We live in interesting times in the automotive business, for sure. Everyone is talking about driverless cars, connected cars, electric cars and the emergence of the ‘sharing economy’. But we don’t quite know how these things will actually play out, how much disruption is really ahead. In the meantime, traditional rules apply. Vehicle makers can still make big profits on the traditional automotive business model. Premium brands can continue to enjoy particularly fat margins.
And yet the radically different vision of the transportation future – and the pathway to it – is not easily dismissed. Technological advances are rapid; new digitally based services and businesses are opening up rapidly, wherever you look.
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We did get a sign last week that the German premiums are well aware of the threats ahead. BMW and Daimler decided to work together in developing new services for radically different future mobility needs. They know that they have to step up the pace and take defensive actions to protect profitability.
Over the last twenty years or so, both companies – and Audi – have very successfully redefined the premium part of the car market to add niche models and, with some degree of subtlety, move into higher volume areas. Think of the A-class, Audi A3, BMW X1 and so on. It’s a long list and, let’s face it, these premium brands are a lot less scarce on the roads – certainly in Britain, anyway – than they were when I was a kid.
The difficulty they face now is developing an effective strategic response to such a wide range of possible scenarios and outcomes ahead. It’s all very uncertain. If disruption is coming, how do you prepare? In the worst case for them, the market for owned vehicles collapses, with commoditised shared autonomous vehicles (SAVs) dominating the future of vehicular movement in urban areas (where more of the population around the world is going to be living). Big fleets – perhaps run by Uber/Lyft or Apple/Google – might exercise considerable market power, with far fewer people choosing to actually own a vehicle.
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There’s a good analogy in music downloads and streaming. Why ‘own’ a subset of MP4 tracks on your laptop or smartphone when you can easily stream from a universe (well, almost) of recorded music anytime? Needless to say, the musical universe proposition works out much cheaper on a per-track basis, the service provider working on a subscription model. I speak as someone who still appreciates the added value of the vinyl LP, the elaborate artwork on the gatefold cover, the crackling sound through the speakers, the physical feel of the product and so on. Some people will pay for that specific ‘experience’ (and there has been a resurgence of sorts for vinyl), but not many, at least in terms of the total market. I don’t get my old vinyl albums out very often, these days (but when I do, I appreciate them even more).
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By GlobalDataSimilarly, SAVs could be very bad news for long-established brands that carry premium values, that sell on owning a product blessed with engineering prowess, very high quality and conferred premium associations. A pay-as-you-go ride from A to B in a driverless pod is less likely to be configured as a premium product. But we don’t know that will be the case and maybe they will co-exist with owned vehicles. It’s not necessarily a binary game. There could be shades of grey and the transitions could be long. There is much uncertainty, of course, in terms of exactly how things will play out over the next ten, twenty years. Today’s big automotive OEMs have more than a few cards up their sleeves. They have strengths, big strengths.
They have to address future scenarios and avoid the so-called ‘Kodak moment’.
Nevertheless, they have to address future scenarios and avoid the so-called ‘Kodak moment’ (a slightly unfair but enduring reinterpretation of the old Kodak advertising slogan based on the idea that someone at Kodak invented a prototype digital camera in 1975 – but the company put the lid on it, only for others to do the disruption later). BMW and Daimler, it seems, are quietly pulling out the stops to make sure they avoid such a ‘Kodak moment’ and stay centre stage in automotive transportation, whatever may lie ahead. No crystal balls, explore everything and there’s no room for complacency. Even competitive questions can be quietly put to one side when fundamental and existential questions are being raised. Cooperation with a like-minded rival is preferable to extinction for both. Risk mitigation comes in many forms.
