Two Major Possible Scenarios for Automotive and Mobility
The business model of the automotive industry is about to change drastically. Let's look at two possible scenarios.
For quite a while, automotive has been the supreme discipline of both the advertising industry and the German economy as a whole. On the verge of the digital transformation (or rather disruption), the question looms whether that will still be the case in the not so distant future. In principle, there are two major possible scenarios for the future of automotive: the first is more hardware-focused, the second has its emphasis on software and services. And of course, both are interconnected.
The first scenario
Let’s have a look at hardware first. These days, we can describe a car as a complex computer system on wheels. This includes, as it is the case with all digital systems, both hardware and software. From this perspective, the car is the ultimate mobile gadget. It is an Apple-like integrated system, closely controlled by the manufacturer who captures most of the value added. Distributed through different channels, the car generates revenue by hardware sales, while the software is more or less free of charge.
As cars are getting increasingly digital, car manufacturers will try to move to a platform business model, with hardware still front and centre. At some point, we’ll see app stores for cars, and apps that enhance the car experience with additional services and software. (Automatic, for example, launched their app store back in 2015.) This scenario follows the Apple iOS blueprint and could be a possible path at least for premium brands. Since the global car market is huge, there might be room for more than one premium car platform brand.
The second scenario
But like Android and iOS, the yin and yang of the mobile (smartphone) world, this leaves room for a second, software-and-services-focused platform model. In the second scenario, the car hardware tends to be commoditised. The iPhone profit share is a huge warning sign for car manufacturers. In 2017, Apple’s quarterly profit share has been 84%, 68% and 72%. This doesn’t leave much room to breathe for other smartphone manufacturers. If and when the same happens to the car bigwigs, they’ll be more or less doomed.
The second scenario sees value creation moving away from hardware and towards software and services. This shift has now been anticipated for a while by automotive managers like Rupert Stadler, chief executive of Audi. He expects new digital services to eventually make up half of the carmaker’s revenues in the near future. If Android can be a lesson here, this would imply Audi to control the platform. For a premium brand like Audi, that looks at least feasible, while at the same time requiring an Apple/iPod-like pivot.
With the iPod in 2001 and the iPhone only six years later, Apple performed two successful pivots, propelling the company into the mobile hardware-centric platform philosophy that proved to be key for the rise to the top of the world economy, as the most valuable company, within the space of a mere 10 years. Can Audi do the same? That remains to be seen. For the car industry, the key trends driving the transformation are electrification, autonomy and cars as a service. Again, these trends are interconnected.
Automotive at risk of commoditisation
The digital car will be defined differently, as for example the launch of Byton at CES last week illustrated. It’s about the user experience, the user interface, the voice controls, the sensors, the network and its corresponding network effects, the platform model and the AI systems, maybe even VR/AR/MR and the immersive experience a car ride will provide. And in today’s world, it makes less and less sense to own a car. Thus, in both scenarios, the automotive business model is moving further away from hardware sales.
It will be key to own the customer relationship. But if the smartphone world is a role model, this leaves room for multiple players. Apple and Google have customer relationships through their platforms, while the users still need contracts from telcos. In the case of Android, the hardware is provided by third-party vendors. In both scenarios, it’s an open question how profits will be distributed between the different players and layers of the future automotive industry. What’s clear is that profits will shift from hardware to software and services, fostering the need for car manufacturers to build up the corresponding businesses. Otherwise, they will get commoditised.
Meanwhile, Adam’s been having wild fever-dreams of what the future of mobility might look like