Cars

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.

 

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.

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.

 

Automotive Disruption Just Around the Corner

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tesla-disruptWhen did the world wake up and take notice of the automotive industry?

5 years ago General Motors (GM) filed for chapter 11 bankruptcy and no one seemed to care, today it’s a completely different story. GM recently announced one of their best quarters ever and has about $25 billion in the bank, yes that’s a “B” for billion. Now everyone is talking about the automotive industry, so much so that the press is speculating that Apple is working on an electric vehicle. The current automotive trends people are talking about are highlighted below and some of the companies involved:

– Self-driving cars (Google X)
– Electric cars (Tesla)
– Ride-sharing (Uber)
– 3D printed cars (Local Motors)

I assume the sudden interest in the car is because it’s such a large industry and when you talk about disruption this is one market that needs it. However, let’s rewind a bit.

The automotive age really kicked off with the introduction of the Ford Model T in 1908 as an affordable car for the middle class. It had 4 wheels and an internal combustion engine. You know what the car still 4 wheels and an internal combustion and that’s the problem. Yes, cars from 1908 look very different from the 2014 models but at the heart of the car is still the fossil fuel gulping internal combustion engine.

The automotive industry’s innovation for the past 10 years has been selling vehicles with more and more horsepower. I can’t for the life of me understand why you need a 400+ horsepower SUV to lug people around. I love cars, but when I speak to most normal humans they view their cars as a way to get from point a to point b. The industry really should have spent their R&D budget on engineering cars that would go further on a tank of gas/petrol instead of focusing on how fast it could drain that tank.

Self-driving cars and ride-sharing services like Uber show that people don’t want to drive. If people could afford a driver/chauffeur they would but most can’t and hence these other options are flourishing.

The aura of the electric car has been elevated 100x with Tesla in the game. Previously, electrics cars were ugly looking and something only a tree hugger could love. But, Tesla changed the game and is quickly moving towards its eventual goal of having an electric 4 door car costing around $40,000. In addition, there are many people working on the ultimate technology that would detach the car from the fossil fuel grid…solar power. Fisker Automotive which recently was bought out of bankruptcy by a Chinese company had a solar panel roof on their cars to power the accessories in the car. As solar cell technology gets more efficient it truly will allow the car to cut the cord to the fossil fuel grid.

For me the most innovative area is 3D printing, imagine you get into an accident and you take your car to the bodyshop to get it fixed. Instead of ordering the fender and having it delivered the next day, they print the rear-quarter panel overnight. Back in the day when GM launched Saturn one of the selling points of the car were the dent resistant body panels. The plastic pellets used to create the body panels were sold by GE Plastics (now called SABIC). In a country like India, all body panels should be made out of these plastic pellets since people get their doors dented and dinged almost on a daily basis. 3D printing of body panels is one thing but Local Motors recently unveiled their fully 3D printed vehicle. The implications of the open source project are far and wide, people can take the Local Motors designs and improve upon it. Who would have guessed that open source would hit the automotive industry.

It’s exciting times ahead for the automotive industry, the question is whether the big automotive companies can quickly capture these trends or continue the status quo. It’s the typical innovator’s dilemma, get with the times or get left behind.

Datsun No-Go Fiasco

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datsun-goA couple of weeks ago the Global New Car Assessment Program (NCAP) tested the Maruti-Suzuki Swift and Datsun Go (owned by Nissan), two cars which are sold in India. Most countries have their own automotive standards board like the US has the National Highway Traffic Safety Administration (NHTSA), India has the Society of Indian Automobile Manufacturers (SIAM). NCAP is an initiative by the United Nations to make cars and roads safer around the world. NCAP usually has stricter norms in countries where big companies can push around the government officials…kinda like India.

So what were the results of the frontal impact tests for the Maruti-Suzuki Swift and Datsun Go? They deemed both cars unfit for Indian roads and sent a letter to the CEO of Nissan, Carlos Ghosn, stating he has no business selling a car that is so unsafe and should immediately stop producing the car.

The outrage in India was pretty much…not there. As expected a spokesperson from SIAM had a quote to justify the abysmal results:

Every country has its own safety requirements. Our cars are meeting safety norms set by the government. The protocol followed by Global NCAP was not designed for India and tests must be conducted based on the conditions here.

Of course, the cars tested were both without airbags and I’m willing to bet those are the most popular variants of those cars. The reality is most people will place money above their own safety in an effort to save money. And that’s the crux of the issue where SIAM is stuck, consumers don’t want to pay for expensive safety features and car manufacturers are just giving consumers what they want. But at some point the government needs to make some hard choices and enforce that ALL cars have a minimum set of safety features. If all cars go up in price by Rs. 30,000 (USD 500) then so be it, at least people will not die needlessly.

The crash reports for both cars are below:

The PDF of the Maruti-Suzuki Swift results.
The PDF of the Datsun Go results.

YouTube clip of the Datsun Go impact test:

Tata Motors Revival?

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Tata_zestTata Motors up until last week had been under flying under the radar while they rebuild their company. For many years, the cars that Tata Motors produced were about as exciting as watching paint dry and hence were mainly sold to taxi fleets. Then in early 2008, Tata Motors revealed to the world what was billed as the cheapest car ever made – Tata Nano. Tata Group Chairman Ratan Tata unveiled the car and said instead of riding on a bike with 4 people, consumers could instead ride in a car. Two things derailed their plans which the Nano has never recovered from.

The first thing is people don’t necessarily like others to know they bought “the cheapest thing” not a very aspirational way to show the world you have upgraded from a bike to the cheapest possible car. But, what really hurt sales was when several of the cars would spontaneously turn into an instant barbecue grill. What was more surprising was the response from a Tata group company – nothing. They blamed the consumers and said their cars were fine. Ouch, I’m no PR specialist but that just seems like the dumbest possible way to handle the situation.

After that fiasco, Tata Motors got their act together and hired an outsider to run the show. They found Karl Slym who was previously heading up the Indian operations for General Motors. Karl was supposed to clean up the mess and get Tata Motors back on track. Although he was juggling many balls, in the press he talked at great length about streamlining and optimizing the number of vendors they buy parts from. I dropped an email to Karl and mentioned:

I hope design is a priority as well or you will end up streamlining the process to deliver cars more efficiently that only a mother could love.

His response:

email-karl-slym

 

It appeared Tata Motors was back on track to streamlining the operations, building cars people would actually buy and making sure the dealers were happy again. Then tragedy struck, in early 2014 Karl committed suicide.

However in his absence Tata Motors seems to have moved past that tragedy and starting to see the fruits of Karl’s labor. The first car out of the newly revamped Tata stable is the Zest. It’s a compact sedan that is going after Maruti’s main market. From the looks of it, the Zest could be a massive success that the Tata group is looking for. It’s the first car in this price segment to have an automatic transmission paired with a diesel engine.

So what’s next for Tata? In the coming months they will launch the Tata Bolt which is their new hatchback that will compete squarely with the Maruti Swift and the Hyundai i10/i20.

I’ve never liked the cars from Tata Motors but that view is changing as Tata is improving their product line. If the Zest and Bolt are big commercial successes then I can see Tata Motors moving up the pricing curve and introduce products to complete against the Honda City. I’m sure this time around Tata Motors will not lose sight of the goal and do whatever it take to make consumers happy.

Spare Capacity

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sharing_economyOver the past few years you might have heard the term “sharing economy” being thrown around. Which is a more consumer friendly term for monetizing underutilized fixed assets. This is different from an eBay where you have an old phone which you want to sell and they provide the marketplace to find a buyer for it.  It’s also different from Elance where you are offering your professional services to people looking for those skills. Personally I like the term spare capacity over “sharing economy” because that’s really what it is.

The startup that kicked off the “sharing economy” revolution was Airbnb in 2008 at the height of the financial crisis. Airbnb is a website that provides lodging but not using the traditional method of hotel rooms. Instead it rents out the spare capacity that an individual has such as a room, apartment, condo, house, etc… to people looking for lodging. The timing couldn’t have been better, the financial markets were in a downward spiral and people were looking for a cheaper lodging alternative and the owners of these fixed asset were looking for a way to make some money on the side.

Since then there has been an explosion in services to help people generate cash from what they own. For the taxi/cab sector there is Uber, Getaround and Lyft to name a few. The initial concept for Uber, which started in 2009, was to allow anyone with an iPhone to hail a black sedan (a generic term used to refer to the Lincoln Town Car, Cadillac Escalade, etc…). The idea was that many of these black sedans were just sitting around and waiting for their next scheduled pickup. With Uber the drivers could get connected to a system of people looking for black sedans and monetize their spare time and their car.

What really got me thinking about spare capacity is when I had a chance to listen to Aaron Hirschhorn of DogVacay. DogVacay is like “Airbnb for dogs”, it allows you to find a host family for your dog while you go on vacation for a couple days or couple weeks. That’s a great way for someone to make money on the side that loves dogs and has a house or apartment to host the dog.

The initial title of this blog post was “Boosting the Economy via Spare Capacity” which is correct but I decided to nix the title. But the premise still holds true, you can wait for the economy to turn around or work with what you have. Which explains why so many of these businesses started around the time of the financial crisis, they were ripe for people wanting to do something right now.

India is so ripe for exploiting this spare capacity. I was reading a report about transport trucks and 80% of the owners have less than 5 trucks. Which means the market is highly fragmented and an opportunity to monetize the return leg (backhaul) of the journey. The freight carriers know how to go from point A to point B, but at point B is where the could use a technology enabled spare capacity solution.

The one I always talk about is the spare capacity with my car and driver. I have a driver who takes me to the office and for most of the day he just sits around doing nothing. This is not unique to me, there are many people in the same boat as me. Of course, there are critics who say it will never work because people don’t want to rent out their car. I would argue the same thing could have been said about Airbnb when it started, “people will never give out their homes or apartments for nightly rentals…”. However the stats speak for themselves – Hilton Hotels has around 200,000 room nights in their inventory and Airbnb is already booking more room nights then the largest hotel chain in the world.