So much is being written every day about Connected Cars and the change it is going to bring in our lives. However, not much is being written about the shift in business models, and the technology associated with Connected Cars. What is shared are some opinions, research content and themes around changing business models and that’s not enough. Well, as a part-time pro-bono engagement with Silicon Valley startups here in California, I get to engage in some deeper conversations which truly challenge one’s thinking as to how many shapes business models will take.
Let me add some more meat to the story line. Most of us are already aware of the tiered structure of the supply chain in the automotive industry where OEM (Original Equipment Manufacturer) is at the top of the pyramid. As Yole puts it, there is going to be a dramatic shift in business models by the way tiers would move along the value chain. The current tiered structure looks something like this:-
And this tiered structure is going to evolve into two views: - One Near Term and another Long Term. Near Term is by 2022-25 and Long Term is by 2030-35.
Now this becomes interesting. If you observe closely, in Near Term a new Tier is added which specifically belongs to technology providers like Google, etc and OEM is still at the top of the pyramid. Whereas, by the Long Term even the OEM positioning has been challenged by Service Providers like Uber, Lyft and so on which would revolutionize the market with urban mobility concepts. The technology providers are shifted further down and stand at position 3.
In future, even OEMs will not be at the top of the automotive value chain.
Interestingly, though the ranking order has pushed the tiers down, the original classification of tier 1, 2 and 3 still remains the same. In simple terms – a tier 1 supplier like Bosch, Delphi, Denso and so on would still be classified as tier 1.
The big reason for that is – an assumption that they would still keep doing what they are doing today. This is a risky assumption which could be proven wrong in the future!
So what impact does the change of order cause?
This is a great question to ponder over. The answer is easy yet complex. Let’s take scenario of tier-1. Three big impacts:-
Value & Valuation – when the order from the top pushes you down, it basically means your contribution in the overall value chain has been reduced. And because it has been pushed down and brought closer to the bottom your valuation of the company also goes down because of the change in business demand. Not a good situation to be in.
Adopt to survive or die – even though most tier-1 suppliers have a diverse portfolio of product offerings, they would still be forced to quickly adapt to changing business needs before the new players wipe them out completely. Nothing in changing business models is certain. No one can precisely predict the future.
Consolidation – leading to only a few dominant players to survive. The rest would either go out of business or would be acquired by larger ones.
As a recent article puts it: -
Even the OEMs are not safe and this is evident from examples like – Toyota has invested in Uber, GM in Lyft, Apple in Didi Chuxing, Daimler in Mytaxi, VW in Gett and BMW has started its program DriveNow. And as mentioned in a recent study:-
Most OEMs are realistic enough to admit that they do not possess the capabilities needed to succeed in the mobility space, even though they also understand that these platforms may very well become to the auto industry what Google and Facebook are to the Internet: points of convergence and control. So they have taken ownership positions in mobility businesses, under the assumption that this will give them access to capabilities, technologies, skills, and cloud-based platforms
Well all this may not be true or come true?
In my recent conversations with some of the startups, it became evident that tier-1's see the risk and acknowledge it too. Some are already working hard to figure out what they would want to do next and others are looking out to build partnerships. The situation is painful because in contrast to current scenarios where tier 1's are considered as extended design arms for OEMs, in the future more OEMs may not be partnering with them. As mentioned in the examples above OEMS are building partnerships with startups either in the mobility space or in the technology space. Hence, tier-1's are left in lurch. Now as a survival or should I say an adoption strategy for the future, some are taking interesting steps. I can explain one example at the moment.
Look the value chain of Long Term and we see that Service Providers, which are urban mobility service providers, are at the top of pyramid. This means that mobility service providers would be going to have large numbers of vehicles to provide mobility services to round the clock, on-demand, door-to-door and various other modes of operation. Now this large number of vehicles would basically be a vehicle fleet for those service providers. There is a no brainer required to understand that a fleet needs to be serviced, and maintained at regular intervals to upkeep availability for customer.
And this is where the answer lies.
Fleet management would be the next big business in the automotive industry. In the future, it would be about managing fleets of urban mobility service providers.
It gets interesting from here because fleet management is not about mere maintenance and services, rather, it is also about managing critical capabilities of routing and dispatch too. With technology now enabling smart dispatch and routing, fleet management is going to evolve to the next level.
Tier-1's could play a smart role and take on partnerships with urban mobility service providers. Yes, that partnership would mean entering into a new business model, however. what choice otherwise would they have. Though they may not need to open workshops for repair and service, they can partner with technology companies who are building fleet management solutions for the future which are built on artificial intelligence and machine learning. The options are there, even though they may be few, but then at least thinking differently when one has time in hand, could be a potential game changer.
Being fast, agile and adaptable – is the only way of survival in the fast lane!
Jagmeet Singh is a tech enthusiast with 20 years of experience across industry verticals globally. He is a management consultant by profession and writes about the latest technologies as a hobby. When time permits, he engages himself as pro-bono with Silicon Valley, California-US, start-ups on Connected Car, Artificial Intelligence, and Machine Learning.
Views expressed are his own and do not represent his employers – past or present.