Car Wars – Part I: Lessons For The Auto Industry From The Ascent of The Smartphone

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Porsche unveiled a new concept car at the Frankfurt Auto Show. The car is called Mission E and improves on everybody’s favorite electric car, Tesla’s Model S, in some respects. The Mission E can reach 60 Miles per hour in 3.5 seconds, its battery charges to 80% of its capacity in 15 minutes (Tesla takes 30 minutes to charge half its battery) and has a range of around 310 miles compared to Tesla’s 270 miles. [1] But here’s the thing — there is no certainty about whether this car will ever go on sale. Porsche has stated in the past that it plans to sell electric cars by at the  latest 2020, but by that time Tesla will have been in the market for 8 years already. The kind of optimization pressures 8 years in the market put on your product are far more efficiency enhancing than 5 years spent in testing. The things you learn when the rubber meets the road are far more useful than simply making the theoretically perfect product in a locked room.

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Inertia Kills

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This reminds us somewhat of the position Nokia found itself in 2007. At that time, the company had a market share of 49.6% in the mobile phone market. The company had just launched the N95, a multimedia focused feature phone with the ability to send and receive emails, and announced that it would launch an all-touch smart phone inside 2 years. [2] Apple had already come out with the iPhone, while all the incumbents of the mobile phone industry were launching feature phones with additional features, each of which made sense on its own but made the whole thing unwieldy. By the time Nokia came out with its all-touch smart phones, Apple had already entrenched itself as the market leader, while new entrants like Samsung and HTC were on the horizon. Nokia’s position in the market had been compromised.

This was a classic case of disruptive innovation. Nokia had been a market leader for so long that it believed that their strengths in hardware manufacturing would come to define the direction that the market would take. All this while, the paradigm was changing. Nokia failed to adapt fast enough to the changing market dynamics and Apple ate their lunch. While the mobile phone has evolved substantially in terms of capability and form factor over the last decade, there was also a tectonic shift in the designing, manufacturing and marketing of mobile devices. In the era of feature phones (prior to 2007), hardware, design and form factors proved to be primary differentiators for vendors. Vendors had to have a technical understanding of the underlying communications technologies and electronics and intellectual property was perceived as a barrier to entry into the market. The market was dominated by a few rather big names such as Nokia, Motorola, Samsung Palm, HTC and BlackBerry. While contract manufacturing was available, most large players chose to run their own in-house manufacturing operations.

However, a lot changed with the advent of the full-touch screen smartphone in 2007. At a base level, all smart phones as we know them today are quite standardized – featuring touch displays, sensors, applications processors, cameras, and memory and wireless devices. The smartphone paradigm as we know it has not changed much since 2007. This in turn has brought about an increasing level of contract and white-box manufacturing as small manufacturers build smartphone using off the shelf components, system-on-a-chip and reference designs. While some vendors like Apple still design or optimize their devices at the component level while building intellectual property around their designs, this isn’t the norm in the broader smartphone market. Upstart vendors ranging from India’s Micromax to China’s Xiaomi have been able to create profitable smartphone business models with little intellectual property or manufacturing muscle, relying on platforms powered by processor companies including Mediatek and Qualcomm.  These companies then differentiate their offerings through subtle design, software enhancements and robust marketing and distribution to drive their businesses.

Time Is A Flat Circle

Something similar is playing out in the shift from internal combustion engine to all electric cars. The first and most important thing to appreciate about the shift to the electric power train is that it reduces the mechanical complexity of the car. The number of moving parts is reduced drastically, as the drive shaft, fuel tanks, transmission, and internal combustion engines are all removed. This reduced complexity implies that the sophistication required in building and designing cars changes, which in turn changes not only who can build these vehicles but how they are built. Previously, cars were these bulky machines with multiple components similar to mobile phones, which were these bulky pieces of hardware with a lot of components. In order to make a good car you needed to have expertise in the manufacturing and design of these components similar to how you needed expertise in communication technology to make good phones. But the shift to electric is a reconceptualisation of the car as piece of metal that runs on software similar to how smartphones are now just pieces of glass that run on software. Put simply, if the value in the car industry in the last ten years lay in the engine, the shift to an electric power train means that the value now lies in the battery. A further shift to self-driving cars will likely change that value center to software.

Just as with smart phones, which outsourced the manufacturing of components to Shenzhen, it is possible that the drive train and battery design will be standardized while the manufacturing of the body-in-white can be done by third parties just like auto companies do today with Joint Venture operators in China. On top of this, companies will be able to add their own software capabilities, branding, marketing and distribution to create value. Given all this, you would expect leaders of the auto industry to be making plans to steer their companies in this new direction. But here is Daimler’s CEO, Dieter Zetsche, at the Frankfurt auto show “What is important for us is that the brain of the car, the operating system, is not iOS or Android or someone else but it’s our brain. . . . We do not plan to become the Foxconn of Apple.” [3]

This is similar to the situation in 2000, when the then Microsoft CEO Bill Gates approached the then Nokia CEO Jorma Ollila to collaborate on developing an Operating system for mobile phones. Mr Ollila, fearing that most of the profit generated through the collaboration will be siphoned off by Microsoft, refused and instead opted to develop Symbian with Psion PLC, a maker of hand-held computers, and phone maker Telefon AB L.M. Ericsson. [4] The rest as we know is history.

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Notes:
  1. Porsche’s new electric sports car will make Tesla owners jealous, September 15 2015 []
  2. Where Nokia Went Wrong, September 3 2013 []
  3. Daimler CEO Rants that they Won’t be the Foxconn of Car Makers for Apple, September 17 2015 []
  4. Facing Big Threat From Microsoft, Nokia Moves to Share Its Software, May 22 2002, www.wsj.com []