Disrupted Cars – VW illustrates classic innovators dilemma

Woes at VW, just the tip of the car industry’s iceberg of troubles

iDisrupted Commentary

Car makers are like banks. For more than one reason they are in a fight for survival. For the time being they have to contend with problems of their own making. But disruptive technology poses a much bigger threat to their long-term viability. Within a few years the car industry we know today may not be recognisable.

Banks were bailed out in 2008 and 2009 because their balance sheets had been shaken to their core by sub-prime mortgage securitisation. Once banks had been rescued, and in many cases fallen into public ownership, it was like all hell had broken loose. The list of misdeeds, and indeed of deliberate cheating, stretched from Reykjavik, via Edinburgh and London to New York. While banks still struggle to grapple with the problems of their own making, they find themselves having to contend with a whole new set of challenges.  For more, see Disrupted banks: Will technology do away with the need for banks? https://disruptionhub.com/disrupted-banks-will-technology-away-need-banks/ and Disrupted Banking – the advent of the zombie banks?

Now the car industry finds itself in much the same position. It is clear that the problems at VW are just the beginning. According to Transport and Environment: “Every major car manufacturer is selling diesel cars that fail to meet EU air pollution limits on the road in Europe,” and, “on average new EU diesel cars produce emissions about five times higher than the allowed limit.”

Those who say VW will recover from its current crisis are guessing. At this stage, we have no idea if further issues will come to light. With banks, we found that nearly all of them were at it, once we found evidence of wrong-doing at one, we found similar evidence at others. We have no idea if other car makers will follow VW onto the regulators’ naughty step, we have no idea if the misdeeds at VW are the first of many such examples.

What we can say is that, regardless, the car industry as we know it faces a fight for survival. For VW, thanks to the fines it is likely to be hit with and the avalanche of bad PR that had descended upon it, this fight has just got a good deal more difficult.

Peak car

First of all, there is something called peak car; there is evidence that growth in the popularity of cars is slowing down. This chart tells the story.

Disrupted Cars - The Innovators Dilemma

 

If we look at the history of the transport industry, it does not tell an encouraging story, not from the point of view of the car industry. If you look at the story of the train, bus/tram you will see that after experiencing rapid growth in popularity, things went into shuddering reverse.  Why should the car industry be different?

 

Technology, however provides three major threats: they lie with the rise of electric cars, self-driving cars, and then the sharing economy. Disrupted Innovators

Innovators dilemma 

The effect that both electric cars and self-driving cars are likely to have provides a perfect example of innovators dilemma. This theory, developed by Harvard professor Clayton Christensen, looked at how industries change, and how the leaders in the industry can appear to be in a position of dominance, but a rapid change in technology can leave companies that once seemed invincible being measured for their place in the great corporate graveyard.

Famously, Christensen focused on the disc drive industry, as it shifted from 12 inch drives used with mainframe computers, eight inch drives used with mini computers, to 5¼ inch drives used for desktop PCs and to 3½ inch for laptops. With each shift in the type of disc drive that was most popular, most of the major disc drive makers went bust, or at least lost a significant level of market share.

The problem was two-fold. Firstly, there was a flaw in market research. Companies surveyed their customers, and were told there was little interest in ‘this new type of disc drive’. One of the lessons of innovators dilemma is that, when it comes to disruptive technology, customers don’t really know what they want. This is why Henry Ford is supposed to have said – “If you asked people what they want they would ask for faster horses.”  Likewise, Steve Jobs ignored research indicating that customers didn’t want a touchscreen keyboard on their phones.

The second problem lies with speciality. The more a company does something, the better it gets at it. By the time the leading players in the disc drive market had woken up to the threat posed by the new disc drive, it was too late. Companies that they had previously dismissed as being of no consequence, had become specialists in the new type of disc drive. The older companies found they couldn’t compete.

Electric cars 

The car industry faces a threat from electric cars and then self-driving cars. A large proportion of the car buying public say they want neither. Many petrol-heads dismiss the very idea of electric cars ever taking over from cars powered by the internal combustion engine. They look at the current state of the art in electric cars, and extrapolate forward.  But new technology does not change at an even pace, it can accelerate, and in the process defy their predictions. The future of VW is a just a sign of things to come. Research led by Professor Jos Lelieveld, at the Max Planck Institute for Chemistry in Germany, found that across the world three million people die each year prematurely thanks to air pollution. A study commissioned by the Greater London Authority and Transport for London found that 9,500 people die a year in London, thanks to air pollution.

In the aftermath of the news that VW had been gaming the system of tests employed in the US to check for diesel emissions, the media and public have woken up to the damage done by air pollution.  It is analogous to the experience of banks. They came under the spotlight post 2008, and we became aware of a long list of misdeeds. The public became less tolerant of banks failing to follow the rules.

Assuming that you are a believer in the idea of man-made climate change, then that is reason enough to put a large question mark over the car industry as it stands. Combine this issue with growing awareness of air pollution associated with health, coupled with the car industry falling under the spotlight following the VW furore, and there is a very powerful set of reasons to believe people will turn away from petrol charged cars, and opt for alternatives.

At the same time, the offering from electric cars is improving. Just as makers of the new generation of disc drives specialised, and became more adapt at this technology than the industry incumbents, so too Tesla is becoming a master of electric cars, while most of the major car makers do little more than tinker with the technology. Waiting in the wings are Apple and Google/Alphabet with their own ambitions in this space.

Batteries are becoming longer lasting and cheaper.

Consider this as an example of technology that may hasten the advent of electric cars. Highways England has commissioned research into building roads that can charge electric cars wirelessly while they are moving. The implications are staggering. If the technology can work, and one day it surely will, the need to stop off and fill your car up with petrol or recharge it at a fuelling station disappears. There are many reasons to stop driving when you are on a long journey, but providing your car with more petrol/recharging it will cease to be one of them.

Such technology may provide the killer app to electric cars.

Self-driving cars

Looking further forward, we will see the advent of self-driving cars. People enjoy driving, there will be resistance, but the benefits of such vehicles are many fold. For one thing they are safer. For another thing self-driving cars can drive much closer together, making better use of available road infrastructure, and for another thing creating an aerodynamic benefit – a bit like a peloton in cycling.

Consider, however, how self-driving cars will change the user experience. Driver and machine have an almost intimate relationship – a good driver feels in touch with the working of the vehicle he/she drives.  Self-driving will change this. A male driver may see his car as mark of machismo, and a means for impressing members of the opposite sex.

Self-driving cars will take the sex out of driving, this in turn will change the appeal of car ownership.

Consider now the economics of car sharing, coupled with how social media can make this easier to arrange.

A this point it is worth quoting from iDisrupted, the book by John Straw and Michael Baxter

Writing for the Project Syndicate series, Carlo Ratti and Matthew Claudel say: “According to research from the Massachusetts Institute of Technology’s SMART Future Mobility team: ‘the mobility demand of a city like Singapore – potentially host to the world’s first publicly‐accessible fleet of self‐driving cars – could be met with 30 per cent of its existing vehicles.’” Other researchers suggest this number could be cut by even more in New York, “if passengers travelling similar routes at the same time were willing to share a vehicle.”

According to a report from McKinsey, from Stefan Heck and Matt Rogers, the average American car spends 96 per cent of its time parked. Another 0.8 per cent of this time is spent with the driver looking for a parking space, 0.5 per cent is spent sitting in traffic congestion, and just 2.6 per cent of its time is applied to productive use.

Given this, and given what was said above about how self-driving cars will change the psychology of car driving, it is not unreasonable to assume that car sharing will indeed become much more popular within a decade or two. If we share cars, we won’t need to buy so many to meet our needs. If we buy fewer cars, then the car industry will face a massive threat.

The conclusion

VW’s problems are serious, but compared to the threats it faces in the near future they are mild. The same applies to VW’s mainstream rivals.