Restructuring the Car Industry

The global auto industry seems headed for change on its enormous scale. The changes will be wrenching and difficult and will devastate some players and create major opportunities for others. 

In the 1990s, telecom moved headlong into a decade of transformation that rewrote the rules forever: competition, a change in the underlying technologies, and the migration from narrowband voice to broadband data and from wireline to wireless, and the diffusion from expensive services for the world’s middle class and wealthiest to absolute global ubiquity were the ingredients to this recipe for change.

And now, the auto industry faces challenges on a similar scale, driven by similar forces. Consider these:

  • Car usage is dropping (as measured in miles driven per year per car or per driver) in advanced markets; in the USA, car usage tracked growth in GDP every year from the mid-1960s until the early 2000s … after which GDP growth continued (with a famous crash in the middle!) but car usage has not grown at all. This is likely also related to the structural challenges in the work force: the percentage of the work force holding jobs has dipped and isn’t growing much at all during the ‘recovery’.

 

  • Cars are not nearly the aspirational objects they were – although car advertisements tout ‘fun’ and ‘freedom’ … they’re increasingly functional, a transportation solution to be considered alongside others.; This is partly because many of the hours spent in cars are spent in slow-moving urban traffic, or hunting for an elusive (and expensive) parking slot. It’s also because cars are expensive: the median car price in 2013 has reached $30,000! (And the younger generation entering the workforce at professional levels, who would normally be likely candidates for car purchases are now often hidebound with college student loan debts at high levels, reducing their willingness or ability to buy cars.)

  • The prototypical customers for cars are no longer rite-of-passage American youths or middle-aged, middle-class American or Europeans, but are now a global mélange of working and aspiring buyers with diverse aspirations and expectations, with new needs and heeding new brand messages.

  • And in many cases, there simply isn’t the same need to buy. In almost every major city now, the public mass transit systems (buses, trains, etc.) are being amplified by increased support of bike lanes and city-based free bikes, while regulated / medallion-based taxi services are being supplemented by services like Uber; rental car services are being supplemented by car-usage services like Zipcar and CityCarShare.

  • The underlying technologies are being rewritten: no longer is there a single, dominant powerplant technology – the 4-stroke internal combustion engine using gasoline (petrol). Instead, there’s a range of hybrids, pure electric cells, some experiments with hydrogen, … and a variety of vegetable or food-based fuels.

  • Internet shopping … surely means that fewer trips are now being taken to buy many goods. Personal experience does not make a statistical force, but it’s clear that – several times per month – we’ll find some product we want to buy and, rather than adding this to the list of things we should look for when we go shopping, we won’t ‘go shopping’ … but rather fire up Amazon or Zappos or LampsPlus (most recently) or eBay or … and at least do the first round of comparison shopping and perhaps conclude the purchase. Fewer hours and miles in the car, for us and for millions of others means less reason to get in, use, wear out, value and care for the cars.

  • Structural resistance to change that goes beyond the slow paces normal in enormous industries. The dealership distribution model, mandated in most US states, has created structural blocks to market innovations. And the reliance on a few, powerful global components vendors in the automakers’ supply chain has similarly restricted innovation on the design side. (Why ARE so many cars the same shade of grey? Because the paint makers want to sell the same paints, one automaker exec told me recently.)

  • Much of the driver’s experience is no longer shaped by muscular BHP / torque figures (although, to be sure, these are key for sales of supercars). Just as cup holders – to the chagrin of German car makers – were among key concerns for buyers in the 1990s, it’s now all about electronics. Built-in navigational systems, proximity and lane-detection systems, complex entertainment and phone-pairing systems, and how information is rendered and displayed … such factors now create high value in how the driver-buyer appreciates the auto, and create new complexity for the automakers which have to deal with software version control and update cycles on a daunting new scale.

The future of cars is not just about self-driving vehicles –this is an industry ripe for structural change.