When Uber launched in France two years ago, the roads around Charles de Gaulle airport descended into chaos. That day I spent several hours in a traffic jam because taxi drivers had blocked the access roads and set cars on fire. The taxi drivers were angry because Uber, which works via an app, allows customers to book a driver who will take them to their destination in their car for a much lower price than the cost of a taxi fare.
The Uber business model is considered to be disruptive. Disruption is a process in which a business model or an entire market is thrown into disarray by a breakthrough innovation. The Uber business model is an example of how such disruption is threatening the entire automotive sector and the individual factors driving the changes.
- Immediate availability: Uber consists of a service which is available immediately and is also known as the “on-demand economy” due to its touch-of-a-button character
- Online sales: The service is advertised, traded, settled and rated on an online platform. The internet is ideal because 1.) its broad reach means that it brings together a significant number of service providers and customers which creates a market, and 2.) it enables a convenient interaction and transaction
- Transparency: The flood of data which arises during the operation of the online platform is used to improve the software, the work processes and the offer itself. The customer profile becomes clearer, the sales pitch therefore becomes more precise, and the offer can be customised to their requirements
- Sunk costs: The services which are offered are based on the use of freely available capacity. Idle resources are mobilised so as to earn money, such as empty apartments (Airbnb), cars that are otherwise unused (RelayRides) and one’s own labour when one is otherwise unoccupied (Task Rabbit)
- Immediate market response: Users of Uber generally submit an immediate rating of the service provider which is visible to all. The service providers also rate their customers. Information about the conduct of the service providers and customers which is reliable and immediately available makes a major contribution to the functioning of the market, as the participants can find out whether their business partner is reputable or not
In this context, the most successful business models are those that prove superior to the previously existing services. Uber has achieved considerable success in San Francisco, for example, a city known for its unreliable taxi service. The same applies to Airbnb in New York, where the hotels were considered overpriced.
There are cooler things for young customers than owning a car
Customers in the automotive sector are frequently unhappy with the current offer. A lack of parking spaces, traffic regulations and emissions often make owning a car inconvenient. These days, customers also have other expectations: Their dream car is more like a communication device in a networked world. Connectivity is more important than horsepower.
This is expressed in the values of leading brands. According to Interbrand, the most highly coveted brand in the world isn't VW ($13bn) or Mercedes ($34bn.), but Apple ($120bn.). Apple knows how to talk to “digital natives”. It knows how to address the target group online, and also has the best locations, with shops in the best city centre sites, whereas showrooms of the big car brands are empty.
The car manufacturers have lost the ability to dominate the market
The barriers to market entry of yesterday have fallen because car manufacturers have outsourced their production to an increasing extent and ceded their know-how to suppliers. The value added of the manufacturers now amounts to just 25%. Leading the field in this respect is the young Chinese manufacturer Qoros, which has developed three models with just 850 employees. The company broke a taboo when it handed responsibility for the fine adjustment of the engines, performance management and steering – which determine the driving characteristics considered to be typical of the brand – to Bosch. Yet the success of Qoros has justified this move. Not only did Qoros achieve the best results in the NCAP crash test, it also won the Red Dot Award for excellent design.
The manufacturing depth is set to fall further with the boom which is forecast to occur in electric vehicles. In this respect, in mid-February Mercedes-Benz announced that its suppliers will manufacture its electric motors in the future. The reason: When it comes to electric motors, differentiation by competitors won't be possible in the future. Electric engines have five times fewer components than combustion engines, their construction is much more simple, and they require less mechanical precision. The manufacturing of an electric motor requires far less working time and the content of the work is also different. Software plays a major role.
E-cars are threatening many suppliers with bankruptcy
The suppliers’ business is still based on combustion engines – for now. For example, 85% of the business of the emissions specialist Eberspächer is with combustion engines. At Borg-Wahner, a manufacturer of ignition coils and heater plugs, it is 90%, while at Mahle (cylinders, pistons, valves) it is 50%. The Working Group on Insolvency Law in the German Lawyers’ Association has envisaged that over 100,000 jobs will be lost in Germany in this area over the next decade.
Many suppliers are responding to this threat by focusing on components which are used in both E-motors and combustion engines. This includes Eberspächer, which has moved into the production of electric heating and air conditioning systems. This also means, however, that they are limiting themselves to the further development of existing products instead of putting their entire business model to the test. In my opinion, this approach falls short: our research with MIT demonstrates that revising the business model promises more success than conventional innovations do.
Bosch has demonstrated its forward vision and thinks beyond its current range of products by offering online bookings of charging stations. A strong orientation to the customer and their changing needs can be seen to bring success. In this context, digitalisation is to be viewed as an opportunity for gathering detailed information about the customers’ requirements, whether it is via social media or through sensors that have been installed in products. These technologies enable the customer relationship to become more transparent, on the basis of which new business models can be established.
Michelin has fitted its tyres with sensors, for example, which enable the customers’ driving performance to be assessed in real time. The result: with analytical methods, Michelin is now able to reduce the rates of fuel consumption and damage frequency. With the data, Michelin is also able to offer its customers added knowledge which it markets in the form of a service. Moreover, Michelin is beginning to move from offering its tyres for sale to offering them for hire. The exact default forecasting means that the hiring costs are affordable and the business case is positive. This offer also involves a settlement method which invoices the effective use (pay per use) rather than the ownership.
The traditional delegation of the sales to the manufacturer acts as an impediment to disruptive business models on the part of suppliers
The examples provided by Bosch and Michelin demonstrate that ostensibly “non-digital” products such as tyres can still be transformed into new, digital business models:
- It is the actual use which is to be made transparent through digitalisation
- Direct access to the customer is secured through use-dependent remuneration, ideally via a payment platform
Despite this, the biggest impediment for the suppliers is that their sales traditionally take place through the vehicle manufacturer, and they themselves do not play any role when interacting with the end customer. It actually takes courage to question the sharing of tasks that has been nurtured over the course of many decades. Capgemini highlights how these “chains” can be thrown off on the road to a disruptive business model in the form of five steps.