The biggest loser in this shift is likely to be the oil industry, according to RethinkX’s recent analysis in their report Rethinking Transportation 2020-2030, with demand predicted to contract by 30% over the next decade, accompanied by a price collapse. And as with the recent collapse of the US coal industry, this precipitous decline might happen very quickly once the tipping point is reached.
But what about the automotive manufacturers and their suppliers? Large automotive firms have been slow to respond to the Tesla challenge, but that does not mean they cannot win; but to do so, they will need the courage to throw away a lot of what made them successful in the previous century. For this is not just a battle over product innovation, it is also about the future shape and nature of the firms that produce them. What organisational structures, culture and practices do they need to be able to innovate at scale, become more agile and develop the service and product ecosystems that the future of transport as a service (TaaS) will make possible?
It is not clear that the current model of car ownership will continue beyond the next decade. As Angus Hervey wrote in a Future Crunch piece titled Carmageddon is Coming, the rise of the smartphone and on-demand mobility, combined with electric vehicles and autonomous driving, presages a future of TaaS and genuine car sharing (not just better taxis) that could impact every industry connected with the automotive sector, from insurance right through to repair shops and parts suppliers, whilst creating a whole new world of service and experience innovation opportunities.
Tesla’s latest milestone
Tesla recently reached parity with BMW in market value, and as the graph below from Bloomberg indicates, it will soon be on the heels of Daimler and VW as well. But BMW delivered 2.4m vehicles in 2016 compared to Tesla’s 80,000, on which the Silicon Valley firm made a loss of $725m compared to BMW’s profit of $7.7bn. So why are they valued the same? Partly because the production facilities of BMW are almost twice as expensive on a per revenue basis, reflecting both the complexity of the non-electric product and also the vast supply chain and production system needed to produce millions of vehicles, rather than tens of thousands. But also because whoever owns the electric and autonomous future will be well placed to compete beyond the bare metal of the car in markets enabled by autonomous driving that do not yet exist.
Even a regular car now uses around 100m lines of code, compared to 1m twenty years ago, and this is expected to double soon, which suggests software is commoditising hardware, and also raises a whole slew of digital security and safety questions. Google’s Waymo, Uber and Apple are also hovering around this space, secretly developing some of the core technology it will require, but it is not yet clear whether any of them will opt to become automakers in their own right, as Tesla have done. In fact, for Apple, the market may not even be defined by cars alone, as Tim Cook hinted in an interview with Bloomberg:
“Clearly, one purpose of autonomous systems is self-driving cars — there are others. And we sort of see it as the mother of all AI projects.”
Long term, the very nature of the car, its role in society, and how we organise urban environments could be up for grabs. But in the next decade, the rise of electric vehicles and the adoption of autonomous driving look set to transform a trillion dollar industrial sector.
Corporate inertia versus new platform thinking
Some of the technology behind autonomous driving seems to have been floating around automotive R&D labs since at least the turn of the century, but these firms arrogantly assumed that they could dictate the pace of change in the market, and erroneously believed that consumers were not ready for EVs or autonomous driving. The premium that Tesla owners have been willing to pay to be early adopters of electric vehicles, and the compromises needed in the early days of charging infrastructure roll-out, seem to have surprised them. A classic case of being so over-optimised for the past that you miss the bigger picture.
“Few people know that we started Tesla when GM forcibly recalled all electric cars from customers in 2003 & then crushed them in a junkyard”
“[This] was done against the will of their owners, who held a candlelight vigil all night to protest the death of their cars”
But it would be wrong to assume they have lost the race. As The Financial Times recently pointed out, in this tortoise versus hare race, Germany is investing heavily (in particular in the Saxony region) to develop battery technology and mass market electric vehicles that look set to emerge in 2019/2020 at a level of scale, quality and price that Tesla might struggle to match. If BMW, Mercedes, VW et al can switch production of their millions of cars per year to electric drivetrains faster than Tesla can up-scale from tens of thousands to millions of cars per year, then the market will be wide open. That will make the differentiators – the new customer experiences that electric and autonomous driving make possible – all the more important in the next phase of competition.
One key to this might be extending the notion of platforms into the realm of customisation and experience. Car production is already based on the idea of one physical platform being re-used for various models. Elon Musk recently explained that he made a mistake in using the original S series platform as the basis for the more ambitious Tesla X, and based on that lesson, they will not use the current Model 3 platform for the cross-over SUV Model Y that is expected to follow it. By their very nature, these platforms are limited in their scope for re-use and they take a long time to design and produce, although their lifecycle seems to be speeding up. But other areas of the vehicle are also becoming platforms in the technological sense, such as the car entertainment and navigation system. These have gone from integrated systems to hardware platforms that can support different operating systems and apps on top.
Right now, we are still in the strange phase where our smartphones are probably superior in most respects to the hardware and software on the dashboard, but the adoption of Apple Car Play and Android Auto might close this gap. Smartphones are true platforms, in that any developer can create apps for them, whereas most in-car systems created by traditional suppliers are not (yet). But looking forward, if the promise of autonomous driving is realised beyond level 2 (hands off, but ready to intervene), then the whole car could become a software platform, and its interior an experience platform, opening up huge scope for competitive differentiation.
Organisational innovation, not just product innovation
So, if the tortoise is to catch up with the hare and possibly overtake Tesla, what can they do to re-orient automotive manufacturers and their suppliers to succeed in a rapidly changing market? These firms have evolved over a long period of time to deliver quality and reliability at high levels of scale, and so it is important not to throw that away or lose those skills in pursuit of greater agility and innovation. But right now, most innovation is happening at the edges of these organisations, or possibly within acquired startups or special units, whilst the core continues to grind out today’s vehicles at relatively low margins (at least compared to industries like software and computing). It is no coincidence that BMW’s i3, arguably the best non-Tesla electric vehicle widely available today, which began as a concept in 2009 and went into production in Leipzig in 2013, emerged from a dedicated ‘skunk works’ group, rather than the existing conventional product process.
The majority of leading car makers are now investing heavily in electric vehicle and autonomous driving technologies. Daimler’s charismatic CEO Dieter Zetsche was very visible at this year’s SXSW technology festival in Austin, and spoke about the firm’s partnership with Nvidia, the graphics chip maker that is active in AI and other real-time technologies needed for autonomous driving. Daimler also plans to spend $15bn on a range of electric vehicles by 2022. Bosch, a leading supplier to car makers and a very impressive firm in its own right, is investing a great deal of effort and funding to ensure it retains its leading position in the new era. The firm recently announced a $1bn chip factory, over $400m per year additional investment in electromobility, and a plan to revolutionise its powertrain division for electric vehicles; behind the scenes it is also working on solid-state battery technologies that could deliver significantly greater range than the Panasonic cells that currently power Tesla vehicles, and might yet decide to jump into this key market in a big way. Other firms are either developing their own electric vehicle concepts or teaming up with chip makers and other technology companies on autonomous driving platforms.
The question is: are they also ready to invest in ambitious programmes to transition their own organisational operating systems from an early Twentieth Century industrial factory model to one that can compete in the Twenty-First Century?
After a long period of slow, incremental innovation, the sector is now in a period of great change and rapid, disruptive innovation. But the large organisations that grew up around the automotive sector were not designed to operate in such conditions, and unless they can adapt quickly, their own internal structures and management culture could hold them back in significant ways. The challenge they face is how to bring the same level of agility, innovation and new thinking into the core of these organisations, rather than rely on it always coming from the edges or from special R&D units. Based on our experience in the sector, I think the following areas of focus should be seen as urgent organisational priorities.
Leadership and decision making
There was a time when a dozen older men with near identical training, qualifications and mindset could take every major decision in a large multi-billion-euro organisation, and treat all the layers of management below them as operational managers, to be driven by centrally-agreed targets. That time has passed. Not only is this model spectacularly inefficient and costly, it is also dangerous, as events like the recent VW scandal demonstrate. In VUCA conditions, large organisations need to make better use of their collective intelligence, human sensor networks and distributed sense making to make better decisions. Anything that can be devolved without creating risk probably should be. The role of management boards at this level should be to set the frame and direction and to ensure the organisation has what it needs in terms of capabilities and resources to deliver against its goals. To operate a more distributed model requires better collaboration technology, more openness and sharing within the organisation, but most of all, a totally different management culture than the one that prevailed during the easy days of the mid-to-late Twentieth Century.
Multi-modal operations and pace layering
Customer care needs to move fast, as does sales, marketing and other functions. Innovation needs to be managed with freedom to connect across product and service lines. Many back-end functions can and should be organised using agile management methods to improve their speed and reduce their cost. But production needs to be highly organised and tightly managed, as does quality control and other ‘line organisation’ activities, perhaps using LEAN rather than agile methods. There is no one system, structure or methodology that can run a firm of such complexity. Instead, automotive sector firms need to get better at contextual or situational leadership and also consider using different approaches and controls for different layers of the value chain, which are moving at different speeds. Enterprise management culture, budgeting, reporting, purchasing and centralised IT functions all tend to act against the requisite variety needed to operate in this way. That is a challenge for management, but also for organisational structure and practices. This is one area where Tesla shows the way, to an extent, with its data-driven prioritisation for upgrades and the way the car platform is constantly improved by software updates that are pushed out automatically. But we also need to apply this thinking to the organisation itself, running variable speeds and levels of agility at different levels.
See our work on new approaches to organisational design
Innovate on the organisation, not just products
Employee engagement needs to improve in most large industrial firms, and one of the best and most meaningful ways to achieve this is to involve the whole organisation in business improvement. Most employees can point to problems, broken inefficient processes or missed opportunities in their area, so rather than run annual employee surveys, better to give everyone a role in suggesting tweaks and improvements on an ongoing basis.
See our work on distributed, agile organisational change
Connected structures and networks
The functionally-divided corporate structure is a legacy of a previous era of low volatility, where the focus was on specialisation and process optimisation. The priorities today are very different, and the divisional structure of large organisations is not only getting in the way of collaborating and innovating across the organisation, but it is also creating perverse incentives for teams to narrow their focus to product and services that their division owns and can take credit for. There needs to be a real focus on encouraging cross-functional working, collective awareness and collaboration, plus a drive to equip and empower small teams to focus on small, defined goals that can join together in more fluid networks and groups regardless of where they sit in the organisational structure. The current state of the art in terms of collaboration technology and collective awareness is advancing too slowly and is not yet central enough to the way work happens in large firms.
See our work on collaboration technology and digital workplace hubs
Long-term platform strategies
Large automotive firms have made a number of strategic investments in startups, in addition to acquiring some firms and integrating them into their core operations. They also typically run startup engagement programmes, including hackathons and incubators. But few have really solved the challenge of how such big firms can work with small specialist firms without acquisition and integration, which often destroys much of the value that made them attractive in the first place. One vision for the future of the major automakers is that they become more like a platform that produces vehicles reliably at scale, but where a variety of small, specialist firms can provide elements of the product or wider service and experience. Right now, they have very close relationships with their biggest suppliers for everything from major specialist components to smaller options and add-ons, but both are locked into long product design and development cycles that may not be fast enough for the more experiential elements of future vehicles that become bigger sources of competitive differentiation. By opening up their organisational platform to a wider ecosystem of startups, they could have earlier access to innovation and also provide a much wider array of add-ons, options and in-car services, rather than these become after-market products.
See our work on business as a platform strategies
Who will win?
The hare is not guaranteed to win the initial race to mass market electric vehicles, and although the tortoise has been slow to catch up, the number of electric vehicles planned for release in the next 2-3 years might change the picture considerably. Large automotive firms – both the manufacturers and their tier 1 suppliers – have huge advantages in terms of scale, supply chain, resources, skill and experience, but the main thing holding them back is the bureaucratic management model and organisational structures they created to run the previous generation of their organisations. But the next phase of the race, if analysts like RethinkX are correct about the end of personal car ownership, the longer lifespan of electric vehicles and the dramatic fall in transport costs that autonomous driving will bring, is less clear. If we see a major fall in demand for new vehicles, a rise in fleet management / rental models and competitive advantage moves from hardware to software, services and experience, then the skillset and market focus of automotive firms will need to change dramatically.
Right now, the speed of change inside these industrial behemoths is nowhere near good enough, and that is deeply concerning. If they can accelerate their moves towards agility and platform-based businesses that make the most of the talent that exists both inside and outside the organisation, then they might surprise a lot of people. But if they continue to cling on to Twentieth Century industrial management methods, they may end up being so slow and costly to run that even where they are competitive on product and price, they cannot remain profitable. And if they cannot find the will to change from the inside, then external factors such as a rapid collapse of the diesel passenger car segment or Tesla overcoming its production scale challenges – might force the issue instead.
For more information about our work in this exciting sector, please contact us to learn more.