An Industry Struggles In The Face Of Rapid Change

Learning from the current state of the automotive business

As I strolled through the halls of the Geneva motor show this year, I reflected upon the changes that have taken place since I first visited in 2003. It struck me just how much has changed in the intervening 15 years, yet, at the same time, how little.

Now in its 113th year, the Geneva motor show still remains the most important global motoring event and the one that industry insiders look forward to the most. Like a Swiss cuckoo clock it rings in March, a bell-weather for the state of the auto industry, providing a sense of its direction and a prognosis for the months and years ahead.

For some auto manufacturers, Geneva is the first opportunity of the year to talk numbers, company performance and year to date sales. For most, however, it’s a chance to cast an eye to the future, announce new innovations, address industry challenges and outline how they will meet them head on.

On the motor show calendar, Geneva has always been the most avant-garde. That much hasn’t changed. Like Switzerland, the show is proud to be neutral with no native brands to lay claim to a home-court advantage. But things are changing.

Its relevance, like many of the big international motor shows, is dwindling. With the dynamic change taking place in the industry, so each show is facing a need to maintain its relevance and reinvent itself. Geneva this year seemed to suggest more evolution, than revolution.

Out of sync?

Given the extent of digital transformation taking place in the industry, Geneva failed to provide evidence how it and the industry is truly coming to terms with what is around the corner. Instead, it served to highlight how the industry cycle is out of sync with the fast pace of technology.

Increasingly auto manufacturers are showcasing new models and technologies outside of the motor show circuit. As the car becomes the ultimate connected, autonomous device so the likes of the Consumer Electronics Show (CES) have become more relevant and important.

That leaves Geneva, and its related shows, to focus on the product, remaining in place as a selling show for the public. And while there was talk about the future, those words were masked by the shiny new metal on show.

More than before the lip-service paid to investment in electric vehicles and the testing of autonomous cars, only served to highlight the gap between the industry incumbents and the external challengers – all of whom don’t feel the need to be present at Geneva. Not just the typical players – Google, Apple et al – but the likes of the growing range of emerging electric autonomous brands who will bring new product with a step-change to the underlying business model such as NIO, Lynk & Co etc.

On the approach to the Geneva motor a large advertising billboard from Hyundai proclaimed cheekily “Your turn, Elon” alongside an image of its electric Kona SUV which will launch in Europe later this year. The truth is Tesla launched the Model S six years ago and has been accumulating invaluable usage and charging information from its customers ever since while rivals are only just launching their EVs. Might it just be too little too late?

At times this suggests an industry at odds with itself; trying to catch up while also convincing everyone around them (and themselves) that the future is bright. The reassurance each brand wanted to convey was palpable – each claiming they were prepared for change and that they will be driving it. The reality is somewhat different.

Volkswagen, for example, showcased a vision for their electric future with the Sedric while making clear that the diesel engine was still part of its future plans. This despite the recent emissions scandal with VW committing to spend around $30 billion. Matthias Mueller the VW CEO confirmed the company isn’t giving up on diesel, even predicting a diesel “renaissance”.

This was at odds with the clear message across the show: electric cars are no longer of the future, their time has come. Staring with the Jaguar I-PACE, to be launched later this year, a succession of pretenders to Tesla’s EV crown will be launched. Porsche, Mercedes-Benz, BMW and Audi will all launch electric vehicles within the next couple of years.

Yet behind the electrification, the subtext to the show was that diesel cars, so long the bastion of the German auto industry, are increasingly a symbol of the past. In many respects diesel is a patient that has been read its last rites. Falling diesel sales, the challenge of stricter carbon dioxide regulations, a public backlash and consequent political demonization in cities throughout Europe has gained too much momentum to be stopped.

The Japanese brands, leaders in electrification and hybridisation, were the first to sound the death knell of diesel. Toyota announced it will stop selling diesels in Europe by the end of 2018, Subaru will end production of diesel cars and the new Honda CR-V will not be sold in Europe with a diesel engine in its line-up.

Instead the canvas of Geneva was painted full of electric vehicles and plug-in hybrids. The advance of electrification has moved from the niche to the mainstream with cars – crossover vehicles and luxury sedans – that customers will actually want to buy.

Big in Japan?

So how can the Japanese be so quick to denounce diesel when VW and others are still holding on steadfast? Quite simply, bottom line contribution. Diesel cars have never been a significant percentage of overall sales for the Japanese, unlike European brands. At the same time, the margin on diesel vehicles is lower than their petrol counterparts.

Here lies the rub though with EVs. The commercial reality of electric vehicles today is they cost 30-40% more than their equivalent internal combustion engine vehicles. Auto manufacturers have to absorb higher development costs and higher material cost of the battery. And that is before accounting for investment in charging infrastructure. It’s the equivalent of having to build the first cars and gas stations alongside each other.

That really was the main theme this year, and will continue to be for the foreseeable future. While the electric autonomous vehicles provide a shiny patina at the show, they are also subterfuge that masks the internal struggle facing every incumbent in the auto industry. It defines how they are coming to terms with the level of disruption taking place and the material impact on the returns they are able to create (and have to return to shareholders).

Specifically, how do you continue to sell the one thing that drives the underlying profitability of your business in Europe, while addressing the challenge of an electric, autonomous future, given the significant change that is impacting everything in your business – from the industrial footprint to the retail model to the talent required – and responding more quickly to the customer and market needs?

Underpinning this challenge for auto manufacturers is a shift from monetising your business based on margin per vehicle sold to a margin generated on multiple revenue streams: per passenger mile travelled, per unit of energy stored and per unit of data transferred.

For many it’s a difficult tightrope to walk. As an incumbent in the industry today, at best you run the risk of being contradictory, at worst you look confused and lacking direction.

It’s also classic game theory. Auto manufacturers aim to do what is best for themselves within the industry as it stands today, taking as a given what the other auto manufacturers are doing. No-one wants to confess to the change coming, otherwise there would be a destabilisation of the cooperative game, and everyone else would have follow suit. It’s convenient to maintain the status quo.

Contradictory reality

Many are struggling with the contradictory reality they face. The only thing that’s certain in this uncertain future is that the topic of industry transformation is at the top of the agenda for every CEO in every boardroom. Leadership has to deal with the existing and the new, an industrial past with a digital future, and a clock speed from years to days.

It’s a challenge for every automotive leader and one that can come with a high price. At Ford, Mark Fields tried to manage both in parallel, but lost sight of one at the expense of the other. He lost his job.

So that’s what Geneva highlighted more than ever, how the industrial machine is trying to come to terms with speed in a digital age. It represents fascinating theatre, with Geneva the latest stage for the continuing play that is unfolding before us.

Implications

Here is the lesson for any industry: the only way to bring change is to change what you bring. And the constant to that change is the pace at which it arrives. With greater speed the more the industrial machine is exposed, the fissures more evident as incumbents first paper over the cracks and then try to fill the voids. But that takes time.

All the while those weaknesses are exploited by new challengers from the outside. They don’t play to the traditional rules or conform to industry norms. They operate their business to a digital clock speed, while incumbents agonise over their two-speed business.

As the pace of change in the automotive industry will only get faster, the motoring world stands on the brink of a new era of transportation. It feels like the auto industry is readying itself for a fundamental reshaping of the value chain that will pioneer the future of transportation, but only it can come to terms with the change needed.

And when that happens one thing is certain, motor shows like Geneva will fundamentally fail to exist as we know them, an inevitability that can’t be escaped, much like the changing tide facing the auto industry today.