Carmakers shifting up from hardware into services

Automakers are facing the biggest disruption to their traditional business model, ever. No longer is selling cars to dealerships and then obtaining aftermarket revenues from servicing and repairs enough.

The writing is on the wall. A new report from Michael Sivak of the University of Michigan's Sustainable Worldwide Transportation Institute shows that motorisation, car ownership and miles driven per person, peaked in the United States in the past decade. The vehicle-ownership rates per person and per household were at their maximum in 2006, while the distance driven rates peaked in 2004.

The report said that ownership was down an average of 4.4% from the peak, while distances driven were down an average of 7.8%. It’s a smallish downward trend – for now. Yet suddenly, almost every car maker is exploring how to transform itself from manufacturing to mobility services.

Ride sharing: today’s play

It seems like a no-brainer: car sharing and ride hailing could replace car ownership for a certain demographic in certain geographic conditions. Therefore, transportation networking seems to be low-hanging fruit for carmakers.

Volkswagen is probably the most recent entrant. Announcing its spinoff Moia, Volkswagen said that using mobile phones to hail rides represented its biggest opportunity.  Doubling down on that bet, it also invested $300M (£246M) in Gett.

Daimler, on the other hand, was an early entrant, launching the free-floating, car sharing service car2go in 2007. It now has some 2M global users. Two years ago, Daimler bought mobile taxi-hailing service MyTaxi, and last year it absorbed the town-car hailing service Hailo. It also created moovel, a platform that lets people find, book and pay for multimodal transportation options.

“We see the car transforming from a product into the ultimate brand ecosystem in which we grow a huge variety of services that goes well beyond mobility,” says Rasheq Zarif, head of business innovation at Mercedes-Benz research and development North America. “By focusing on sharing, cars will enable new services such as tailored mobility and transport solutions, as well as new ownership models.”

Zarif thinks the next big thing might be peer-to-peer car sharing – Mercedes has launched a pilot of such a service, Croove, in Munich. Paul DeLong CEO of car2Go North America, says that the service is as much about demonstrating electric vehicles as it is about generating revenue from rides. When it became the first, 100% electric car-sharing fleet in the United States, DeLong says: “Our focus was to introduce the public to electric vehicle and get them into the vehicles.”

Still, carmakers are bullish about the prospects for making some money off these new-fangled mobility thingies. Ford has said it expects a return of at least 20% from its mobility initiatives, while McKinsey and other analysts don’t think that car-sharing will cannibalise new-car sales.

Automakers of the future

While no one thinks the passenger car will go away, new models of transportation, including autonomous services, may create opportunities for start-ups to come in with new machines. Google seems to have backed off from its vision of tiny pods and is focusing on creating a self-driving technology package to provide to others, as evidenced by its recent announcement with Chrysler to test it on the Pacifica. And Apple? Who knows?

Public transit is getting an autonomous makeover, thanks to upstarts like Local Motors’ OLLI and Nauto’s demonstration shuttle, both using purpose-designed vehicles instead of modifying existing models. There is definitely room for a new generation of automakers, as Tesla and Karma have proven.

The reborn Karma introduced Revero last fall, aimed more at the luxury car buyer than the tech enthusiast, according to CTO Ken Stewart. “Our customers are very affluent and really like the aesthetics of art and design in cars. They like technology but they like it to reinforce the positive experience of driving their car,” Stewart says.

Stewart insists that Karma is not a start-up, pointing to its ten-year previous existence as Fisker Motors, as well as Henrik Fisker’s own automotive roots. He believes that there is opportunity for other new automakers; for consumer technology companies like Apple, not so much.

A car is not just a washing machine on four wheels, he points out. A company can’t simply outsource the entire thing. There are the safety considerations and also a wide variety of use cases to be considered. “You have to engineer the vehicle for such a wide variety of circumstances versus a phone,” he adds.

Shahin Farshchi, a partner in Lux Capital, says: “OEMs are primarily integrators of technology. They build very complicated supply chains and are expert at churning out vehicles, managing the costs, and getting them stocked and marketed at dealerships.”

The question, he says, is: “How far do you go off-strategy from a cash cow today to something that could be profitable tomorrow?”

DeLong of car2go doesn’t see his company as off-strategy for Daimler. He notes that car2go is integrated into Daimler’s overall strategy, as is the data produced by the service. So far, the service has provided more than 34M trips in North America. “With that comes a lot of data,” DeLong says. Information on where trips start and end, as well as how long they take, provide insight not only into consumer behaviour but also into how cities work. This data is being used among different groups within Daimler, including its R&D centre in Silicon Valley. “It's a gold mine.”

Gearing up for change

Carmakers shouldn’t panic, according to Farshchi. As autonomous vehicles become more common, even if ownership patterns move toward sharing or ride hailing, he expects there to be more miles driven per passenger. That’s because new mobility models will make trips in cars more accessible to more people, while driverless vehicles will cut the cost of ride hailing.

“As anything becomes cheaper, more is consumed,” Farshchi says. In such a pattern, traditional suppliers may be destroyed by lower-cost suppliers but incumbents may also capitalise on the trend. “If OEMs can reposition themselves to monetise miles being consumed by consumers, they will be very well positioned for this future of ridesharing.”

Restructuring

Farshchi sees parallel futures for automakers. In the darker vision, they become commoditised vendors of rolling chassis, while technology providers capture most of the value. “For every dollar per mile driven, 99 cents goes to the tech companies. OEMs can avoid that by being part of the remaining 99 cents,” he says.

To become part of that ‘99 cents’, he advises automotive manufacturers to acquire or partner with some of those companies that provide the added value, including tech providers and mobility providers or enablers.

Zarif notes that Daimler’s innovation lab and business innovation incubator not only develop ideas in-house and launch them in pilot programmes but also look for start-ups to invest in or partner with. It also created a collaboration between the Silicon Valley-based accelerator Plug ’n’ Play and the Startup Autobahn in Germany in order to create a start-up environment in Stuttgart. Of course, it’s working with Uber. “Mobility service providers like Uber offer an ideal platform for autonomous driving technology and for our self-driving cars in the future,” Zarif says.

“It’s very important for these companies to build up internal efforts that will drive their strategy for the partnerships,” Farshchi adds. For example, an auto company hiring engineers who work in artificial intelligence should enlist them to aid in the company’s partner strategy, rather than to attempt to move forward with AI on its own.

Talent hunt

Engineers of all stripes are being relentlessly courted and poached by carmakers, Tier 1s and technology providers. In just one highly visible example, Google lost a big chunk of its formerly iconic self-driving car team. Despite Google’s being arguably the most glamorous employer of engineers, the same tech stars Google had lured there found even more opportunity in start-ups. A case in point is, of course, Otto. Founded by former Googler Anthony Levandowski, it was almost instantly acquired by Uber for $680M in stock but it probably wasn’t the money. “If you find yourself competing on cash comp, and perks such as free massages, lunch, bus rides to and from the office, and gym memberships, then you likely will yield poor results even if you manage to hire top talent,” says Farshchi. He advises carmakers to appeal to engineers’ need for challenge and a sense of mission. They’ll feel rewarded when they solve problems, he says, as long as they’re not burdened with processes or bureaucracy. “Constantly reinforce the sense of mission and purpose across the team, appreciate them for their contributions, and create a dynamic, interactive environment.”

To fill the engineering pipeline faster, Udacity created a Self-Driving Car Engineer Nanodegree. Partnering with a bevy of companies including Harman, Mercedes-Benz, Uber and Nvidia, it provides a full, online curriculum plus a hiring pipeline for graduates. Instructors include self-driving guru Sebastian Thrun, founder of Udacity, and Otto’s Drew Gray. The course requires coding experience but promises to provide the needed skills in just 27 weeks at a cost of $2,400. It’s an interesting world these new-minted engineers will be welcomed into – a world where neither the auto nor the automaker may be recognisable 20 years from now.

[Mob.Kuchinskas.2017.02.03]