run 100,000 miles a year. In practical terms, a private owner driving its car 10,000 miles a year would take 50 years to fully depreciate an EV that can run for 500,000 miles, or more likely the car will be into its 10th owner by the time it goes out of service. Conversely, AVs can only function in a world of EVs that can run much longer mileage and offer substantially lower maintenance costs. Furthermore, AVs would not exist without the connectivity between vehicles, and between them and the road infrastructure, and given their high upfront investment they would not be viable in a world without well-established shared mobility services. In turn, for SM players to become profitable on a consistent basis, the reduction of maintenance costs with EVs, and ultimately the elimination of drivers with AVs will be critical. Even the full cost of connectivity and the companies’ ability to monetize the value of data is considerably enhanced with the existence of on-demand services to customers and will rise exponentially once AVs are fully operational. In practical terms, AVs running 24 hours a day will gather many more miles of information than today’s privately owned vehicles (which also has ramifications for the components business).
All of this matters because the new TAAS model is highly data centric, which offers an opportunity for industry players to mine the data and turn it into an important source of revenue. Several OEMs have started to do this, with the help of companies such as Wejo (UK) and Otonomo (Israel) that use the existing sensors in the vehicle to gather and organize data in commercially useful ways (traffic patterns, driver behavior, etc.). Ultimately, the disruptive process may happen in several stages, with connected cars and car-to-car communications being the first horizon, followed by electric vehicles with semi-autonomous features, and finally fully autonomous vehicles running in organized urban hubs offering passenger and freight services.
So, how is all of this technological tsunami going to be impacted by COVID-19? It’s probably safe to assume that societies will continue to practice some form of social distancing even after the pandemic is brought under control. This means that many customers will be willing to pay some extra cost to use ride hailing services instead of public transportation, which is good news for the likes of Uber, Lyft, Ola and Didi. It may not be far-fetched to assume that, for the same reasons, society will add pressure on Governments and regulatory agencies to speed up the introduction of AVs, though some analysts argue that it is the delivery business that will thrive first, as people will be reluctant to hop in vehicles that have been used by many others before they are disinfected. Further automation of many jobs in the industry can be expected, in plants, product development and support functions where possible. Dealers are likely to see much more online product selection and purchase activity by customers, and those that can upgrade web services and automate sales and service functions faster will likely come on top. And the historic need for consolidation and closer cooperation among OEMs, and between them and new players, may at last become a reality as the large investments still required to develop electrical architectures and AVs become unaffordable in the current and ensuing cash crunch.
With so much on its platter, it’s no wonder OEMs, component manufacturers and new hi-tech players are increasingly relying on global consultants such as Accenture to help them make the transition to the new world. Unlike other industries, the auto business has shown a great resilience by established players, and a remarkable resistance to change and consolidation. Who would have thought that the convergence of various technologies would combine with the devastation caused by a germ that until three months ago no one had heard of, to finally tip the scale and bring about a much needed disruption in one of the most important activities in the history of Sapiens.
The Hawksbill Group