Automobile is a mobility hardware that became so much more. From the beginning, cars have been social tools representing the expression of the owner’s taste, preferences, personality and success. This is the largest good that individuals can acquire and take to places in order to reflect a lifestyle or a flattering image of themselves. In first place, purchasing decision is the combination of design, capacity and budget. Then, cars are chosen because of their specifications (power, equipment, performances, energy type). And for some people, the decision can be fueled by passion or activism.
The technology has grown in importance and improved over the decades. Functions and onboard features are more numerous. In the meantime, emissions and safety regulations became tighter. Harmonization leveled differences between cars. Engine families are less numerous and now lack personality. More and more carmakers share engine development. Handling doesn’t make such a difference anymore, especially with stability control systems. Platforms are using a modular approach and none of the recent ones suffer from misconception (e.g. stiffness or weight). Exterior designs are now closer than ever as the aerodynamics is among the important keys to fuel efficiency. Only some visual cues, lines and shapes differentiate models and constitute unity among brands.
A basic mobility hardware for connected services?
The current path tends to separate the car market today into two different families. The mobility tool on one side and the social, professional or personal item on the other. A little bit like comparing a cheap clock or a Timex to a Rolex or an Omega. They all efficiently provide time, but the content, the image and the value is different. The importance, consequently the value, of the hardware part of the mobility tool is likely to be diminished as the digital content takes a larger share in the interest of the public. Therefore, carmakers’ competition on functions and content becomes a waste of time and money. This would confirm some of the elements from Sergio Marchionne’s presentation entitled “Confessions of a Capital Junkie”.
Marchionne’s analysis is perfectly good on a financial perspective if you consider that automotive should be comparable to retail, chemicals of pharmaceutics industries. But some root causes and most solutions might have missed a major point. Except for the regulatory related technology (emissions and safety), many of the technology features are unused by the vast majority of car users. Racing for product distinction and marketing features is a waste of time and capital if not only based on design and service. Gizmos may look good in advertisement but they are the wrong way to differentiate products as they don’t weight as much as design and price in purchasing decisions. At the end of the journey, these might only satisfy management and engineers. In the upcoming years, the car as a production good might be less important than the services it provides. For carmakers, it means the value will switch from the mobility tool itself to the connected services. The key element is not anymore the product but the customer experience.
This direction would mean that cars might be stripped down from the useless features and head back to basic products that comply with regulations, feature a nice design and offer the package for a reasonable price so we can plug digital applications. Unfortunately, carmakers have proven the infotainment systems and connected services are not part of their core business. All house-developed proprietary infotainment systems are obsolete from day one. They are money pits for carmakers because they have been reluctant to open the onboard systems to start-ups. The data war is on and since the carmakers are overcautious on the use, no-one gets to work on onboard data. Culturally and technologically speaking the digital world is hard to penetrate and control for heavy industry century old companies.
The illusion of the luxury world
Making benefits in premium and luxury cars is no illusion. And it’s likely to continue as high end vehicles are both technological, flattering and, to one extent, collectible. But thinking one can enter this segment and be profitable from day one is going astray. PSA has been trying with DS but the brand struggles to be recognized. It uses far too many Citroën parts for costs purposes and this kills the product distinction. Mazda failed with Xedos. Nissan is pouring money into Infiniti to get it right. Acura is limited to the North American market. Genesis just arrived. Cadillac and Lincoln are in perpetual comeback. Maserati is declining despite a recent product offensive and Alfa is shy to comeback as costs are under scrutiny. The challenge of getting into the high end car market is costly and it takes time to be effective. Not to mention, the market is highly challenging and any newcomer would have to face an aggressive competition. The current example of Apple partially dropping its automotive Titan program to look forward to investing in McLaren speaks for itself.
Most carmakers are willing to create value through high end mainstream products. But the masses will decide as the premium market demand is not infinite. This competition to elevate products above the brand positioning and recognition might confuse customers and drive prices away from affordability. High-end product requires exclusive service. While the product evolves, the sales and customer services usually stall. And most efforts to raise the product quality end-up being a failure. I don’t mean this is mission impossible, it’s just a long term investment with high risks and high reward in case of success.
At some point, it seems some carmakers are willing to create value or make car more affordable through car-sharing programs. GM invested in Lyft, Toyota has now shares in Uber, Peugeot is funding Koolicar and Free2Move, Volkswagen backs Gett, Daimler bets on Moovel and Ford develops its own ecosystem. This first move goes in the direction of the paid-as-you drive strategy. But mileage-based earnings imply using the car and this is far from being the only source of profit with connected cars.
The car of tomorrow
The value for the car of tomorrow is not just the mileage-based services. A vehicle is used to go places and to buy goods and services. Today, consumers might benefit from coupons and rebates. Tomorrow, the connected car and connected digital services will be the opportunity to optimize drivers and consumers shopping journey. And while spending, the next generation coupons could consider paying for the transportation expenses to visit the stores (i.e. gas and maintenance). This is a great way to reduce the total cost of ownership. Michael Oualid based his research on this assumption for The Free Car Project. Google’s strategy is likely to be the same when trying to access infotainment systems on a much larger scale. The advertising and mapping capabilities will provide a new ad hoc customer and consumer experience. Audi, BMW and Mercedes-Benz acquired Here to develop their own mapping solutions and prevent themselves from having to use Google’s solution.
On a technical perspective, carmakers have made a great deal with modular platforms (Volkswagen’s MQB, Toyota’s TNGA, Renault-Nissan’s CMF, PSA’s EMP). Gearboxes are mostly developed by suppliers and shared on a large scale. The next step concerns engines as more and more joint-ventures et co-operations indicate that carmakers will share engines. Competencies are outsourced to enhance project and engineering flexibility. And finally, major technologies are mutualized and provided by Tier 1 suppliers. Another step would be shoving useless equipment to ease costs and capital burning. These elements tend to indicate that, in the next 20 years, carmakers’ business could become design maker, assembler and service provider (connected and financial) still with strong involvement in the overall development for regulations and legal purposes.
For the time being, it seems that carmakers could very much be chasing two rabbits and catching none. On one hand, they are still trying to create value on cars that feature complex technologies and numerous functions for a contained price. In other word, they invest time and money on a product that could be of lesser importance as it becomes more connected and less distinctive competition wise. On the other hand, they try to enter the digital world where they face the competition from start-ups and newcomers. Those benefit from a fast-paced culture and a great expertise in service as their business is based on customer experience. Carmakers have difficulties to catch up as they still work on proprietary systems and applications that are frozen in time. And this all picture becomes even more blurred when the current evolution requires the car to communicate with its commercial environment. On top of that, the hot topic is the autonomous driving and everyone rushes into early and barely efficient solutions. Those function will be safe and fully operational on “eyes-off” level (level 5 according to the Society of Automotive Engineers’ definition) when autonomous cars will be trustful enough to operate along with human-unpredictable-drive cars. The lowered number of crashes could even change the design of the cars in term of safety and emissions.
Until further developments, autonomous cars will mainly constitute a higher level of assisted driving. The appreciation may vary from one population of drivers to the other. When looking at Europe, it has taken several decades to accept automatic gearboxes on a large scale because of the lesser impression of control. It’s likely that autonomous (or semi-autonomous) driving will require years to become natural. Young generations might have a better level of acceptance, but those populations are less numerous when talking about new car buyers.
It’s all about business model and content
Automotive business model changes. And this change will strongly impact the cost and the revenue structure for carmakers. If the current trend of increased service and lowered content is confirmed in the upcoming years, carmakers and suppliers will see their expertise transformed. To one extent, it becomes comparable to the evolution of the cell phone that went from a simple phone to a smartphone, with many deaths on the way and successful newcomers at the end. Carmakers and suppliers would have to follow the transformation and lower investment on marketing oriented features. In the meantime, they have to collaborate or embrace the new technologies to recover value on the services. It represents a major change in the core business of making mainstream cars. This disruption would be changing from a Timex to an iWatch. Some businesses have successfully disrupted their business (e.g. IBM), some have totally missed the innovative path of disruption (Blockbuster, Kodak).
Carmakers and suppliers have a much larger task today in market intelligence as they have to look far beyond their traditional businesses. The mid-term concerns the amortization of current investments and technologies. The long term is made of assumptions considering several exogenous influences. Industry actors have to move out of their comfort zone, embrace disruption and improve customer experience. This is not part of carmakers’ culture. As an example, the popularity of Tesla is not product based. The models are somewhat plain in terms of design, quality and equipment. Tesla’s success is based on the storytelling, the image and the customer experience. The only lesson to learn from the most recent newcomer is to improve service and provide a new type of customer experience. The next decade will connect the vehicles to their environment and could change the car from a product of itself into the simple hardware for mobility services. This would be a complete transfer in the value chain and could constitute the biggest ever change for carmakers and suppliers. This is both an opportunity and a risk and it requires cross-industry and non-corporate strategic intelligence.