Tesla’s first Roadster, launched in 2006, had a base sticker price of $109,000 and sold 2600 units in its first year. Detroit was then amused, as was evident from a now famous comment made by Mr Bob Lutz a long-time auto executive, and former Vice Chairman of GM. In an interview to a national magazine, Bob Lutz had said that the Tesla motor car and the company that developed it was a joke! But, how the tables have turned in just a few years! Tesla recently announced, in its last quarter earnings release, that it has sold out the entire 2015 production of its popular Model X car! Today, their EV car prices have dropped significantly, and it is expected that a sub $30K model is in the offing in 2016!

Silicon Valley takes on Motown!

Not surprisingly, Tesla was founded by 2 computer engineers, Martin Eberhard and Marc Tarpenning, who had never worked in any part of the automobile industry, and based 2500 miles away from Detroit, in San Francisco. (Contrary to common belief, Elon Musk is not Tesla’s founder, he was an early investor and Chairman… see http://tinyurl.com/jvvpq46). Not only did Tesla build a new car company, it also redefined the business model as it went along. It pioneered the direct-to-consumer sales model in the industry, doing away with the dealer in the middle. It started arranging a factory visit for its customers who then became its biggest sales force! Recently, Tesla has announced that it is building a mega factory to produce batteries - this is not just vertical integration, but a new business in the offing, as they plan to sell batteries to home owners for storing energy. Tesla open-sourced its patents, another first in the automobile industry. Elon Musk had seen how software open-sourcing helped the big tech companies build a large ecosystem of application developers, who then popularized the platform, creating a viral effect. Here too, chances are that new players will come in to build cars, subsystems, or may be other kinds of electric vehicles, based on the IP open-sourced by Tesla, eventually creating a viral effect that helps Tesla!

The Uber Phenomenon:

Tesla, and the electric car, is not the only major change that is happening in the automobile world. Startups like Uber, Lyft, Zipcar are now providing chauffeur driven cars where and when you need them, at prices that make them affordable to the typical car-owning class. Their technology frameworks enable them to optimize the service so efficiently that economies of scale will kick-in and make it more attractive than owning a car in the near future. Is this, perhaps, the reason why developed countries like the US are now seeing a perceptible downward trend in licensed first-time drivers? As per one study, the percentage of high school seniors who had a driver's license fell from 85% in 1996 to 73% in 2010! Teenagers are waiting longer to get their driving license, and there are many reasons being attributed - social networks make it less necessary for kids to drive to meet friends at malls; the next generation wants to live and work in cities, not suburbs; etc. But whatever be the reason, the big surprising trend being predicted is that car ownership is likely to go down and not up.

This trend could stymie the rising per-capita car-ownership numbers in the growth markets of China and India too. These are markets which are already seeing the launch of Uber like services, well before car penetration has reached saturation point like in the US , Europe and Japan. China’s 85 cars per 1000, and India’s 18 per 1000 are still a respectable distance from the 797 cars per 1000 number that the US boasts. What if the car numbers in these growth markets stall, because of more efficient alternate services on offer to get people to where they need to go?! It could well be a blessing-in-disguise, considering the emissions havoc that has already been wrought in China and India by the existing number of cars on the road. The smogs in Beijing, Delhi are already legendary… Is anybody thinking about the social cost of selling more cars in these places?

The Chinese are showing the way!

The Chinese government has made some strong initial moves to encourage electric cars in the country – zero purchase tax, a subsidy of $18000+, and a mandated 30% share of electric cars in government fleets. Will this shift the demand to more electric cars in the high growth China market that, today, is larger than the US? The jury is still out, but electric cars saw a 320% growth in China in the last year. In fact, China has its own robust NEV(New Energy Vehicle) industry, with biggies like BYD Auto having launched a sedan, a taxi and even a bus. Interestingly, BYD Auto is a subsidiary of BYD, a battery manufacturer - the largest manufacturer of rechargeable batteries in the world. With cars in the $35000 range (post govt. subsidy), BYD has attracted worldwide attention, and an investment from Warren Buffet!

But this is not all. China has a booming low-speed electric car market, with hundreds of manufacturers who have put half-a-million electric cars on the road, mainly in the Chinese countryside, with no government subsidy. These cars cost between $2000 and $12000, use lead-acid batteries, and are powered by 1.5-kW to 4-kW direct-current motors, with a top speed of around 38 miles per hour. They typically have a range of 60 to 100 miles. No seat belts, no airbags, but, guess what, the Chinese customer driving on the rural roads is not missing them. The market, of 600M rural folks in China, is big. Plus, this could well be the lead indicator for similar large markets to emerge in places like India and Africa too. Perhaps they can take on the two wheeler market too in these places? Wonder why we are not yet seeing more electricals in the motorcycle/scooter segment, given that they won’t have the range issue that electric car makers struggle with!

Batteries, and Solar are coming together:

Interestingly, the thrust to design more eco-friendly cars is leading to Solar Energy getting research dollars like never before. As per Tony Seba, the acclaimed author of the book Clean disruption of Energy & Transportation, Solar is gaining the critical momentum now, because three big industries - Auto, Utility and IT, are furiously working on solar as a source for their energy needs. Solar & Battery technology are coming together - solar roof panels need a storage device to really make it a viable, continuous, energy source. This is where Elon Musk’s giant bets in Solar power (SolarCity), and Batteries (the $5Bn Tesla Gigafactory) starts making sense. So, Tesla and BYD are not only disrupting the auto industry, but the utilities too. Now, is a Tesla, or a BYD, a car company or an energy company?!

The Driverless Car is for Real:

Driverless cars is another dramatic shift that is underway in the auto industry. Once considered the fancy toy of Google billionaires, today traditional companies like Audi and Mercedes are piloting the move to driverless cars. There is now universal acknowledgement that the technology to build driverless cars already exists. It is licensing regulations that need to change. Already States such as California and Nevada have issued licenses, and more will follow. Uber has proclaimed that it would embrace driverless car technology as soon as it is available, and it is not hard to see the reason why - their biggest headache today is in recruiting and retaining drivers! In one shot, poof!....that goes away with driverless cars!

The need to rethink Manufacturing & Supply Chain all over again:

Have you heard of 3D printing and micro manufacturing? Well, Local Motors(www.localmotors.com) demonstrated successfully, recently, that it could build a working car in 6 weeks using 3D printing and micro manufacturing. This is amazing at many levels. Can we get custom tailored cars now in a couple of months? What if we could co-design the car and get it manufactured / delivered? What if, like Ikea furniture, we can start assembling cars that are uniquely suited to our needs and who we are? If this really takes off, the capital cost for building billion-dollar factories will come down, breaking down the big entry barrier.

Even without 3D Micro manufacturing, the industry has started rethinking the entire supply chain. Electrical vehicles do not have many parts like the ICE based cars. Batteries, Power trains, Motors form the core and the conventional car manufacturers today do not have the in-house expertise in any of these areas. Outsource, acquire or build is going to be a key strategic decision for them as they start competing in the Electrics space.

Every Segment of the Auto Industry is being Disrupted:

If the big car companies themselves are all being disrupted by the advent of electric cars, and driverless cars, wonder what is going to be the future for the large global Auto Parts Industry...by one estimate, a typical IC Engine car has about 30,000 different parts! According to CALSTART, the advanced transportation consortium in California, 70% of an electric vehicle‘s component parts may be different from a gasoline-powered vehicle.

What about the impact of this on the large auto repair and services industry? The electric vehicle has one moving part, the motor, whereas the gasoline-powered vehicle has hundreds of moving parts! Fewer moving parts in the electric vehicle means that it requires little or no periodic maintenance and is way more reliable!

We talked earlier about how Tesla wants to sell directly. A big reason for this is that the conventional dealer will not see the post-sales service business in electric cars, and will therefore resist selling more of these cars. Dealers are up in arms and have gotten States like West Virginia to stop car manufacturers selling directly. Perhaps, they would be better served in the long term if they start figuring out how to re-invent themselves.

Self-driving cars represent “a real threat to the auto insurance industry,” said Warren Buffett at his 2014 annual meeting, “It will be very good for society and it will be very bad for auto insurers”, said he! It is expected that the advent of driverless electric cars will eliminate 90% of the car accidents that occur today due to human error! So, why will we pay high auto insurance premiums any more?! On those lines, what about hospital ERs? Should they get prepared for less number of accident victims too?!

Oil companies too are watching. What happens to gas stations? Will they need to become the supercharging stations of the future?? What if the recent dramatic fall in oil price is partly due to expected fall in demand? If so, could it be a permanent fall – have the oil companies or the countries producing oil seriously considered this possibility? What we hear, instead, is that this is a temporary phenomenon exactly like the earlier cycles, and that oil prices will be back up again soon. But if that is not so, then what? Will it mean a longer life-line for the incumbent auto companies, and will electric cars have a tougher time? Will the existing car companies take their eyes off and become complacent yet again? Lots to ponder about…!

Is Motown seeing the Writing on the Wall?

How are the Big Autos responding to all of this disruptive change happening around them? Judging by what was on display at the North American International Auto Show at Detroit this January, Edward Niedermeyer of BloombergView says, “business as usual in the auto industry is alive and well… with its usual barrage of big trucks, muscle cars, luxury sedans and supercars, Detroit seems determined to remind you that it's still a very good time to be in the traditional auto business”!

Yet, behind all the bravado, there is indeed the lurking fear of severe competition from the likes of Tesla within two years. Every car major is getting out there, albeit tentatively, with products in this category - there is the BMW i3, the Mercedes B Class, the Nissan Leaf, Chevy Spark EV, and the VW Golf EV. GM just showed off its Chevy Bolt Concept electric car with a sub $40K price tag, and a 200 mile range; Nissan has pledged that its nextgen Leaf will match, and possibly exceed the Bolt’s range; Honda has promised a new Electric Vehicle to complement its 2016 FCV; and of course, there are the other two FCV alternatives - Toyota’s Mirai, and Hyundai’s Tucson.

In response to the Ubers and Zipcars, some of the auto companies are experimenting with the idea of “mobility as a service”! (sounds close to “software as a service”, or SaaS, isn’t it?:) ) A completely different model for the incumbent car companies, and one going to be equally tough for the them to adapt to...but they are trying. Instead of selling cars they provide you with the car as a service instead! Daimler has Car2Go, a service that it has launched in parts of Europe and US, based on its Smart fortwo model cars. BMW has DriveNow, a electric car-share service that it has launched in San Francisco. Volkswagen has Quicar, in Hanover, Germany. Another interesting service is ParkNow from BMW, a service which helps its customers find right parking spots, pay and exit. Perhaps, this is their way for these incumbents to test the waters for a larger initiative if and when the market reaches the inflection point.

It’s indeed a tough battle ahead for the car companies. The likes of Uber have found traction because of the associated software and technology that silicon valley has plunked into the space. Location apps, route optimizing algorithms, crowd-shared traffic information, and what-not, make one rethink on the need to keep a car that is typically idling and waiting 80% of the time! The $40bn valuation that an Uber has got today must be giving heartburns to a Ford (valuation $61b) and a GM (valuation $54b), and they ought to be wondering why they could not have been a Uber given their understanding of the market, their reach and their access to cars! In fact, Uber is not stopping here. It is now trying its hand at door-to-door delivery, crossing into the world of UPS and Fedex. Another pointer to the car companies - when manufacturing gets simplified and financing is not required anymore, should they not rethink their business models? Are there other adjacent large spaces they could play in, while satisfying the same basic need of their customers – transportation?

An Apple Car, did you say?!

There is a strong rumor that Apple is going to come up with a car soon. Apple trackers say that the company’s hiring in the recent past is a clear indicator. Why else would it clean out A123, a Li-ion battery maker and a supplier to car manufacturers? Or why else would they hire Johann Jungwirth, who used to head R&D for Mercedes Benz in North America? And then there was the meeting of Elon Musk with Apple executives. Apple single-handedly disrupted the mobile phone, the music and the PC industries, with its ability to redefine what the customer needs(even before he knows). So one can only speculate what the industry will look like if and when Apple chooses to step in. And whether any of the incumbent automobile companies could meet the fate of a Nokia, or a Blackberry!

In Summary:

All in all, these are surely exciting times to be an auto executive. For several decades now, there has been little fundamental change in this industry. Yes, there have been improvements in engine efficiency, safety and comfort, in pollution control, in manufacturing automation, and so on, but much of this has really been incremental change . For the first time now, the industry is witnessing the possibility of dramatic, transformative, change. If current trends are an indication, this change is going to disruptive, and completely alter the face of the entire ecosystem as we know it today. Several new players will enter, shake up the industry, and emerge as leaders. For every entrant who succeeds, dozens will enter, shake up the industry, but fail! Every incumbent company, and every incumbent executive within this industry, is going to be deeply impacted. And it is going to be mighty interesting to watch who the winners are going to be, who the has-beens, and how this entire transformation plays out over the next few years.

But one thing is certain. Who wins or loses, is going to be determined by who is at the helm of these companies. Conventional leaders won’t do. The industry is going to need a whole different set of leaders in the years to come - Leaders who are passionate, entrepreneurial, and think out-of-the box. Leaders who have a vision for where the industry is headed, where their company needs to go, and know how to lead from the front. Leaders who know how to take learnings from one industry and market, and apply them in another one. Most importantly, Leaders who know how to take the strategic risks, challenge the status quo, and succeed. In short, Transformational Leaders! This $10 Trillion Auto Industry is going to be their Oyster!