Automotive Innovation in the Time of Cholera

Admittedly, it’s a bit of a leap to draw an analogy between Márquez’s book “Love in the Time of Cholera” and the challenges facing the automotive industry because of COVID, but how could I resist? The title does predict many years of pain and struggle, so I stand by my choice.

A 'CASE' for INNOVATION

Even before COVID hit, the automotive industry was facing a perfect storm, best summed up as a shift to CASE (Connected, Autonomous, Shared, Electric). It is telling that the cover image for this post “This is your car in 2020” does not have a single logo of a well-established car manufacturer. Instead, it has logos of high-tech companies, all of them with 2020 valuations much higher than established automakers. Not bad for a prediction from 2015 by Medium.com: “Any Company Can Be A Car Company In 2020“. Indeed!

This table from a recent ZDNet article shows projections for the next ten years in each of the CASE categories. Every one needs enormous investments, and the automotive industry will have a hard time funding the required research and development effort.

EV Development

The EV is the big elephant in the room. Developing an electric car takes years and requires a staggering amount of money. This was a challenge even before the COVID-induced recession hit profits.

In 2019 Reuters estimated that automotive manufacturers will have to invest over $300 billion over the next ten years in electric vehicles.

This may turn out to be a conservative estimate. Wired quotes Volkswagen’s own estimate of over £50 billion ($75 billion USD) to introduce EVs to the market. Volkswagen has recognized that even this amount is not enough, partnering with Ford to share costs and collaborate on ideas.

Dyson Walked Away from its EV Project in 2019

In my October 2019 blog, “Dyson will stick to Self-driving Vacuums,” I wrote about the company’s decision to cancel their EV (Electric Vehicle) program despite having invested over $500 M and having built a 500-person dedicated team around the effort. Dyson has an enviable record of uninterrupted growth since going public in 1993. Their success has been driven mainly by the well-deserved reputation for relentless innovation. With Dyson’s experience in global manufacturing, electric motor and battery design, everyone was looking forward to their entry into the EV market. Dyson was prepared to invest $2.6 billion in the development of the EV but has decided to scrap the investment as it deemed it not economically viable.

In June, we got to see what we’ll be missing. Thanks to Dyson’s leading-edge battery technology, the sporty-looking seven-seater SUV would have had almost twice the range as Tesla’s Model X, 600 miles!

It is telling that Dyson failed to find a buyer for the project in spite of discussions with Jaguar/Land Rover. Dyson is not alone in facing an uphill battle to enter the automotive sector. China’s NIO, Lifan Group, and Zotye are also facing challenges.

And then there is Tesla

The market certainly places a premium on innovation. In June 2020, Tesla became the most valuable automaker. Its market cap peaked at over $300 billion in July, making it more valuable than the next three largest automakers combined.

How is this possible when Tesla sold 367,000 vehicles in 2019, and Toyota sold 10.7 million – 30 times more? The answer seems to be disruptive innovation. Tesla is an innovator in many areas, not all of which have to do with electric vehicles: autonomy, direct sales, and software.

InsideEVs article “Is Telsa’s Biggest Edge due to software?” draws an interesting analogy between Tesla and Apple’s iPhone:

One apt analogy is the disruptive wave that Apple unleashed on Palm, Nokia and other makers of previous-generation cell phones. “When Nokia’s people looked at the first iPhone, they saw a not-great phone with some cool features that they were going to build too, being produced at a small fraction of the volumes they were selling,” writes Evans. “When many car company people look at a Tesla, they see a not-great car with some cool features that they’re going to build too, being produced at a small fraction of the volumes they’re selling.

Forbes take in “What Tesla’s $100 Billion Market Cap Says About The Company?” is that it is about:

A Clear And Relatable Vision
Production Levels (demonstrated ability to execute)
Real Differences (in design, capabilities, performance, driver experience)
International Appeal and Production (global scale and mindshare)
Listening to Users (be responsive, engage the customer base, build fanbase)
A Sense of Fun (evoke emotional response)
Chutzpah (Cybertruck, anyone? How about Roadster’s highest mileage vehicle claim, 152 million miles and going?)

Forget the $100B market cap at the time of writing by Forbes. It reached over $300B in July.

Never bet against a visionary!

Innovation is not just about EVs

The lifespan of a new vehicle model is approximately 6-8 years, with a refresh/upgrade after 4 years. Add enhancements to the driver experience around connectivity, infotainment, and software features amidst a highly competitive market, and you get an idea about the breadth of demands placed on the R&D budgets in the automotive industry. To add to the difficulty, it is unclear what impact the pandemic and recession will have on buyer preferences.

Many new models, often critical to the product portfolios, have already been delayed by the COVID-related shutdowns. An article by Detroit Free Press, “Which upcoming vehicles will be immune to COVID-19?” divides the projects into three categories:

Those so close to production it would cost more to delay them than continue as planned.
Others are “mission-critical,” too important to the company’s image or balance sheet to delay.
Everything else is in the product plan is negotiable when times get tough.

It cites a long list of crucial new vehicle models affected by delays: Mustang Mach-E, Ford Bronco, F-150, Escalade, Chevrolet Tahoe, GMC Yukon, Cadillac Escalade, Honda Civic.

2020 new or redesigned vehicle delays:

13 already launched
15 sales launches delayed within 2020
11 not officially delayed yet, but at high risk of delay from 3Q to 4Q
22 4Q launches that could shift in 2021
4 already delayed from 2020 to 2021

Sam Abuelsamid, principal analyst at Guidehouse Insights sums it up best: “Anything beyond mid-2021 is definitely up for grabs. For the highest volume, highest profit programs, I expect manufacturers to try and stay on track as much as possible like the new big Jeeps” including the Grand Cherokee, Wagoneer and Grand Wagoneer.”

So what's a CEO to do?

In a pre-COVID article from spring 2019 “Facing up to the Innovator’s Dilemma“, Strategy and Business points to the low ROC (Return on Capital) of the automotive companies in comparison to other industries as the key factor limiting financing options. The average ROC was 4% vs. 13% for information technology, 11% for consumer staples, and 7% for telecommunications. S&B lays out three rather bleak scenarios and indicates that Scenario 2 – Delayed Investment is the most likely.

So what’s a CEO to do? It would seem that the answer is to relentlessly innovate and defend the R&D investments by any means possible. It will likely mean some tough decisions. One approach is to partner or merge. We already have seen some strange bedfellows:

Renault, Nissan, and Mitsubishi deepen their alliance in a bid to survive the coronavirus crisis
Fiat Chrysler and Peugeot speed up work to close their merger
Volkswagen has decided to share its MEB platform with competitors, such as Ford, to reduce the cost of developing it.

Programmers vs. Engineers

One other thing a CEOs might want to do is hire some software developers, or partner with Silicon Valley players. Today’s vehicles already are computers on wheels, and ride around with over 100 million lines of code. Also, many of the differentiators or additional revenue opportunities are around in-vehicle experience, autonomous driving, connectivity, predictive maintenance, manufacturing and supply-chain management. This requires a shift form the traditional engineering focus to put greater emphasis on software, big data, and machine learning. McKinsey gives this interesting statistic:

Since 2010, 500 companies invested over $50 billion
in automotive-related machine learning research
97% came from non-automotive companies!

This is probably one of a few times when I don’t envy the automotive CEOs. I close with a link to a great video from McKinsey about the automotive industry facing a perfect storm of rapid change – a second inflection point. Asuthosh reiterates many points about CASE (Connected, Autonomous, Shared, and Electric) all converging at the same time to shake up a 10T global industry with probably the most complex supply-chain in existence. Throw in a black swan event like COVID, and you have a perfect storm indeed.

About the Author:

Paul Rachniowski is based in Ottawa, Canada. Paul’s interest in Supply-Chain stems from having worked for almost 20 years at Kinaxis on advanced supply-chain planning solutions and the company’s flagship RapidResponse product.