Cars Clash: The Reshaping of Global Automotive Industry

Cars Clash

The production model automobile is generally reckoned to date to the 1885 introduction of Karl Benz’s four-stroke petrol engine vehicle. As technologies go, this platform has been enormously successful, yet today, at the venerable age of 132, it is under attack from two separate and titanic forces that, together, will reshape profoundly the industry landscape and will likely eradicate many of the world’s most familiar industrial brands.

The two forces are, of course, drive train electrification and autonomous driving. Even before a recent fatal accident (in which an Uber autonomous car killed a pedestrian in Tempe, Arizona) it was clear these two trends were on different timelines. Yet while the accident in Arizona will certainly slow down the development of autonomous vehicles, their ultimate ubiquity is still more or less inevitable. In fact, at some point, their use is likely to be mandated because of the benefits to public safety. And long before this happens, the shift to electric vehicles will be essentially complete.

In each case, the implications for the automotive industry are profound. The cost to shift to electric mass production vehicles will be enormous, and the capital requirements should make it hard for any but the largest OEMs to convert by themselves to electric power. By some reports, Volkswagen will invest around $80 billion over the coming decade, while Bosch (the German auto parts supplier) has withdrawn from battery development because it required a $20 billion investment just to enter the industry.

We have seen something like this happen in semiconductors, where the industry has gradually consolidated as the capital requirements to build out new fabs has remorselessly increased. Even the largest firms engage in cross-licensing of technologies, and second tier firms have consolidated into alliances.

The same pattern of consolidation is likely to emerge in the automotive industry. The recent investment by Geely in Daimler is perhaps a harbinger of this, and many smaller car companies will be forced to partner with each other, or with the largest firms, to gain access to what is, after all, an emerging technology.

This is a key point: the internal combustion engine is an exceptionally mature technology, with few real technology barriers to entry and a global pool of skilled people and proven suppliers, both for the engine and the vehicle systems it powers. Electric technology, by contrast, is in its infancy. Access to design, engineering, production and procurement expertise is limited across the spectrum, the technology is rapidly evolving (which means costs have room to fall rapidly for firms that can build scale) and supply chains are both flimsy and substantially opaque. Firms that fall behind in the race may never catch up.

So I expect over the next decade that the global car industry will consolidate as well as condense into clusters of technology-sharers. Cars and brands may look and be positioned differently, but they will increasingly possess more in common under their skins.

Competing successfully in the electrifying environment will take a huge effort in strategy, design, and capital investment. Unfortunately, there’s a strong chance that it will all be to no avail once truly autonomous driving becomes the norm.

The reason for this should be readily apparent to anybody who has hailed a taxi, or called up a Lyft or an Uber. Users of all of these services have no control over, nor really any interest in, the model or brand of the vehicle they ride in, other than to be sure it is adequately sized for the number of people getting into it.

So, in a world in which transportation is a service on demand rather than asset-backed, so to speak (by one’s own vehicle), it’s hard to see where competing brands of vehicle have much room to command value. This portends a bleak future for automotive companies and their stockholders unless they can solve the conundrum.

The two obvious exceptions are first, if one car manufacturer manages to capture network economies. Competition law renders this outlook virtually inconceivable, although we shouldn’t rule it out. The second relates to the software package that controls a user’s experiences while in the car. Here the chances of network effects leading to a Google-like monopoly are less discountable (though still small) and users may indeed select vehicles on the basis of the informatics and on-board entertainment available.

The ramifications of autonomous driving spread far beyond car manufacturers. But the impact on automotive firms is likely to be huge and for many or most companies, potentially terminal. For managers and their investors, the questions revolve around how to preserve the value of the brand in the face of such massive pressures towards commoditization, and more fundamentally, whether to fight the trend or to surrender early and be acquired – sometimes it’s worth more to be eaten than to eat.

Thus while passengers are unlikely to need seatbelts in the autonomous future, for investors in the auto industry it’s time to buckle up.