Looking at the wave of disruption that is already happening right now or coming to industries that have not natively been part of the digital business, the automotive industry is surely one of the most interesting. Their products are what moves the world and what captures many people’s passion and materialistic desires. Even with the core use case being a physical one, transportation of people and/or goods, this industry will be disrupted, just like any other industry and way of doing business has been or will be disrupted by exponentially advancing digital technology (e.g. traditional retail, the media/newspaper industry, the music industry, books publishers and stores, travel agents, even the telco/communications players, etc.).
We are now in an era in which technologies such as computing, networks, sensors, artificial intelligence and robotics, to name a few, are advancing exponentially. And not only that; they are also converging and thereby allowing industries to disrupt one another.
Even without a lot of imagination the potential and benefits of introducing a radical digital technology-driven transition into the auto industry are crystal clear. Autonomously driving cars, eliminating millions of world-wide traffic deaths, while at the same time drastically increasing road utilization efficiency by cutting out the human brain as decision making entity. A massive cut-back on climate-altering emissions by shifting to electric engines. Reutilization of urban parking lot real estate. Putting an end to the related dangers of distracted and drunk driving. Free capital and funds bound in car ownership for other purposes, stimulating other industries and businesses and the economy in general. Those are only a few top prospects of how things could change for the better.
The key question is, if in the melting pot of consumer technology, cloud, Internet-of-Things technology and cars, the incumbent automakers possess of the right level of the key success factors for the future of the automobile. How well are the classic players of this industry, maybe THE industry of the industrial age, set up and prepared for what is ahead?
Executive arrogance… like seen before so many times
A disturbing hint that the incumbent automakers are not necessarily the ones that will set the pace in the future are the opinions and statements you can hear from some of their executives and decision makers. It is about opinions and statements like “we’re in this business today, those others are not”, “we’re smarter or more knowledgeable because we’ve been in this business for longer”, “it will take these attackers years and so much money to gain significance, that we’re not afraid of them”, “[very promising and on the brink of exponential advancement] technology xyz? – I don’t believe in it”, “company/attacker what?”, etc.
Remember similar statements from executives of seemingly invincible players like Research in Motion, Nokia, Kodak, Blockbuster and the likes? Everyone knows what happened to them.
Now, there is a bunch of new players entering the arena. And yes, it is a fact that many of those new market entrants aiming at shaping the future of cars – may it be dedicated auto startups like Uber, Tesla, etc. or internet players showing interest in the space like Google, Apple, etc. – have (had) little experience in the car business. But it should not be underestimated that the car business has been, is being and will strongly be infiltrated by new digital technologies which are changing cars and mobility as we have known it so far. The future will be considerably different than the past in this business.
I am not saying the established players have no chance; but these kind of attitudes are certainly alarming and we have seen their negative parallels in the past.
Software is eating the world… and of course it is eating cars as we know them, too
When it comes to the classic manufacturing industries, it is the shift to software that should be most alarming to them. Software is playing an ever increasing key role for the customer experience. Software developers and engineers will be the ones determining the future of this industry, determining the experience and the differentiating details.
Surely, current state-of-the-art cars, albeit relying on combustion engines, already have a lot to do with software, electronic control and embedded digital information systems. However, it has never been at the core; neither during the development of the vehicles, nor at the core of user experience. Software and digital technologies have been added to cars far more than a century after the invention of the automobile. Software sits in cars in all the imaginable silos, isolated solutions and is accompanied by significant integration complexity. Certainly the overall mindset of these organizations is not centered around software. So far it has been peripheral within the automaker organizations. It is not the main area of expertise, neither on the level of the management and main decision makers, nor in the wider organizations that are dominated by classic mechanical engineering functions. It is still this non software engineering part which is dominating.
I believe that the key success factor going forward is the utilization of software, digital technology and a radically new approach to the baseline user experience. It must be in the center of all activities.
Take autonomous driving. It is certainly not the only feature that is heavily relying on excellence in software engineering. But it is surely the most important development and serves as a good example of what is happening and what a difference a superior approach to it can make. For autonomous driving the car and its systems need to stay on top of billions of data points from in-car sensors, remote sources like near-by cars, the distant internet. And that in real-time. A myriad of decision alternatives need to be processed and executed unbelievably fast.
The race for top talent
You better have the best team of software architects, programmers, data scientists and of course machine learning and artificial intelligence specialists on board. The best of breed in these disciplines naturally do not work for the classic car companies. They are usually found at the internet giants or specialized startups that often times are funded by their venture capital firms. Those have been and are the biggest attractors for top talent. Like, in contrast, the car companies are for the top talent in the classic mechanical engineering functions.
There are ways to address this situation, like poaching of top talent and employ people where many of the top candidates can be found. There is hardly a classic auto maker that does not run an R&D center or similar operations in the Valley. But it will always be a tough competition for the best talent with the likes of Google and Apple, or Uber and Tesla and many more which do not even exist yet. And there might be a significant amount of top talent who will always opt to work for the pioneers and maximum agility players in contrast to helping big ship industry incumbents become “cool”.
It’s the data, stupid!
Another aspect, and this is strongly related to the software topic, is the role that data and the collection, possession and utilization of it play in the future of the automobile. Excellence in autonomous driving is more than just collecting sensor data from various types of sensors, munch it with other data sources and take driving decisions based on it. The machine learning capabilities which are needed for setting the highest standards in driving and hazard avoiding are dependent on the systems being fed with the largest amount of data imaginable to learn from. In order to create sophisticated enough schemas that excel in every imaginable situation there cannot be enough foundational data. I believe that those companies who master this data collection and utilization will outperform the competition in this crucial piece of functionality of future cars.
Tesla is a great example of what I mean. Every car Tesla has sold so far, no matter if it has the “Autopilot” capability or not is basically able to send all sensor and telemetric data back to Tesla (given owner permission). This is currently shoveling data gathered from about 1.5 million miles of driving per day back to Tesla. Even Google possesses of respective data based on 1.2 million miles of autonomous driving collected by their fleet of experimental self-driving cars. That’s a fraction of the Tesla data pool, but still pretty good for improving and perfecting autonomous driving decision making algorithms. And it is likely a lot more than what can be assumed to be available at the average incumbent auto maker.
I believe the best of breed autonomously driving cars will be those that are fed by the largest amount of input fleet data. The larger and more versatile the input data, the more benefits there are for developing and improving the best autonomous driving systems.
Ability to innovate; rapidly innovate
When – compared to the traditional way of doing things – new technologies start to disrupt your business, the most important advice is to adapt to rapid innovation. It is a must and the only way to survive. Unfortunately the traditional car companies and rapid innovation so far have lived far away from each other; definitely when you compare the rapid innovation power to those of players in the digital technology space. Product life cycles in the auto industry are very long, both in terms of product development as well as product usage cycles. You want feature updates in a car? Go get yourself a new one! That’s more or less how this industry is functioning up to the present day.
To be fair, given the complexity of the product and the price tag of the average car they will likely never reach similar short-lived product life cycles like smart phones.
But there are two factors to be considered, which in my opinion will definitely put up the pressure on makers of automobiles:
- The relevance of classic ownership models will further decline while “sharing economy” models are on the rise: renting, on demand, pay-as-you-use, etc. This will sharply increase the expectations of consumers towards features and up-to-dateness of the cars providing mobility which can only be achieved by radically embracing rapid innovation philosophies.
- Future cars will be working according to the platform model that we have seen coming into many businesses: there is a hardware platform and on top of that a software based platform with the ability to receive frequent feature and functionality updates over the air. And this is again only working successfully when rapid innovation is embraced.
The general idea, updates of functionality during the product lifecycle of a car, is to a degree already happening today. They are related to entertainment and media features, navigation or mobility management. But they are usually not bound to in-car systems, but tied to smart phones, which are delivering such features for an in-car experience. People rely on external systems and devices to provide these, because they embrace rapid innovation driven update cycles.
In contrast, Tesla is paving the way for the necessary true change in how things work for car owners. And this is about car inherent functionality, not things delivered via smart phones. Significant updates of functionality not only to peripheral features, but core features are a reality for Tesla car owners today. Good examples are “Autopilot” and “Ludicrous acceleration”. Coming to a Tesla car after it has initially shipped.
What makes things worse for the incumbents is that their manufacturing model has a lot to do with a systems integration model and less with a manufacturer in the classic meaning. Dozens if not more providers of parts, functionality and features develop these externally and the car companies source these from them and integrate them into the final product. Their external vendors and partners haven taken over larger and larger parts of this value chain in the last years. Now, what does that mean from a “excellence in digital engineering” point of view? The digital technology driven parts of the user-experience better be developed, implemented and maintained in-house. Software is much less compliant with a distributed development and operations model like this. Major flaws are inevitable to occur and a smooth and consistent user-experience tough to achieve under these circumstances of production.
Digital technology powerhouses like the internet giants had no problems in the past to even put other players that are operating much closer to and with digital technologies into their places. The telecommunications companies are a good example. Not used to in-house driven software development but rather external system vendors and integrators, they were and are not able to keep up with the rapid innovation coming from aggressive and agile players much younger than them.
Last not least, the incumbent auto makers – when not changing this modus operandi – will be facing disadvantages for differentiation in anything outside of the pure exterior and interior design of their vehicles. They are not really the owners of the end-to-end experience. This might not have been so crucial and impactful when all players in the market have operated this way, but it surely poses a problem in a future car world with much more focus on digital technology driven car user-experiences.
The electric future of mobility
I have taken a look at some details around autonomous driving and how that translates into the competitive situation of new players vs. incumbents. Another definitive battle ground will surely be electric drives. When thinking about this, and also looking at how this topic has been played so far, I think it is equally challenging to incumbents like the data collection and autonomous driving feature.
Very obviously, new market entrants can leverage their lack of heritage, not to say legacy, to fully center all of their organization, car design and architecture around the electric engine. Tesla is already doing this, and all automotive ambitions Google, Apple and any other new player in this field has, will certainly lead to operation models alike. In addition to the clean sheet chance of starting with electric drives from square one, electric drives are in many aspects “simpler” than their combustion engine competition. There is no more combustion principle, fuel economy management, classic transmission systems, emission systems, carburetor optimization, exhausts, etc.
Now we are talking about a totally different set of expertise needed: batteries, charging technologies, engine controllers, power optimization, etc. Sounds familiar? There are clear parallels in areas of expertise which have been the home turf of technology and IT companies. Those are technologies that classic digital business players have been working on for their entire life span.
Removing complexity in the engine and drive discipline, combined with a replacement of core technologies with ones native to digital companies, combined with the chance to start their automotive operations from scratch incorporating these benefits will give them a good chance to make a profound impact in the automotive business.
The consumer relationship
Apart from technological and organizational aspects there is another interesting area which has had a distinct and historically grown setup. The customer relationship and its indirect nature via associated dealer networks as it is standard in the industry. Who has not wished for a world without the hassles of the overhead man-in-the-middle old school car dealer? I can very well see that by replacing this with a more efficient, closer and more pleasant experience there will be a more coherent and better functioning customer – supplier experience. A direct-to-consumer relationship in my opinion would be more consistent with the overall shift in the product experience.
When cars talk back to the supplier, are always connected, receive OTA updates of crucial pieces of functionality, offer an overall connected high-tech experience, then it seems natural that the sales and service relationship is a direct one. In such a setup, everything that gives you as a producer and supplier better knowledge and better understanding of your customers and their customer journey strengthens your position.
Tesla is going exactly this way. The fact that the traditional industry players are fighting this approach with lawsuits speaks for itself. That has never been a good sign for established players when market disruption is hitting or about to hit them.
Where are we heading?
Certainly, some of the established automakers and their partners will transition and develop cars with autonomous driving capabilities. There will be better and there will be worse ones. Some of them will come up with decent electric cars and/or electric autonomous cars. Some of them are already trying out new business models for a “sharing economy” world that is less relying on individual car ownership but simply focusing on mobility, no matter how it is provided. This is all going in the right direction.
But there are and will be extremely creative, decisive and pushing entrepreneurs with lots of valuable experience and ideas from other technology areas which they will bring to the automotive table. They have the will, the power and the means to radically redefine and execute on new consumer expectations towards cars and mobility.
And whenever the scene is set for profound technological change in a business space, new players get a real chance to step up and snap up considerable market share away from established players. I believe that this is exactly what is happening now and what is going to happen. We’re in the beginning of some very interesting and balance sweeping times in the automotive industry.
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