Automakers must address two questions because of the environment they are currently facing. First, will they be able to make the announced Software-Defined Vehicle investments in the timeline they were projecting, or will they need to slow down their investment pace? Second, will they face any negative implications if they delay their plans to roll out such vehicles and the monetizable services they enable?
This will be a very interesting year for the automotive industry. The world economy is expected to continue slowing down, the semiconductor shortages that have been plaguing the automotive industry are projected to continue for this year, and energy prices will remain volatile. In the last couple of years several incumbent automakers including GM, Ford, Hyundai, VW, and Mercedes, as well as newcomers like Lucid Motors, and Rivian announced their intent to make large, multi-year investments related to the development and scaling of electrified Software-Defined Vehicles. Vehicle sales in 2022, though better than in 2021, remained significantly lower than in 2019. Even if sales improve further in 2023 nobody expects them to recover to their 2019 level for a while. By successfully executing the announced Software-Defined Vehicle plans associated with these large investments, admittedly a tall order, incumbents will position themselves to be on par with the newcomers that are now considered the thought leaders for this vehicle type.
Incumbent automakers are currently facing multiple challenges. Among the most serious are:
- The deterioration of the global economy negatively impacts their sales. The recent SAAR numbers from the US and the EU, while slightly better than those of 2021, they are significantly lower than 2019.
- The geopolitical tensions, particularly those between the West and China, impact both their sales and their supply chains. Consider that VW derives forty percent of its sales from China whereas Mercedes and BMW derive thirty percent each.
- The rising competition from newcomers that were once startups, automakers from China that are now entering the global market, and technology companies that want to control the software stack and the monetization it enables. These negatively impact current sales (even with EVs we have gone from a limited selection of models to an abundance of offerings) and the plans to monetize the customer of the Software-Defined Vehicles that incumbents plan to release. For example, Chinese automakers like MG, BYD, Nio, and others are entering the European market aggressively. They are selling BEVs that are well-built, offered at very competitive prices, and equipped with features that customers find attractive, particularly for urban driving.
These challenges are not expected to disappear soon. If anything, more EV models will be introduced in the next few quarters, and the decoupling of the supply chains that were built over the last thirty years between the West and China will accelerate further driven by recent government funding legislation, e.g., the US and EU CHIPS Acts, and the US Inflation Reduction Act. Also judging by recent announcements, the competition will intensify. Today Chinese automakers are trying to capture the European market’s low- and middle segments. They plan to target the high-end segment as a second phase.
Newcomer OEMs are facing their own challenges. Competition from incumbents is starting to impact their sales and waiting list signups. The volatility of the financial markets is impacting their ability to raise the capital needed to achieve their scale-up goals. Some, e.g., Canoo, Lordstown Motors, Faraday Future, may be left without financing alternatives, or in a very weakened position.
Incumbent OEMs must not alter their plans to develop and deploy Software-Defined Vehicles. They must at least stick to the timelines they announced if not accelerate them. Because of their position that gives them access to important financial options, they have a few advantages which they must capitalize fully, even if this means that their shareholder relations suffer in the short term.
First, they must continue selling ICE vehicles under their existing business models, work to maximize their margins from the sale of these vehicles, and use their balance sheet to fund their Software-Defined Vehicle efforts instead of distributing any profits to their shareholders. Second, if funding through the balance sheet is not sufficient, they should consider raising debt, as well as forming joint ventures with one or more partners, not unlike what Honda did with Sony.
Introducing as quickly as possible clean sheet Software-Defined Vehicles together with their version of the Flagship Experience will enable incumbent OEMs to:
- Simplify their model lineup and offer fewer trims per model. Each such vehicle can then be personalized by every one of its owners. Today the owners of used vehicles “inherit” the options of the vehicle’s first owner without the ability to make any modifications.
- Offer vehicles that are price-competitive even compared to those offered by the Chinese, because they will have few features initially. The features the owner will then be able to add via Over The Air (OTA) updates will provide OEMs with new customer monetization opportunities.
- Appeal to larger customer segments rather than the high-end affluent segment as is the case today with most electric vehicles. This can be particularly important for OEMs selling vehicles in China, as European OEMs do. The sale of lower-priced Software-Defined Vehicles that can be upgraded after the sale through the Flagship Experience will allow OEMs to lower the impact of the fifteen to twenty-five percent tax the Chinese government applies today on imported vehicles.
The incumbent automakers that are willing to take the risk of sticking or even accelerating their timelines for developing clean sheet Software-Defined Vehicles will be able to level the playing field and compete effectively with newcomer OEMs and Chinese OEMs that are dominating their local market and are starting to enter foreign markets with their own Software-Defined Vehicles.
You didn’t mention Tesla.
How will they fare with the increase in EV competition?
Tesla is somewhere between incumbent automakers and startups that are starting to scale, e.g., Rivian, Nio, Lucid Motors. There is no question that the recent introduction of EVs by incumbent automakers (most of which are what I’ve been calling “clean sheet Software-Defined Vehicles) is starting to impact their sales. This is the reason they are starting to reduce their prices and have shorter waiting periods. However, they continue to innovate and invest aggressively, which is what I’m advocating for incumbents to do.
Tesla without engaging in the typical marketing incumbents engage in has been able to win the “innovator” and “early adopter” market segments. As with every product, these segments tend to be small and consist of sophisticated users. With these segments word of mouth works well. With the broader market segments (“early majority” “late majority” “laggard”) the word of mouth is a factor but not the only factor because the members of these segments always tend to be more conservative in their thinking. With vehicle purchases, additional factors are considered by the prospective buyer: safety, the total cost of ownership, price, reliability, etc. For this reason, word of mouth is important but not to the same degree as with the first two segments.
If Tesla wants to successfully sell to the early majority market segment (I take for granted that they have won the early adopters) and beyond, they will need to start educating the market on the benefits of their “total experience” (which includes the in-vehicle experience their technology enables) compared to the corresponding experience of EVs from other OEMs, e.g., VW’s ID vehicles, Ford’s Mach-E, Hyundai Ioniq 5, etc. But by adopting this approach, Tesla will be seen as behaving like an incumbent automaker. Automakers used to advertise in this way. The average consumer doesn’t yet understand the benefits of the Tesla approach. They may also not completely understand the benefits of Apple’s iphone, but one costs $1000 and the other $50000+.
We’ll have to see whether the strong interest in EVs that we saw over the few years is maintained during 2023 and beyond, and whether their customers care if these EVs are Software-Defined Vehicles. This is at the heart of the second question I posed in the piece
When EVs become mainstream, the difference between an EV and internal combustion engine will become irrelevant, and being an EV will no longer distinctive… then will the brand and model selection depend on an emotional connection to the brand and model? Could it be like the transition from Henry Ford’s Model T, a revolutionary low cost car for the masses, that was replaced by Alfred Sloan’s General Motors, “a car for every purse and purpose”?
The book I’m currently writing discusses the role that the customer experience will have in the future. In particular, I explore how the Software-Defined Vehicles that will be introduced over the next few years (most, if not all, of which will use alternative powertrains, primarily battery electric) will enable and benefit from a comprehensive customer experience that encompasses the entire customer journey and not only the part that leads to the sale of the vehicle, as it happens today. I call it the Flagship Experience.
As I started to explain in https://bit.ly/3U62b4t the customer journey associated with the Flagship Experience will have substantially more instrumented touchpoints most of which will provide the automaker and its partners with opportunities for post-sale monetization.
In summary, my thesis is that as we move along the phases of New Mobility (https://amzn.to/2Unu2AM) the customer experience offered around our privately owned vehicles will be more important to most customer segments than the vehicle’s external design. The vehicles coming out of the assembly line will have fewer trims but will have the capability to be personalized through software.
By the way, this approach will enable the automaker to monetize the vehicle over each one of its owners and not only the first owner as is the case today. Conversely, the owner of a used vehicle will be able to personalize the vehicle to her needs rather than just inherit the options the first owner selected.
If we accept your thesis, then which of the auto companies (or software companies) will be best suited to take advantage of this shift?
Presumably Tesla is better at software and a software business than the incumbent OEMs?
Like many others, I consider Tesla to be ahead in the overall technology stack (software and hardware) that governs the Software-Defined Vehicle. With regard to incumbents, I am waiting for the software platforms that incumbents like GM, Mercedes, Ford, VW, and Hyundai will release in the next year or two, like GM’s Ultifi platform, as these will be the first platforms to be coupled with clean sheet architectures. In some instances, these platforms are being developed exclusively by the OEM, GM and VW being good examples, and others in collaboration with partners, as in Mercedes’ case that is collaborating with NVIDIA. As a result of these collaborations chip companies like NVIDIA, Qualcomm, NXP and others will emerge as big winners of the transformation that is happening in the automotive industry.
I see a parallel with the US airline industry in the 1990s. Southwest was very successful, and all the major airlines felt they needed to emulate SW’s low cost, point-to-point system with quick turnarounds and one aircraft type (anyone remember Continental Lite, Delta Express, or the United Shuttle?), but they never managed to pull it off. It confused customers to have two value propositions in one airline. They couldn’t lower their costs as much as Southwest due to unions and employees. Trying to share services between full service and low cost didn’t work. All were shut down.
Another example in the auto industry: GM had a joint venture with Toyota (NUMMI). Ironically it was at the site of what is today Tesla’s Fremont plant. NUMMI proved that the Toyota Production System could take one of GM’s plants with the worst quality and productivity and turn it into one of the best. GM attempted to take this operating model more broadly and through Saturn. Saturn was shut down.
My conclusion: All legacy auto companies will have trouble emulating the organizational and operating model that Tesla has pioneered around EVs as the product and a modern manufacturing, distribution, and maintenance platform (people, culture, and processes) to deliver it.
Tesla won’t stand still, as their Silicon Valley tech cultural roots mean they won’t rest on their laurels. They will continue to innovate.