The Innovation-Driven Disruption of the Automotive Value Chain

8 Apr

In the last two years I have spoken to several business, technology, innovation, and corporate venture executives about their companies’ innovation goals and the initiatives they establish to address these goals.  Several of these leaders work in the automotive industry and through our conversations I have concluded that a) in the next 10 years we will create more innovations that will impact the automotive industry than we have created in the previous 100, b) these innovations frequently couple technology with business model, sales model, overall user experience and other types of innovation, c) software-, Internet- and big data-driven innovations will have greater impact than those in the car’s hardware platform, and d) because of all the automotive innovations that were introduced in the last 2-3 years, and the ones that will be introduced in the near future, particularly those relating to the electric-autonomous-connected car, the automotive industry is approaching a tipping point of disruption.

In this post I discuss three points:

  1. The disruptive innovations are coming from companies outside the traditional automotive ecosystem.  These companies, many of which are based in Silicon Valley, are offering fresh visions on transportation.
  2. Recognizing that they may be disrupted by such companies, automakers and their suppliers are starting to steps to re-invent the way they innovate and how they interact with companies in innovation clusters such as Silicon Valley.
  3. The automotive industry’s efforts in this direction are still small compared to the magnitude of the potential disruption and it is too early to tell whether they will lead to a marked reduction of the disruption risk these companies face.

A Few Facts About the Automotive Industry

Before discussing some of the innovations that can disrupt the automotive industry and in order to appreciate the potential impact of these innovations, it is useful to present a few facts about the automotive industry.

The automotive industry (approximately $1T in annual sales today) is dominated by a group of 14 very large automotive OEMs, with their several dozen brands, shown in Figure 1.

Figure 1

Figure 1: The largest automotive OEMs and their brands

Over the years OEMs have transitioned from being vertically integrated companies and have become integrators of components in car platforms they define and own.  While initially these were hardware-only platforms, today’s cars can be thought of consisting of a software platform, of mostly embedded and proprietary software that controls major functions of the car, and a hardware platform.  According to a report published by the Center of Automotive Research the automotive industry spends $100B/year on R&D, which equates to $1,200 per vehicle produced.  As is shown in Figure 2, most of this investment is made on the car’s hardware platform and on the elements that control this platform, make it safer, more efficient, etc.

Figure 2

Figure 2: Typical automaker’s R&D areas of focus

The components that are integrated into the car platforms are primarily provided by a very large number of hierarchically organized suppliers, the upstream part of the automotive value chain show in Figure 3.  The downstream of this value chain includes the thousands of car dealers and logistics companies that are responsible for moving the parts and bringing the cars closer to the consumer.

Figure 3

Figure 3: The automotive value chain

Four Companies At the Core of Automotive Disruption

As Figure 4 shows, the automotive value chain is starting to get disrupted in a variety of ways. These disruptions are coming primarily from software, Internet and big data application companies outside the traditional automotive ecosystem.  Many of these companies are venture-backed startups and several are based in Silicon Valley.  These companies are disrupting by combining technological with other forms of innovation, e.g., business model, sales model, marketing model.

Figure 4

Figure 4: Companies disrupting the automotive value chain

Four of these companies are at the core of the disruption: Tesla, Zipcar, Google and Uber.

  • Tesla.  Tesla’s disruptive innovations go beyond the electric vehicle, its components, e.g., batteries, its charging stations and the company’s manufacturing process.  The company’s innovations include its direct to consumer sales and service model, personalized user experience inside and outside the vehicle, and automatic software updates.  The company will also offer a fully autonomous car with certain levels of autonomy being available as early as this summer.  The majority of these innovations are driven by software and big data analytics.  So much so that Tesla is considered as much a big data and software company as it is an automotive company. For example, the telemetry being gathered from each car can be used to analyze the entire fleet’s usage patterns (that in turn can be used to improve capabilities, such as the vehicle’s battery range, introduce new features, etc.), detect crashes, identify need for maintenance that can improve vehicle performance, and find lost cars.
  • Zipcar.  Zipcar’s innovations were created to support the car-sharing model.  Zipcar’s membership-based, car-sharing disruptive business model was combined with its innovative, data-driven software platform and novel user experience.  In the short term Zipcar disrupted the car rental industry and that’s why Avis acquired the company. Zipcar now uses the data it collects to identify new locations to place cars, i.e., having a more distributed rental network, better re-balance its fleet (fleet re-balancing based on usage is a big issue since one-way rentals represents 12% of North American car sharing membership), offer one-way rentals at more competitive prices than full service companies, and offer lower prices/hour of usage.
  • Google. Google is disrupting with two software platforms.  Today its Android mobile platform can control the car‘s dashboard, including the navigation system.  The data collected from this platform is combined with Google’s data analysis capabilities to provide an increasingly personalized in-vehicle experience, as well as an in-context experience when entering the vehicle. Longer term, the experimental software used by Google’s autonomous cars could be offered as a car software platform.  Automotive  manufacturers could build vehicles, i.e., the hardware platform, around such a software platform.  This would be similar to the approach Google took with the Android operating system which it offers for free to smartphone manufacturers so that they can build devices around it. As it is doing with mobile devices Google would want to own the data generated by this car software platform and have the exclusive right to monetize this platform through data-driven advertising.  In addition, Google could develop a transportation network of self-driving cars that will use this software platform and will be based on a reference hardware platform that would be manufactured by an automotive OEM.  By using big data analytics on this network Google could develop applications that offer dynamic ride pricing to optimize the network’s usage, optimize the number of vehicles that will be needed to serve a population, and other such applications.
  • Uber. Uber’s innovation is a hybrid of Zipcar and increasingly of Google.  In addition to its business model (and here), Uber’s innovations also include its mobile application which allows for the presentation of routing information and transparency for the arrival time, ability to rate drivers thus establishing driver reputation, and demand-based dynamic pricing.  More recently the company started work on an autonomous car and is expanding globally with blinding speed as it aims to build barriers to entry in addition to what its first mover advantage provides.  While it initially disrupted the taxi and limousine industries, Uber’s model is now starting to disrupt the automotive value chain, as well as the on-demand delivery industry.

While still a rumor, Apple can emerge as a fifth major disruptor of the automotive industry.  Apple can disrupt in two significant ways.

  1. Apple is all about the user experience.  If it decides to enter the automotive market it could disrupt not only the car’s software and hardware platforms, but also the overall car-buying experience, car-servicing experience, etc. very much like it did with its mobile devices (iPod, iPhone, iPad). Since it already owns retail stores around the world, Apple will be able to follow Tesla’s model and offer cars directly to consumers without relying on dealers.
  2. Because when it enters a market Apple takes control of the entire supply chain, as it demonstrated with the mobile devices, it has the potential of re-imagining and thus disrupting the automotive supply chain, an area that automakers consider their core competence.  To achieve this, Apple will need to identify a manufacturing partner to play for the “Apple car” the role Foxconn plays today for Apple’s mobile devices.  It will also need one or more support partners with knowledge of the automotive regulatory environment to play the role wireless carriers, and particularly AT&T, played when Apple introduced the iPhone.

These four, or five, disruptors have access to abundant private and public capital, as was most recently demonstrated in the case of Tesla, Google and Uber.  In addition to their balance sheets, Google, Tesla and Apple can also use their high market capitalization to fuel their automotive goals.

Six Trends Driving the Disruption

The disruptors were the first to start capitalizing on six trends:

  1. The changing car ownership model. For generations owning a car has been a primary aspiration.  In the developed and developing economies the car had been placed at the center of every person’s life.  As a result of the central role cars have been playing in our lives, automobile safety and fuel economy became important issues defining car and innovation around cars.  However, consumers in these economies are moving from the notion that puts ownership at the center to one that puts access at the center.  Google’s transportation vision is very consistent with this shift.  The car is starting to be viewed as only one of the means that can move us through our daily life rather than something that defines us.  In addition, consumers are starting to become negative about many aspects of car ownership: purchasing, servicing, driving on congested roads, parking, and insuring.  Based on surveys conducted by Arthur D. Little, the division between car sharing, rental, leasing and owning a car is diminishing for both consumer and corporate vehicles. Companies capitalizing on this trend: Zipcar, Google and Uber.
  2. A car that is electric, autonomous and connected is a computer platform on wheels. In recent years the car had started becoming a multiprocessing distributed computing system.  By further increasing its computing power to enable autonomous driving and provide always-on, broadband, IP-based connectivity the traditional notion of a car as an electromechanical platform is changing irreversibly.  The addition of electric propulsion requires the further reliance on on-board computers and associated software.  This new platform will run on infrastructure and application software that is based on open standards and delivered as a service, much like every other enterprise and consumer application is.  The car as a computer on wheels is disruptive and enables the emergence of a completely new ecosystem and value chain.  It will also require a brand new set of safety regulations, actuarial considerations and financial underwriting considerations, as well as data privacy laws.  Companies capitalizing on this trend: Tesla, Google and Uber.
  3. Use of software, Internet and big data enable new on-board experience.  Software-, Internet- and big data-driven capabilities combined with the right consumer electronics enable the provision of many services that improve the overall driver and passenger experience (see Figure 5). Companies capitalizing on this trend: Tesla, Zipcar, Google and Uber. 
    Figure 5: Services enabled through always-on Internet connectivityFigure 5: Services enabled through always-on Internet connectivity
  4. Cars generate and consume big data.  Like every other computing device, the car/computer platform on wheels not only generates but will also consumes big data.  The big data that is being generated from the car and through car-related services and interactions (sales, maintenance, insurance), can be analyzed to understand consumer and vehicle behavior, provide personalized passenger and driver experience, optimize vehicle performance, and improve the economics of the car’s usage, Figure 6.  Companies capitalizing on this trend: Tesla, Zipcar, Google and Uber.
    Figure 6: Big data uses in the automotive value chainFigure 6: Big data uses in the automotive value chain
  5. The driver and passenger experiences inside and outside the vehicle are changing.  If the car becomes just one of the means for moving through daily life then passenger and driver would want the car to be able to take into account their life prior to entering the vehicle in order to personalize and improve their experience and productivity while in the vehicle.  For example, with the increasing importance of a continuous experience for driver and passenger and the centricity of mobile devices to our lives, the automotive OEM is starting to lose control of defining and controlling the dashboard specification.  This role now goes to Google and Apple since theirs are the dominant mobile platforms. With fully autonomous vehicles, like Google’s demonstrators, and car-sharing services, like Uber’s, the passenger experience starts to matter more than that of the driver.  Big data analytics will play a big role in understanding context and personalizing the in-vehicle experience.  Companies capitalizing on this trend: Tesla, Uber and Google.
  6. Use of the Internet removes the middleman (car dealer, rental agent, taxi/limo dispatcher) and in the process improves the consumer experience, also in Figure 5.  Companies capitalizing on this trend: Tesla, Zipcar, and Uber.

We therefore see that, a is happening in so many other industries, software, the Internet and big data with associated analytics are main ingredients for the automotive disruption that is taking place.

The Automotive Industry’s Response

Automakers and their suppliers have not been sitting still as they started becoming aware of these trends.  They have been investing heavily in R&D and during the last three years have been increasing these investments.   Figure 7 shows the top 20 R&D spenders in 2014, based on data compiled by PwC, where we see (in red) that six of the top 20 companies are automotive OEMs.

1 Volkswagen 11 GM
2 Samsung 12 Daimler
3 Intel 13 Pfizer
4 Microsoft 14 Amazon
5 Roche 15 Ford
6 Norartis 16 Sanofi
7 Toyota Motors 17 Honda
8 J&J 18 IBM
9 Google 29 GSK
10 Merck 20 Cisco Systems

Figure 7: Top 20 corporate R&D spenders in 2014

Though the R&D investments of automotive OEMs are high, these investments focus on a) sustaining innovations, e.g., improving manufacturing processes through the use of robotics, b) innovations that are necessary to comply with government regulations, e.g., increasing the use of plastic, carbon and aluminum components along with novel bonding methods to make cars lighter and thus increase their gas mileage, and c) making defensive moves, e.g., introducing electric vehicles and development of cars with increasing levels of autonomy.

Figure 8 shows the results of a survey, also conducted by PwC, where executives from a variety of industries were asked to identify the top 10 most innovative companies of 2014. Notice that Tesla Motors is the only automotive company included in the ranking.

Innovator ranking


Figure 8: PwC survey results of the top 20 most innovative companies in 2014

Figure 9 shows the results of a similar survey conducted by BCG where in addition to Tesla Motors, the top 10 list also includes Toyota Motors.

1 Apple 11 HP 21 Volkswagen 31 P&G 41 Fast Retailing
2 Google 12 GE 22 3M 32 Fiat 42 Wal-Mart
3 Samsung 13 Intel 23 Lenovo Group 33 Airbus 43 Tata Group
4 Microsoft 14 Cisco Systems 24 Nike 34 Boeing 44 Nestle
5 IBM 15 Siemens 25 Daimler 35 Xiaomi 45 Bayer
6 Amazon 16 Coca-Cola 26 GM 36 Yahoo 46 Starbucks
7 Tesla Motors 17 LG Electronics 27 Shell 37 Hitachi 47 Tencent
8 Toyota Motors 18 BMW 28 Audi 38 McDonald’s 48 BASF
9 Facebook 19 Ford 39 Philips 39 Oracle 49 Unilever
10 Sony 20 Dell 30 Softbank 40 Salesforce 50 Huawei

Figure 9: BCG survey results of the top 50 most innovative companies in 2014

The results of these two surveys lead us to conclude that industry executives do not view automotive companies as top innovators despite their high R&D investments.  This may be because the the automotive industry by culture prefers to be a fast follower, rather than a first mover.  In addition, software, the Internet, data and data analytics are not in the automotive industry’s DNA.

Because Silicon Valley is at the forefront of software-, Internet- and big data-driven disruption, several automotive OEMs and suppliers have started interacting Silicon Valley’s ecosystem.  In many cases these interactions take the form of visits by corporate delegations.  However, increasingly automotive companies are starting to establish a presence in Silicon Valley (Figure 10).

Figure 10


Figure 10: Automotive company presence in Silicon Valley

This presence is in the form of:

Figure 11 organizes these efforts by type.  (Along with every incubator we include the incubation model being used). Today these corporations employ about 550 people in Silicon Valley.

Corporate Venture Capital Research Lab Incubator Business Office
GM GM Ford (Model 1) Johnson Controls
Volvo Daimler VW (Model 1) Faurecia
Nissan (via WiL) Ford Chrysler (Model 2)
Delphi VW Bosch (Model 2)
Bosch Delphi
Nokia (Connected Car) Bosch
Hyundai Honda

Figure 11: Automotive companies with CVCs, incubators and research labs

Analyzing the Automotive Industry’s Efforts To Date

Based on the data in Figure 11 it would appear that, at least some, automotive companies are taking the right steps to avoid being disrupted.  However, upon closer examination of these efforts one can conclude that:

  1. Oftentimes these efforts appear to be putting the “cart before the horse.”  Before determining the form of their presence in a particular innovation cluster, such as Silicon Valley, automotive companies must a) establish their innovation goals, e.g., transform their business model, provide the leading connected car platform, adapt their supply chain to accommodate the electric-autonomous-connect car, b) identify the cluster with critical mass of innovators to address the selected innovation goal(s), c) decide whether the corporation wants to work with early stage startups (and thus be prepared to tolerate the risk they present) or with more mature companies, as Mercedes and Toyota did with Tesla before it went public, d) select the best way to connect with the ecosystem in the selected cluster(s), e.g., venture investments only, specialized research lab, incubator, etc. Few of the automotive companies I spoke to thus far have done this four-step analysis.
  2. The data in Figures 10 and 11 and the relatively small number of people these companies employ in Silicon Valley lead us to conclude that only a few companies understand the impact of the pending disruption to their industry and business.  These groups are just too small to have a transformational impact to their parent corporations in light of this disruption.
  3. The arrival of the electric-autonomous-connected car will require the automotive industry to modify its notion of what companies are part of the value chain.  The new value chain will need to include at least electric utility companies, financial services companies, and insurers.  Such companies will need to start working together in the same way that automotive OEMs work today with their suppliers.
  4. Even the companies that have established venture investment groups they have not been very active investing. For example, see the portfolio of BMW’s iVentures.
  5. The corporations in Figures 10 and 11 are not all acquiring, investing, or incubating in the sectors at the core of the disruption (application and platform software that is based on open standards, big data analytics, mobility, user experience technologies, Internet of Things, and digital business, and the disruptive business models that are service-centric and subscription-based (here and here).  For example, compare the portfolio of BMW’s iVentures with the portfolio of GM Ventures.  Moreover, their efforts focus on technology innovation rather than other types of innovation, e.g., business model, sales model, etc.
  6. The efforts between the groups working within the innovation ecosystems, the central R&D organizations of the parent companies and the business units are not well coordinated.  Part of this misalignment is due to reporting relations.  For example, BMW’s iVentures reports to the executive responsible for car maintenance and dealer management. Another part is due to clarity of mission.  For example, some of the Silicon Valley-based automotive research labs, are actually acting as research scouts, rather than labs conducting research and report directly to corporate research.  Others are part of a business development function.   Finally, it can be due to the fact that the business unit executives are focusing only on short-term objectives, e.g., car sales per quarter, or the attainment of the quarterly profit margin goal, rather than the coming disruptions because success on such objectives brings them corporate advancement and financial rewards.

Through the four disruptors mentioned in this post, and many others being developed innovative companies not mentioned, it is becoming evident that disruption in the automotive value chain has started and can soon reach a tipping point, particularly as the electric-autonomous-connected car becomes a reality.  Automotive companies are starting to re-think how they must innovate in order to avoid being disrupted.  Part of their re-thinking involves how they interact, collaborate with, invest in and even acquire startups in innovation clusters like Silicon Valley.  The industry’s efforts to date have remained small and are doing little to reduce the disruption risk the automotive companies are facing.



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