In early November 2017, Waymo announced that while it will continue its tests in Washington, California, and Texas, it was ready to start ferrying consumers in its fleet of driverless minivans in Chandler, Arizona. Later the same month GM presented their roadmap for autonomous vehicles and details about the mobility services it intends to offer using such vehicles starting in 2019. These larger scale efforts follow a year during which incumbent OEMs, automotive suppliers, global ride-hailing companies, large technology companies, and startups have been demonstrating autonomous vehicles of many form factors targeting a variety of next-generation mobility applications. Automotive OEMs are making important decisions about the role they want to play in next-generation mobility. These decisions will result in five categories of automotive OEMs.
Next-generation mobility refers to the movement of people and goods using a combination of a) intelligent and often autonomous, connected, and electrified (ACE) vehicles, and b) transport services such as ride-hailing, ridesharing and others, that are offered on-demand. Consumer adoption of next-generation mobility implies that personal transportation is evolving towards a hybrid model that combines car ownership with on-demand transportation access. The transformative effect next-generation mobility will have in consumer transportation will definitely impact the automotive OEMs. With the first wave of acquisitions, investments, and partnerships already in place, incumbent OEMs must start planning about the medium- and long-term impact of next-generation mobility on their business.
Shifting from today’s car ownership-centric personal transportation model to next-generation mobility’s hybrid model will be a multi-phase process, as is shown in Figure 1.
Figure 1: The phases of next-generation mobility
Advancing from one stage to the next will be characterized by increasing utilization of on-demand shared mobility, and of autonomous vehicles. Such vehicles will initially be deployed in larger cities, most likely those with higher urban density that can be mapped at the required level of detail and whose urban landscape is well-understood, and will be used to provide inner-city rides. Eventually shared mobility using autonomous vehicles will move to dense suburbs. The autonomous vehicle demonstrations that we read about or experienced during 2017 will be followed by pilot implementations, and eventually revenue-generating commercial deployments of passenger shuttles like those of May Mobility, and of robotaxis like Waymo’s, and GM’s.
We have projected that the transition to next-generation mobility will take several decades. Figure 1 is trying to depict the first few phases of this transition. It is hard to accurately predict how next-generation mobility will evolve beyond the next 8-10 years. During the period covered in the figure we expect that the overall number of Personally Owned Vehicles (POVs) to start declining in the geographic areas with high availability of Multimodal Public Transportation (MPT), and Mobility Services using human-driven vehicles (MSD). The availability of Mobility Services using Autonomous Vehicles (MSAV) is likely to accelerate this trend and may even lead to similar POV reductions in urban areas with lower population densities where today MPT is not broadly available, and where the use of human-driven vehicles may not be economically feasible.
As shown in Figure 2 the automotive ecosystem today is dominated by 14 incumbent OEMs that together control 47 brands.
Figure 2: Incumbent automotive OEMs and their brands
During 2017 incumbent OEMs started to make important decisions relating to the role they want to play in next-generation mobility. In particular each OEM must decide:
Decision 1: What vehicle types will the OEM offer? Conventional and connected only, connected and electrified, automated and autonomous.
Decision 2: Will the OEM offer on-demand mobility services in addition to vehicles? If so, what types (ride-hailing, microtransit, etc.) and for which use cases (passenger transportation, last-mile delivery, etc)? On the one hand OEMs realize that by offering mobility services they will be able to derive much higher revenue over the life of the vehicle than the one-time revenue they receive today from the sale of each vehicle. On the other hand, however, they also realize that on-demand mobility services will require them to adopt business models and practices about which they have no experience.
Decision 3: Will the OEM address next-generation mobility on their own, or with partners, and if so, which partners? We are already seeing such partnerships being established between GM and Honda, Ford and VW, and Daimler and BMW.
Based on the decisions they will make regarding next-generation mobility, automotive OEMs will be organized into five distinct categories. As we transition through the various phases of next-generation mobility, OEMs will become members of one of the following five categories shown in Table 1:
|Conventional vehicles||New mobility vehicles||On-demand mobility services||Example vendors|
|Category A||X||Subaru, and Mazda|
|Category B||X||X||Toyota, Nissan, FCA, and Tata. Chinese and Indian OEMs: BYD, GAC, Great Wall, BAIC, FAW, DongFeng, Changan, Mahindra|
|Category C||X||X||X||GM, Ford, Daimler, BMW, PSA, VW/Audi, Geely/Volvo, SAIC|
|Category D||X||Tesla, Byton, NIO|
|Category E||X||X||Waymo, and Baidu (using contract manufacturing), Zoox, Tesla maybe|
Table 1: The five categories of automotive OEMs
As we progress along the phases shown in Figure 1, we expect that Category A will continue to shrink, with more incumbent OEMs joining either Category B or Category C. In fact, by the end of Phase 2 Categories B and C will be the largest, containing mostly incumbent global OEMs.
Several incumbent OEMs that want to offer electrified and autonomous vehicles may end up licensing the requisite technologies. For example, GM recently invested in Rivian and use its technology to introduce electric pickup trucks under its badge. Similarly OEMs may decide to license an AV Stack from companies like Waymo or Aurora rather than developing one from scratch. For example, consider the partnership between Aurora and Hyundai to develop autonomous vehicles.
We are seeing incumbent OEMs taking different approaches around mobility services. Some like GM, Ford, Daimler and a few others have already started offering a variety of such services. Others have decided to first invest in companies offering mobility services, particularly ride-hailing services, in order to gain an inside look into a mobility services company’s operations and business model. For example, Honda and Tata have invested in Ola, whereas Toyota has invested in Uber and Grab.
Volvo is the only OEM thus far that will attempt to move from Category A directly to Category E since after 2019 it will only be manufacturing electric and electrified vehicles and offer mobility services under the M brand. This is expected to be an expensive transition with broad implications to the company’s business model.
As we move to Phase 3, we will see more consolidation in Categories B and C as personal vehicle ownership starts to decrease, the use of on-demand shared mobility continues to grow particularly in urban areas globally, and competition from new OEMs in Categories D and E intensifies. Under such conditions, certain OEMs in Categories B and C are likely to merge, be acquired, go bankrupt, or decide to become contract manufacturers. By Phase 4 and beyond, Categories B and C will merge with Categories D and E. It is unclear how many OEMs the market will be able to sustain. I anticipate that it will be a much smaller number than we have to day.
By analyzing the phases of next-generation mobility, their impact on the automotive OEM categories, and the way these categories are likely to evolve, we have arrived at four important observations.
Observation 1: In order to be successful when Phase 4 arrives, the OEMs in Category C, and E must achieve three goals.
First, they must get the autonomous vehicle technology right. Most OEMs are already testing such vehicles. GM’s acquisition of Cruise puts them ahead of peer competitors and ready to start pilot deployments. To achieve this goal OEMs will need to collaborate with (invest, partner, acquire) technology startups, as well as incumbent Tier 1 and lower tier suppliers in order to address critical issues such as object recognition in images, high-definition mapping, the fusion of a variety of sensor data, and others. For example, VW’s Moia unit recently announced its partnership with Aurora, a Silicon Valley-based startup developing and OEMing autonomous vehicle platforms, and Ford acquired Autonomic. The challenge with achieving this goal is that OEMs need to quickly acquire expertise in many new technologies and work with a new set of companies, many of which may be outside the traditional automotive industry. But the overall process of vehicle creation remains the same and is one that OEMs understand well.
Second, they must get the mobility service operating process right. This initially means learning to generate demand for the service (lead generation), take reservations and learn to address any issues that may arise from a particular reservation while providing personalized service, coordinate rides, placing vehicles in the right areas, maintaining vehicles efficiently, financing and insuring the vehicles and their riders, etc. These are skills that companies like Uber, Lyft, Zipcar and other mobility services leaders have already mastered. To accomplish this goal, incumbent OEMs are taking different approaches. As was previously mentioned, certain OEMs have already started operating their own mobility services companies using either conventional vehicles, or a mix of conventional and electrified vehicles. Some of these OEMs have also invested in, acquired companies offering mobility services, or have partnered with such companies. For example, GM invested in Lyft, BMW invested in Ola, Daimler invested in Via, and Ford acquired Chariot and TransLoc and partnered with Lyft. By investing or partnering with such companies, OEMs learn the mobility service process but also understand mobility-related data and the advantages of its exploitation. To achieve this goal OEMs will need to collaborate with fleet operators, fleet managers and maintainers as Waymo has done with Avis and AutoNation. Through such experimentation and collaborations, OEMs will learn operate in the fleet-based on-demand personal mobility value chain. While the existing value chains have been refined over several decades, this is a new value chain and will need several iterations before it becomes stable. Participating in the formation of this value chain can provide OEMs with important lessons on how to structure their business in the future. A partial list of the relations between automotive OEMs, their own mobility services companies, and independent mobility services companies are shown in Figure 3.
Figure 3: Relations between automotive OEMs and Mobility Services companies
Third, they must get the business model right. This requires that the OEMs consider the entire fleet-based on-demand personal mobility value chain. It will necessitate significant experimentation, take time, and may prove the hardest of the three goals. Mobility services business models (subscription-based, transaction-based, and advertising-based) are still in their infancy. Automotive OEMs are used to testing vehicles but not business processes and business models. Their business model has been unchanged for a long time. Uber, Lyft, and other large companies that offer various types of mobility services while they continue to lose money even as their business continues to grow rapidly, are more comfortable with this type of testing and associated uncertainty because of their startup roots.
The challenge with achieving the second and third goals is that they involve processes and behaviors, e.g., rapidly experimenting with different new business models, that OEMs are not typically engaged in.
Observation 2: By offering mobility services, the OEMs in Category C will be simultaneously pursuing two fundamentally different business models: selling vehicles and offering ride services. Using multiple business models is extremely demanding for corporations in any industry. Each model typically requires a separate management team with specific skill sets, as well as different organizational and cost structures.
Incumbent automotive OEMs have built their brands on engine performance, vehicle design, the economies of scale offered by their manufacturing capacity, and their ability to sell globally through a single business model that has been refined and endured over several decades. Based on this model they sell vehicles through automotive dealer networks, and rely heavily on a vast set of relations with a hierarchy of suppliers. While on the average their margins are relatively low, compared, for example, to those of the IT industry, in some vehicle classes, e.g., SUVs, or light trucks, their margins are particularly high.
Today the OEM business model is starting to undergo important changes. Consumer buying behaviors are changing, and digital technologies are driving next-generation mobility. Consumers are starting to prefer direct-sales models, and different ownership options such as short-term subscriptions to vehicles.
In order to succeed, OEMs in Category C must:
- Extend for as long as possible their ability to sell more vehicles that carry higher margins. Use the profits derived from the sale of such vehicles to help finance the high investments that are necessary by next-generation mobility vehicles and services. For example, see how GM and Ford target to continue selling high-margin SUVs and light trucks in order to partially finance their respective moves to next-generation mobility.
- Address the challenges facing the existing business model. For example, see Ford’s Canvas subsidiary.
- Adopt a new business model in order to offer mobility services.
By setting up separate companies to pursue the mobility services business model incumbent OEMs increase their probability of succeeding. Of course, the success of these companies will depend on the corporate culture they establish, the amount of autonomy they are given, and their parent’s willingness to take a long-term view towards their survival and success.
It will be easier for the OEMs that start in Category E to successfully pursue the vehicle sales and mobility services business models because they are developing the necessary skillsets with the appropriate teams from the beginning. Tesla may be a special case. Even though it started in Category D it may be able to make the transition to Category E because it still has the startup DNA that incumbent OEMs are lacking.
Observation 3: OEMs in Categories B, C, D, and E must approach mobility services fleets as opportunities to sell vehicles and as as opportunities to establish direct relations with consumers and gain valuable insights from the use of each vehicle over its life and the data generated.
Today OEMs collect telematics data from the vehicles they sell. This data is inadequate to compete in the emerging model of on-demand shared mobility. Moreover, because their business model calls for sales through their dealer networks, OEMs don’t have direct connections with the consumers who use their vehicles. As a result, with the exception of consumer data that is collected for the purposes of a vehicle’s warranty, they don’t have databases with rich consumer data. Companies offering transport services have much richer data about the consumers they serve.
However, the insights derived from the data collected from fleets used in transport services can be far more valuable than the data OEMs collect now. They can impact future designs, optimize existing designs, as well as provide opportunities for revenue-generating add-on products and services. For example, OEMs can offer Driver and Passenger Commerce. OEMs in Categories C and E have an inherent advantage as they can guarantee access to data from their own fleets. They can analyze trip types, passenger preferences, vehicle telematics, vehicle maintenance records, single vs. multi-passenger vehicle occupancy, trip duration, etc. Insights can vary from the type of offers they can make to drive Driver and Passenger Commerce to identifying the best conditions for recharging a vehicle.
OEMs in Categories B and D must find ways to gain full access to all the data collected by the mobility services offered using their vehicles. This requires investing in such mobility services companies. Continuous analysis of the collected data will help OEMs to first determine the precise needs of the mobility services companies . At a minimum, this includes types of vehicles, when they will need them, and in what quantities. OEMs must get to the position to profitably produce such vehicles and in the quantities necessary. (Tesla represents an interesting exception to this general rule). They can also identify the types of vehicles consumers will purchase since private vehicle ownership will not be eliminated (Figure 1). And any reduction will not occur evenly across every population segment, urban/suburban setting, and geography.
By understanding how consumers use mobility services, OEMs will be able to also surmise the types of vehicles consumers will want to own. Finally, using the collected data, OEMs will be able to determine how and when to update the vehicles during their operating life. OEMs must break away from the traditional 3/6-year vehicle update lifecycles. And they must become comfortable with simultaneously operating in three different lifecycles:
- Software lifecycle with Over-the-Air (OTA) updates of applications and firmware every 4-6 months. Tesla does this today;
- Sensor/consumer electronics, and battery technology lifecycle with hardware updates every 18-24 months. This is the IT industry’s practice over the past several years. Tesla is already adhering to this practice;
- Chassis and body lifecycle with 3-year updates for the vehicle’s body and interior and 6-year, or even longer, updates for the chassis.
Every aspect of next-generation mobility (self-driving vehicles, electrified vehicles, mobility services) is taking off and the pace will accelerate over the next couple of years. Larger pilots are supplanting the autonomous vehicle demonstrations we experienced during 2017 with corporations and startups vying for leadership positions, even during these very early stages of a transformation that is expected to take several decades. Many automotive OEMs, realizing the disruption risk they face, have started to quickly make strategic decisions often taking many actions in parallel. Others are taking a slower approach. However, if they are to succeed, OEMs must get out of their comfort zones. They must take on the risks associated with utilizing many new digital technologies, including technologies associated with the exploitation of big data where they have little or no experience, while simultaneously testing and pursuing different business models as these are being formulated. This has traditionally proven a challenging task for large corporations in any industry. And this is the time for OEMs to become the exception rather than the rule. Because following the rule will mean at best disruption and at worse demise.
Observation 4: By offering mobility services, OEMs in Categories C, and E can derive more revenue and profit per vehicle in their fleets than they do today by selling vehicles either directly or via their dealer networks.
OEMs like GM and Nio that plan to offer mobility services using their own vehicle fleets have the potential to recognize a higher profit per vehicle over the life of the vehicle, compared to the per vehicle profit they recognize today from vehicle sales. Analyses by Goldman Sachs, and the Boston Consulting Group assume that vehicles used by such fleets will have 3-year life span. Operating fleets of OEM-owned vehicles can achieve a gross margin of around 25% and lead to per vehicle profit that is three times higher than the profit derived from the corresponding vehicle’s sale.
Observation 5: OEMs in Categories B, C, D, and E must work in the uncertain environment presented by next-generation mobility. Today this environment lacks standards and has little regulation.
Working under such uncertainty always favors startups that culturally are used to operating under such conditions. Corporations with established business models, and their shareholders, prefer predictable performance quarter-after-quarter. It remains to be seen how the incumbent automotive industry will use its access to governments at any level to turn this environment to its advantage.
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