Is Sharing Disruptive to the Auto Industry?
Subhajit Das, 9/29/2016
Owning a car has been the principal mode of transportation for the last century. But despite the convenience, ownership can be expensive and has its own hassles. Over the last few years there is a near universal realization that personal cars sit idle most of the time and contribute to wastage. Consequently, there are questions about the impact of sharing on the automobile industry. Here we seek to examine whether the business models of car sharing and ride sharing are disruptive to the incumbents in the automobile industry.
The process of disruption starts when in their focus on their best customers, incumbents abandon the lower end of the market and choose to ignore entrants in this space. When such entrants with business models that are asymmetric to those of incumbents start to move upmarket, incumbents are unable to respond and are thus disrupted. In the case of the auto industry, while there have been low-end entrants, the response of incumbents is not to flee but to fight. Auto makers seek to serve all possible categories of customers from the lowest end to the highest end with a variety of brands. For example, General Motors’ cars starts from approximately $12000 and go up to $73000. BMW’s cars start at a higher level of $30000 and go up to almost $120000. The more expensive cars make more profit per car than the cheapest ones. Yet, auto makers have not stopped selling to the low end and fled to the higher tiers of the market. Amongst other factors, the enormous fixed costs in the industry motivate them to serve all possible tiers of customers. And the business model first pioneered by Alfred Sloan where an OEM creates brands that address different segments of customers has served as a template for the industry. So much so that they do not hesitate to support even the used car market. However, there has been a low-end segment of the population – the younger generation in university towns and cities served well by alternative transportation infrastructure. And it is amongst this population that car sharing found its footing. Starting in low-end or non-consuming contexts provides entrants the context to shape up as disruptors since incumbents tend to ignore them. However, despite its origins, car sharing is far from disrupting the industry – it is much smaller compared to the industry as a whole. As of 2014, 24 U.S. cars sharing programs claimed 1,228,573 members sharing 17,179 vehicles. Compare this to the fact there are more than 200mn licensed drivers in the US. And true to their historical behaviour, OEMs have taken notice of this segment especially as it comprises primarily of millenials – the biggest population cohort in the US. Some like Daimler have been extremely successful with their competing solutions while others like GM and Ford are in the process of entering the market. Daimler’s success with Car2go has compelled Zipcar to make changes to its service offering even though it holds an edge over Car2go in the US market. Even from a business model perspective, car sharing is not asymmetric to OEMs. While car sharing comprises of a different combination of resources and processes, it is still a similar business model as that of OEMs inasmuch as it still is a value adding process business. Yes, a car sharing firm does not have high fixed cost manufacturing. But they still need to maintain a fleet of vehicles in a model that is in many respects similar to that of rental car companies that have existed for a long time.
Uber represents a different kind of threat. It certainly did not follow a low-end or a non-consumption context to enter the market. But it brings a facilitated network business model to the industry that is difficult for OEMs to replicate considering the network effects. Even if an OEM enables its customers to share their cars on an Uber like service, potential riders would still flock to Uber or Lyft since the likelihood of finding rides is higher there. Does this mean Uber is going to disrupt the industry as soon as it becomes cost competitive to ownership? To help frame an answer let us examine the circumstances under which we use our cars. Primarily, these are:
- Commute to work
- Use for work
- Shopping, running errands and travel for healthcare
- Shorter distance recreational travel like for example going to watch a movie
- Longer distance recreational travel such as road trips
Regardless of the tier of customers, these are the broad set of circumstances for which we use our cars. Among these, it is clear that for the second, one needs to own a car if it is tied to the work that they do. The first is a circumstance where in many places, people would likely prefer an alternative to driving. When the JTBD is essentially pick me up from point A (my home) and drop me to point B (my office), a service that is cheaper than my car is likely to induce me to give up driving my car. As per census data, average commute distance each way is around 26 minutes and peak hours tend to have some degree of congestion. A service that saves me the trouble of driving 50 minutes a day is certainly attractive in cities with good alternative transportation infrastructure and congested streets. But the choice is not so clear in other circumstances. According to data from AHS, close to 80% of US households live within 15 minutes’ distance from a grocery store. Considering this, it is difficult to see how people would rely on a third-party car for their shopping. For a 15-minute ride would anyone wait even 5 minutes for the car to arrive? There is also the social and emotional dimension even with something as grocery shopping. And then there is the question of time taken to load and unload the car. Imagine stepping out of Costco, waiting for an Uber to show up, taking a few minutes to load the car, travelling for fifteen minutes to home and then unloading again for a few more minutes even as the driver waits. Certainly, doesn’t sound very convenient even for the driver. When one has small children and frequent visits to the doctor are required, it is unlikely that they would rely on Uber. Finally, when one travels with family for recreation, the presence of a third party in the car is unlikely to be welcome. Thus, while ridesharing can definitely address the JTBD of commute in a better way than one’s own car, it is unlikely to do the same in other circumstances. When it becomes cost competitive with ownership, a combination of ride sharing, peer to peer ride car sharing and car sharing can certainly start to chip away at the higher end of the market that comprises of families that own three or more cars. From 1960 to 2010, the number of households with three or more cars went up from 2.5% to 19.5%. A household with one car will hold on to it as it is used to address different JTBDs. But for a household with four cars, two are likely to be primarily utilized for commute of the husband and the wife. If ridesharing or car sharing can be used for commute, then it is possible that four cars are not be required.
However, the industry is looking at a far more dramatic turn of events with the potential arrival of autonomous cars. If autonomous cars can arrive at one’s doorstep at about the same time it takes them to walk to their own car, they may be quite capable of addressing a majority of JTBDs of owning a car except where one is used as part of one’s work or where driving is for pure thrill. But it is not clear when full autonomy is going to arrive. And then there is the question of adoption. History shows us that it took almost 19 years for the car to reach 10% of the population in the US. Of course, the situation today is not the same but not everyone is going to start using autonomous cars as soon as they are available. If people continue to prefer driving on their own, there will be systemic challenges to rollout of full autonomy. A feature based introduction looks more likely. For example, automatic parking could be one of the features that arrives quickly on most vehicles. Given that the arrival of full autonomy is unclear, the question of whether Uber/Lyft will be disruptive to OEMs becomes a tricky one. The principal reason being that ridesharing providers will themselves need to undergo significant change. Their current model is an asset light one where they do not own resources. These are provided by independent third parties. With autonomy, there will be no owners to share their vehicles. Ridesharing providers will either need to maintain a large fleet or partner with someone who provides the fleet. In the former case, it is going to significantly alter their cost structure with the added cost of maintenance, insurance, liabilities and fuel. Even OEM’s will need to be undergo a significant shift in business model. Sharing will reduce the car parc thereby compelling a change to the current model of manufacturing. Today, on every sale, they earn back the cost of a car and a margin. With autonomy, the revenue stream will stretch out over a longer duration of time while asset costs continue to pile up. Sales and marketing will also need to change as the functional aspect will come to dominate over social and emotional aspects for a majority of the JTBDs.
A few OEMs seem to have started on this path with car sharing services as their first step. But changing business models is never easy and inability to do so in a timely manner is often at core of disruption of incumbents. The tenets of the theory of disruption are extremely relevant here and can offer valuable guidance. When organizations are doing well as incumbents in the auto industry are right now, the priorities of the organization constrain the development of new business models at every step. For example, starting a car sharing service is unlikely to sit very well with the marketing or finance department and so there would be constant efforts to make sure that it does not damage the current profit model. A sharing service will likely reduce sales while changing the revenue model and thus is difficult to accept for the organization. As the history of disruption shows, while the leadership may believe that decision making is vested with them, it is actually with the individuals lower down in the hierarchy that execution happens. And they are motivated to preserve their incumbent ways. To increase the probability of success and avoid disruption, the new business model must be set up in autonomous organization that is at an arms’ length from the existing business model.
In conclusion, we believe that while car sharing has disruptive origins with respect to the auto industry, incumbents are motivated to respond owing to the existing business model of the industry. In its current form, ridesharing brings a disruptive business model to the industry that will certainly impact certain JTBDs when it is cost competitive with ownership. With autonomy, the disruptive impact cannot be defined as both ridesharing providers and auto OEMs will need to change their business models.