The Coming Disruption of the Auto Industry

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Most of us are now aware of the transformation Tesla Motors is bringing about in the automobile Industry. To some, what Elon Musk has achieved for automobiles probably goes beyond what Steve Jobs did for computers and mobile phones.

Today, as we look around, electric cars are still a small/tiny fraction of the total automobile industry sales. And many skeptics continue to argue that Tesla is just too high priced and does not have the production capability to attain mass market status in the near future. Well, all of that may be true, for now, but look at how rapidly the perception about electric cars has changed, all thanks to Elon Musk and Tesla. 

As we review the pace of technology advancement and disruption, it is safe to say that five years is the new decade when it comes to technology adoption, speed of innovation, transformation and disruption. Consider, for example, what Tesla was five years back as well as the iPad that was launched in the last five years or so and how much of an impact these developments have had. Going beyond the tablet/computer industry, the iPad has transformed entire sectors like retail, media, healthcare, and education, to name a few. It has touched upon nearly every aspect of a typical person’s life.

So if we go by the pace of the last five years and factor in that every five years, the rate of change is only going to accelerate…the predictions, especially, for the automobile industry become pretty radical.

Coming back to Tesla, let’s look at some performance stats on its newest Model S. The Tesla Model S P90D with a 90 Kwh and the Ludicrous Mode: Is 0 to 60 in less than three seconds, costing around $120k, still cheaper than a Ferrari or a Lamborghini or a Bugatti or an Aston Martin, and yet on par with or better than each of them on performance? Oh! And by the way, Tesla also earned JD Power & Associates’ highest customer satisfaction score for 2015!

So what is the statement that Tesla is making? That you can have a super performance engineered electric car for less than a fraction of the cost you would pay for a Bugatti or one of those exotic supercars? Some of these super cars are in excess of $500 K to upward of $1 million!

Guess what we have been hearing from some of these super car manufacturers lately? Aston Martin recently announced that in a few years they will launch a more powerful version of their own electric car that will compete with a Tesla. Audi just announced that they will launch an all electric SUV that will have a greater driving range than the Tesla Model X. 

Mercedes Benz has launched their own electric vehicle. The grapevine has it that Mercedes Benz and Toyota have worked out partnerships with Tesla for the drive train. BMW has launched their own i3 and i8 electric/hybrid cars. So the trend is that an increasing number of automobile majors are accepting that the future is electric!

Now what will happen when Tesla launches the affordable $35 K, midsize, all electric compact car with a range of 250 to 300 miles per charge (knowing Elon Musk’s track record, if he commits to something then one can rest assured that he will make it happen)? And the future is not very far…Going by Tesla’s product launch dates, this could happen within a time span of three to five years!

I think we can safely assume that in the near future, with battery technology advancing, getting a 500 mile range on a single charge will not be too difficult. Not only will the range increase but the speed of charging will also come down to minutes instead of hours. That will likely constitute a shift in mindset for a lot of folks who are currently sitting on the sidelines, daunted by problems in taking the electric car for long drives with family, etc.

So let’s look two technology decades ahead (10 actual years from now if we assume five years is the new decade in tech terms). You will have an affordable electric car with a range of 500 miles and enough super charging stations to cover you for all combinations of travel and exploration. A major aspect to consider is the effect this will have on the OEM suppliers, dealers, and service networks to the automobile industry. 

Electric vehicles do not have that many parts. For example, they don’t need pistons, blocks, seals, fuel injectors, spark plugs, transmission oil, radiators, fuel tanks…Can you imagine the consequence this will have on ancillary industries? This is going to be a major disruption! What will happen to the service and dealer networks? Electric vehicles do not require that much servicing or maintenance either. What impact will this have on manufacturing jobs, service jobs, and assembly line jobs? If one were to take a look at the robots on the Tesla assembly line, it would be amazing to see the level of automation they have achieved. The situation will be scary as the folks who are dependent on this industry are typically not young kids who can be easily retrained for another industry very quickly. 

The coming disruption will therefore be deep and its outcome will be felt for decades and across continents. Combine the effect of full automation in the electric vehicle/automobile industry with the impact of additive manufacturing—3D printing as it is popularly known. The combined result of these will be devastating for folks who get laid off from manufacturing jobs. As it will be difficult to transition from, say, an automobile manufacturing industry to another manufacturing industry as a number of industries will face the heat of this disruption at the same time.

This trend will not be confined to western/developed economies. The effects will be equally drastic for developing economies. India and China are rapidly expanding their use of green technology and automation in manufacturing. For their economies the growing use of electric cars means less dependence on oil and fossil fuels and reduced oil import bills that run into the billions of dollars today. 

Auto manufacturers are increasingly looking at India and China as a base for expanding their markets. If you take a leaf out of the telecom book, the developing countries leapfrogged due to the widespread adoption of wireless/mobile phones. They did not have to go through the landline route; they in fact skipped over an entire generation and came in on par with the developed world. In fact today India and China have the largest user base for smartphones tablets in the world and are the fastest growing markets for these services and equipment.

So what stops these countries from adopting electric vehicles? Like in the case of the telecom industry evolution, these countries can go straight into electric vehicles instead of combustion engine based ones. This will have a major effect on the cost of manufacturing cars. Unit cost of batteries and other components, etc., will come down as the adoption base increases. Maybe if the user base in India and China expands more rapidly than in North America and Europe, it could actually help the west too as it will lower overall costs across the board due to a large base in Asia. This will have a positive outcome for everyone.

Both India and China are spending billions on infrastructure and green technology. 

Now the Asian economies will run into a larger problem. On the one hand, from a dependence on fossil fuels perspective, electric vehicles will definitely help the economy and reduce fuel import costs. Useful for the end consumer and good for the planet/environment, they will improve the quality of air in some of the worst affected cities due to reduction in fossil fuels.

On the other hand, they will have a negative impact on manufacturing jobs. The onslaught of automobile industry automation for electric cars combined with additive manufacturing and artificial intelligence is definitely going to permanently alter the way we live, work, and travel. So while Asia does benefit to a certain extent, how do the countries make sure that the economy can support job creation? India has close to a 1.2 billion population and China a 1.3 billion population, with millions more entering the labor force every year.

While we can argue that western economies have managed with a whole lot of pain over the last several decades of their transition from agrarian to industrial to services to knowledge/information driven economies, the problem for Asian countries gets compounded when you have such a huge labor force becoming unemployed. Though India may have had a slight advantage as its economy was not so heavily export/manufacturing led. The huge domestic consumption market can help cushion the impact but still there is no getting away from huge problems at hand.

The slowdown in the Chinese economy means they are likely to face an even larger problem. Even the western economies are not geared to handle the rapid changes that will unfold.

Unfortunately, the trend does not stop here. If you fast forward four technology decades (20 actual years), you will see disruptive/nimble companies coming up that offer fully customizable electric cars (we can already see some aspects of this with Tesla). You will be able to login from your handheld and design your own custom electric car with a unique body shell, color, interior, and power train with autonomous or driven options. 

So two decades (20 actual years) ago the option was manual/stick shift or automatic gears. Who would have thought this would morph into manual driving or autonomous driving modes?

What impact will this have on existing automobile giants: GM, Ford, Chrysler, Mercedes Benz, BMW…? Will they be able to survive and compete? What differentiators can they build for their brands, apart from the body shell and their logos! Underneath the hood, it will all be the same!

Will they be able to compete with more nimble and virtual manufacturers who will use the supply chain to design and deliver custom cars rather than build to stock? Perhaps going by recent reports, Apple and Google who are currently testing on their own versions of autonomous electric vehicles could be the next big auto giants. So could we see Apple, Google, Tesla, and Amazon as the new Ford, GM, Chrysler, and Toyota?

After all, electric cars have fewer moving parts than traditional automobiles and have a simpler layout. These include motors, tires, brakes, batteries, chassis, suspension, body/shell, and of course the electronics, etc. My point is that in the near future a more modular structure will emerge, with a plug and play approach. The new ‘Dell of automobiles’ is waiting in the wings somewhere. 

Overall, I strongly believe the advent and growth of the electric vehicles is a boon to the consumer, the economy, and the planet (the impact is all the more efficient if combined with use of solar energy for actual charging of the automobile either at residential or commercial level). 

However, there are several shocks in the works that surpass anything the industry has seen so far. Alvin Toffler’s amazing prescience is perhaps even more relevant today—no escaping future shock!

The industry should take a note and start preparing and come up with a road map for the transition process to help thousands of workers to be better prepared than the first shock that happened in Detroit when the auto industry moved manufacturing offshore.