The winners and losers of the automotive industry paradigm change

The winners and losers  of the automotive industry paradigm change
Photo by Lenny Kuhne / Unsplash

I've been discussing the automotive market for years here as (a) it's a fascinating mix of economic pressure meets technology disruption meets consumer behavior change meets geopolitical turmoil, and (b) I do work for various operators of this market ranging from startups trying to disrupt par to it, to automakers themselves.  

What is most fascinating is certainly how the innovator's dilemma has been playing by the book without missing a step for incumbent automakers in the U.S. and Europe. As a highly capitalistic market that is also extremely demand-constrained and running on razor-thin margins, no surprise that incumbents are at a tremendous disadvantage when facing major technological transitions.

This is what a "red ocean" looks like (source: Jato Dynamics)

And suppose you only consider the margin advantage. In that case, you have a picture showing the new automotive platforms head and shoulders above everyone else (mainly Tesla mainly for now, but not for too long), German brand leaders that still command a premium on the market with mostly old engine platforms, a cohort of incumbents that started to invest late in the game in EVs that are struggling with margins but clawing back, and finally a long tail of incumbents that struggle both on their brand value and on their investments to jump back in the new EV market:

EU & U.S. Automakers ranked by average net profit per vehicle (2022). 

The real competitive advantage in this market is still held by Tesla, which, unbothered by legacy systems, has developed a tremendous competitive advantage on electric power trains, batteries, security systems, and software. A recent McKinsey study of OEMs in the car industry pins Tesla 10 years ahead of the rest of the market (this obviously makes for a good title and might not mean much, but still):

Tesla software architecture vs. Legacy OEMs, a ten years gap? (source McKinsey)

The irony, of course, is that traditional car companies mostly saw software as hidden and deeply technical security features with a layer of an entertainment system. And they are still mostly happy to let others care for the latter. Meanwhile, beyond, the software aspect, Tesla doesn't even think of itself so much as a car company but rather as a full-on operating system for electric mobility:

Or, as I often write about, Tesla is more an energy than a car company... which becomes quite confusing for analysts that only factor in 'cars' as the stock keeping unit of this business: 

🔪 Could McDonald’s start competing with Tesla?
When I train executives or startupers on building business models, there’s always a painful step: understanding that the product is only a feature of the business, not the end-game. This is true to the point that there might be a vast disconnect between the value a company delivers and the

Not to mention the confusion of the rest of the industry that does try to understand how being a platform works and clumsily tries to create recurring revenues around seat heating or in-car entertainment:

🕹️ BMW is trying to find a business model for their new in-car massive screens
After installing massive screens in cars to look more like Tesla (and partnering with Nvidia along the way), automotive companies such as BMW, now try to find a reason to use the technology. New BMW Partnership Brings Video Games To Its Cars From 2023Just don’t expect to play a

In this game, Tesla still has the lead as a digital-native company that also can pivot its platform business to adjacent markets, such as supply chain:

🥔 The teslanomics of electric trucks
You have probably read that Tesla is finally delivering its full electric class 8 semi-trailer truck, only three years late. And among the many reasons this truck has been delivered with such tardiness, one of them is probably worth remembering: the battery physics and economics simply didn’t work.…

And in the West, after more than ten years of constant push, Tesla is also an interesting proxy to measure how far each country is in transitioning to EVs. As I was writing back last November, "What is rather amazing to me is that the EV paradigm has now fully entered early core market mode. The electrification of the car is not an "if?" or a "when?" but a "how far?"

But the last, and certainly deadliest, factor to consider is the fast arrival of Chinese manufacturers that mostly rebooted their car industry to full electric, with massive investments in battery manufacturing. Which, for Europe (and to some extent the U.S. as well), is a major bottleneck:

🔋 The obvious EV bottleneck
I presented last year how the systemic bottleneck analysis[] was one of the key tools I’ve been using for years when discussing the future ofany market. As a quick refresher: a systemic bottleneck is a turn point eve…

For those who have followed this market for the last ten years, there should be zero surprises to now see the Chinese BYD automaker smoothly entering the European market with a Tesla-like master plan. Except that, if Tesla still can't sell cars  (or doesn't want to) below the €50K mark, BYD is already there:

When I say that this market has certainly become the mother of all innovator's dilemma cases, I'm not exaggerating one bit:

😱 First they ignore the Chinese EV, then they laugh at it, then they say it’s unfair...
The Paris Motor Show is in full swing, and for the first years, Chinese automakers such as BYD are front and central. The full capabilities of China as a technology leader are now on full display, and incumbents in the West are starting to feel queasy. It’s disturbing, I root

And the next step will be another business school's favorite concept: full-on disruption (*) with Chinese vehicles entering the European market at a jaw-dropping €10,000 price point.

BYD Seagull EV Priced From $11,400, Gets 10,000 Orders On First Day
BYD received 10,000 pre-orders in the first 24 hours after the Seagull made its world debut at the Auto Shanghai 2023 press conference.

What is still vastly misunderstood is that such a disruption is not just a race to the bottom on price with low-quality vehicles but a systemic paradigm change in how such vehicles are designed, manufactured, financed, delivered, and serviced globally. While Europe is still thinking about building cars, the rest of the world has started to shift its mindset and think in terms of platforms entirely.

And this started ten years ago...

Ruptures are always slow in the making, and then, seemingly overnight, they become the new paradigm. This is true for the automobile market just as it's true for your own market, whether you are in retail luxury, defense systems, or B2B SaaS platforms...

(*) For reference:

In business theory, disruptive innovation is an innovation that creates a new market and value network or enters at the bottom of an existing market and eventually displaces established market-leading firms, products, and alliances. (...) The business environment of market leaders does not allow them to pursue disruptive innovations when they first arise because they are not profitable enough at first and because their development can take scarce resources away from sustaining innovations (which are needed to compete against current competition) - Wikipedia

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