By June 30, 2017 Read More →

Opinion: How automakers can survive disruption


To thrive automakers need to become high technology companies and get into the business of providing transportation as a service. 123RF photo.

Automakers need new business models where cost per mile are the new metric for success

Tony Seba and James Arbib

Jim Hackett, the newly appointed CEO of Ford, has the challenge of a lifetime. Ford right now is Nokia back when Apple and Google were building smartphones. Nokia was a world leader in mobile telephony but was disrupted by two Silicon Valley companies that had never built a phone before. Hackett’s challenge is simple: does Ford become the Nokia or Apple of transportation?

Over the next decade and a half, the automobile business as we know it will vanish, and a new model of transportation will take its place. As we detail in Rethinking Transportation 2020-2030, a new report from the independent think tank RethinkX, autonomous electric vehicles (AEVs) will destroy individual gas-powered vehicle ownership. We anticipate that within 10 years of widespread regulatory approval of driverless vehicles, 95 per cent of U.S. passenger miles will be traveled in on-demand AEVs providing transport as a service (TaaS).

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To survive, automakers will have to build new business models, becoming low-margin, high-volume assemblers of AEVs. Cost per mile will soon be the new metric for success, and focusing on driving down operating costs and increasing vehicle lifetimes is a key imperative.

This transition is already in play. Volvo, now owned by Chinese automaker Geely, has announced they will not develop new diesel internal combustion engines and instead will focus investments on electrifying their fleet. New entrants are streaming into the industry. LG supplies the Chevy Bolt Powertrain, which accounts for more than half the value of that car. Hundreds of electric car, truck, and bus companies, as well as current Tier 1 and Tier 2 suppliers, are potential competitors in this space.

To thrive automakers need to become high technology companies and get into the business of providing transportation as a service. This is where real opportunities will be found. Automakers must understand that the most value will be created by computer platforms, software and business model innovation. They will need creative thinking and quick execution — understanding the new revenue generating opportunities that come with a new mobility platform — from advertising, data monetization and entertainment to product sales, grid support, and other unseen opportunities. Self-driving technology will be a must, not an option.

This will be one of the deepest, fastest and most profound disruptions of transportation in history. If automakers don’t react fast, they risk going out of business — playing catch up is extremely difficult. Nokia’s last CEO Stephen Elop said, “we didn’t do anything wrong and somehow we lost.”

Ford’s board of directors will need to measure Hackett’s success using the new metrics of TaaS, cost per mile, rather than the old metrics of the auto industry, numbers of cars sold.

Hackett will also have to ignore the mainstream experts and analysts who forecast a slow transition to AEVs, rather than the exponential rates of growth that are typical in technology disruptions. When Apple’s iPhone came out, a Bloomberg analyst mocked it, saying that its influence would be minimal and not impact Motorola and Nokia, since it would only appeal to “a few gadget freaks.”

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TaaS will be dramatically cheaper than individual car ownership, right from the start. Because of the extended vehicle lifetime of an EV, which can easily travel over 500,000 miles, and significantly lower fuelling and maintenance costs, TaaS will be four to 10 times cheaper than individual vehicle ownership, rendering traditional metrics useless. The high utilization rates of TaaS vehicles — each capable of traveling 100,000 miles per year — will drastically reduce the number of passenger vehicles on U.S. roads, from 247 million in 2020 to 44 million in 2030, with production volumes dropping 70 per cent.

When technology disruption looms, it can be difficult for people with a vested interest to see it coming. Vehicle autonomy is the key uncertainty. Making investment decisions and balancing the needs of the existing business with the need to invest in the future, in the face of uncertainty, makes Hackett’s job even harder. Pure-play autonomous and electric vehicle companies have an advantage here: they don’t have to protect the sunk costs in the old business model. They see only opportunities.

The transport as a service disruption is imminent. Fortune will favor those who see it not as a threat, but as the opportunity of a lifetime. Will Hacket be more like Apple’s Steve Jobs or Nokia’s Stephen Elop? You’ll know when you use that Ford TaaS app in your smartphone rather than Lyft or Uber to order a car to take you to work, home, or school on a daily basis.

Tony Seba and James Arbib are co-authors of Rethinking Transportation, and co-founders of RethinkX.

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