The Car Industries Innovator’s Dilemma

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car-brands2015 was a banner year for automotive sales in the United States. It was officially the best year ever (let me repeat EVER) for them by selling 17.471 million new cars and beating the previous record of 17.402 million cars set back in 2000. Strong demand, cheap gas and sub-prime like lending practices helped achieve this sales record. Now the bad news, this sales trajectory most likely will not continue for years and years.

Car companies have a great opportunity to take the profits from the past several years and invest in new markets. But, will they? In Clay Christen’s book – The Innovator’s Dilemma, he says:

successful companies put too much emphasis on customers’ current needs, and fail to adopt new technology or business models that will meet their customers’ unstated or future needs.

Remember Kodak? They invented the digital camera but never monetized it. They were busy making so much money from the physical camera rolls and the paper that pictures were printed on to think about the future. That attitude did not work out so well for Kodak.

The question is, will car companies innovate or go down the path of Kodak. The car companies business model is getting attacked on multiple fronts from various startups and technology:

  • ride sharing apps – why own a car, when you can share a ride with someone who is going in the same direction as you. With an app, the idea of carpooling with someone is made much easier and simpler.
  • taxi hailing apps – why own a car, when you can use an app to summon a car to take you to a particular destination
  • electric cars – why own a fossil fuel burning car that is horrible for the environment when you can have an electric car. (Granted the electricity still might come from a coal burning plant but over time solar energy might be the source.)
  • self driving cars – why own a car when you can summon a self driving car to pick you up and drop you to your destination. Apartment buildings might buy these for their residents and allow everyone to share.
  • 3D printed parts – Why go to a local dealer or repair shop when you can 3D print the plastic switch that needs to be fixed.

I’m a hugh car fan, but I know that most people just don’t give a damn about their car. For 99% of the the population a car is used to get from point A to point B and for 95% of the time is just a hunk of steel that sits idle. The rise in these new business models that are attacking the car industry are to address the 99% of the population.

The car companies have the money and distribution to change things around. But, it all depends if their management teams have the ability to break-free from their past and get past the innovators dilemma.

 

On-Demand: Technology or Service Delivery?

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a-little-bit-ofWho would have guessed that in 2009 the idea of hailing a taxi via a mobile app would spark a revolution. That is exactly what Uber has single-handedly done and kicked off what is now termed the “on-demand economy”. In the process, Uber has been estimated to be worth over $50 billion and continues to grow into new markets.

Because of Uber, there are a host of on demand services from delivering groceries, restaurant meals, laundry, home repair, car repair, etc… The list is long and keeps growing by the day. It’s still early days in India and the intense competition in these various verticals has led to a minimum of 10 startups in each category. Which explains why venture capitalists are still funding these “on-demand” startups because no one really knows who will come out on top. Since India is such a large and diverse country, I’m willing to bet that each vertical will end up with 2-3 large players in each vertical category.

Over the past several years I’ve been advising many startups on their product/market fit and technology stack. (Pro tip, to sound smart add stack to anything and people will think you are well versed in that area. Food stack, technology stack, retail stack, etc…). Many of the startups I’ve interacted with for the “on-demand” space are divided into 3 groups:

  1. A team of computer geeks who are looking to provide a solution to a problem
  2. A team that has domain knowledge of the space but lacking any technology strategy
  3. A team that has neither the domain knowledge nor the technology skills, these ideas usually forever remain in PowerPoint

The first group seems to have gotten all the love and media attention. How many times have you read the following headline “3 IITians launch an Uber like service for X”. Initially, I used to enjoy advising those startups because we had so much to talk about in regards to the technology stack. But, when the topic turned to service delivery, business metrics and customer engagement the response was pretty much the same – oh, we’ll just hire some business development and project managers. That should have been my first clue that they were going down the wrong path. For them, the technology was more important than the consumer.

Over the past year, I’ve had the opportunity to work with several startups that fall into the second category. They have the domain knowledge of their particular space but need some hand-holding when it comes to technology. The more that I engaged with these startups the more I realized that they would be more successful because for them it was about maintaining their brand at all costs. Which meant making sure the customer was the most important piece of the equation, not the technology stack which is really just an enabler.

Many of the heavily funded “on-demand” startups built large marketing and technology teams but failed to monitor, measure and understand what the customer experience was. I can’t tell you how many times I’ve heard from colleagues that they used a restaurant delivery app and the food was delivered late, food was cold or something was missing. If you can’t get the basics right, it doesn’t matter how much awesomesauce technology you have running on Amazon Web Services because it’s not a technology problem, it’s all about the service delivery.

What happened VW?

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vw-dieselgateAbout 4 1/2 years ago I penned an article talking about how the Volkswagen (VW) Group was firing on all cylinders in India. After revealing to US authorities it had been intentionally circumventing emissions standards, all that progress is coming crashing down and it could take down the VW group with it. That’s not hyperbole, what the VW Group has committed is a serious breach of trust. So what happened?

It all started with some scientists from West Virginia University who were testing random vehicles for emissions. They noticed the cars from the VW Group always seemed to spew more emissions in actual driving conditions then when stationary at an emissions testing facility. The numbers were not 5% or 10% off but an order of magnitude that was 15-35 times more then the VW Group said the cars would emit. It finally came to a head on September 15, 2015 and the US Environmental Protection Agency (EPA) got involved by issuing a notice of violation. Surprisingly, the VW Group admitted it was intentionally beating the emissions test by using software to detect if a car was being testing for emissions and then changing various parameters to the get emissions levels much lower.

Although, VW admitted it was at fault it tried to shield itself saying it was “rogue coders” who did it not anyone from the management team. HAHA. The investigation is on-going and no one really knows what happened but I can tell you some “rogue coders” would not be able to pull this off by themselves. Either that or VW is one of the most dysfunctional companies on the planet. VW was on a mission to be the largest car maker in the world and I’m sure the mandate from the CEO was to go big at all costs or go home.

The VW Group should be barred from selling cars in the US for 2-3 years to really make a point that you cannot intentionally circumvent the law for economic gain. This incident is different from GM where people died. That was a design flaw that was covered up for years and they didn’t intentionally set out to design a faulty ignition switch. If VW gets a slap on the wrist I think it will empower more companies to roll the dice and see if they can getaway. For such a reputable company like VW to go down this path is pure sadness for any car person, they have some amazing name plates like Porsche, Lamborghini and Bugatti to name a few.

As far as India is concerned, the cars will probably get the required fix to make the cars compliant for emission standards. But, then that means they probably won’t be as fuel efficient which will open up a whole host of lawsuits for fraud. As far as banning VW cars, I don’t see that as an option as the country really needs those jobs and the tax revenue it generates. Whatever the case may be, their reputation has been damaged and will take a long time to rebuild that trust with consumers.

When the Cheerleading Stops

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$_35In life we all face adversity, some more than others. We go about our daily lives and take many things for granted. Then you get the call that everyone dreads, that something has happened to a loved one or a very dear friend. The world briefly seems suspended as you process the information and you feel helpless. I recently got that call from my wife and I could barely understand what she was saying between the torrent of tears and sobbing. Her youngest uncle from her dad’s side of the family had unexpectedly passed away. I was stunned.

It sounds cliche when you hear “unexpectedly passed away”, but in this case it really was surreal. In fact, for the longest time I had incorrectly assumed his age. To say the whole family was in a state of shock is an understatement, he was the “baby” of the family. He was the one that would always want to organize family get togethers or vacations so that everyone could spend time together. He was the one that would walk around the table and make sure everyone had a drink in their hand or their plate was full of calories. He cared for everyone and didn’t discriminate between family member or the staff that worked for him – he wanted to make sure everyone was comfortable and happy.

Let’s be clear, this was not an uncle that I had known since childhood but he became part of my family when I got married. Yet, for days I was shocked and couldn’t believe what was happening. Then it dawned on me why I was feeling this way, he was really the cheerleader of the family. It didn’t matter what you did, he always wanted to get behind whatever you were doing. My wife is an architect and her first project was her uncles flat – his reasoning was she had to start her career somewhere so why not with him.

He was a cheerleader for me as well. Several years ago he heard that I co-founded a financial software company and he was insistent on paying for the software. The best part, his office staff had not even installed or used the software and yet he was asking me who to make the check out to. I was like easy tiger, let’s first make sure your office can benefit from it.

The world is already filled with negativity and it’s great to have someone that is your personal cheerleader. And when the cheerleading stops, that deafening silence is the most painful part of getting that dreaded phone call.

Oh I think that I found myself a cheerleader
She is always right there when I need her

From the song “Cheerleader” by Omi. Although the song is about dating, the song is so apt.

Dear Ola & Uber, Welcome to the License Raj

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Bits-Bytes-CarEveryone from the Bay Area to Bangalore is talking about whether we are in a technology funding bubble or not. I think that misses the bigger question in India of whether the Indian government might have an effect on it. I woke up this morning and saw an article that Vijay Chibber the secretary of the Ministry of Road Transport and Highways, has stated that companies like Ola and Uber must be registered with the state government like any other taxi operator. Vijay refers to Section 93 of the Motor Vehicles Act which states that the state governments have jurisdiction.

Ola has raised just under Rs. 6,660 crore in funding and employs thousands of people and that is most likely going to come to a screeching halt if the government has its way. Registering with the government is not the issue but existing taxi’s are registered and it’s pretty clear no one likes the existing system. How many times have people been refused a ride from a taxi driver? How many times has the taxi driver driven like he was in an F1 race? How many times have you stepped into a taxi and the floor board has rotted and you can see through? Yup, I’m sure all of us have faced this issue.

This issue goes back to my disconnect with Modi. He will travel all around the world and meet with enthusiastic entrepreneurs like Facebook’s Mark Zuckerberg and Tesla’s Elon Musk but back at home…

Well back at home, we are back to square one with the “license raj” of yesteryear. The central government has punted on the issue and has let each state government frame the guidelines for the taxi app aggregators like Ola and Uber. This just means more work for Ola and Uber in dealing with each state government – oh, what joy for them! And, in states like Maharashtra they may impose a cap on the number of taxi’s that an operator can have, because that’s how we roll in the license raj era. VC funding meet Indian Government regulators, you may have met your match.

 

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