Connected Cars: Tesla and new tech firms are poised to muscle in on traditional OEMs

Posted on January 02, 2017 by Matt Pressman

Guest Blog Post: Charles Morris is the Senior Editor of Charged, the magazine of electric vehicles, for which he writes a daily blog and regular print articles. He's also written five books including Tesla Motors: How Elon Musk and Company Made Electric Cars Cool, and Sparked the Next Tech Revolution.

For some time I’ve been writing about the Triple Trend - electrification, autonomy and connectivity - that is beginning to transform the auto industry (and society). Tesla Motors [NASDAQ: TSLA] is of course the leader in all three of these fields. Many would add a fourth trend to this list: new ownership models (car sharing, Uber, etc), and Tesla has mentioned that they have plans to lead in this field as well.


Above: Tesla Model S in matte black (Instagram: 201wrap)

Major technological shifts such as the internet or mobile computing affect all aspects of human society in complex ways, and even the most visionary pundits can’t foresee how things are going to shake out, but we wouldn’t be human if we didn’t do our best to make some predictions. One thing that’s certain is that there will be winners and losers. The automotive industry (as well as firms in related industries, such as suppliers, dealers, repair shops, car rentals, insurers and parking operators) is going to be transformed, and companies that embrace the new paradigm will thrive, while those that cling to the past...


Above: Tesla's 17" touchscreen display (Image: Slashgear)

A recent article from McKinsey & Company foresees the high-tech and automotive worlds merging into a complex new ecosystem. New players are coming into the industry, and they approach things very differently than incumbent OEMs do. The four trends that are driving change favor software-based innovation, and this means that tech companies may be better poised to take the lead than traditional metal-benders.


Above: McKinsey looks at the future of automotive (Source: McKinsey & Company)

McKinsey Partner Michael Uhl describes several advantages that tech companies have over traditional OEMs and tier-one suppliers in the new software-centric world: many tech players have more financial flexibility, with higher valuations and much more cash available for new investments; tech firms are more nimble, with fewer employees and more spending on R&D; and the corporate culture in Silicon Valley is more future-focused than that of Detroit. “The culture of OEMs values consistency, quality, and the minimization of risk. Tech players prefer experimental, fast-moving cultures that reward innovation and risk taking,” writes Uhl.


Above: An icy cool Tesla Model S (Instagram: @teslamotors)

Finally, consumers just perceive tech firms (including a certain automaker) as cooler. Uhl notes that on a recent list of the world’s most valuable brands, six of the top ten were tech companies, while automotive brands lagged behind. In addition, we've also seen tech-focused Tesla rank high above traditional OEMs in other, similar 'Brand Experience' studies.

A recent article for Strategy& offers a very in-depth look at the market for connected and autonomous vehicles. The authors agree with Uhl that automotive OEMs are likely to lose market share to new entrants from the tech world: “By 2030, profits available to traditional automakers and suppliers may drop from 70 percent to less than 50 percent of the industry total. The balance of $120 billion may be captured by new entrants, including suppliers of new technology, mobility services, or digital services. Many of today’s manufacturers and suppliers lack the skill, agility, and boldness to turn their companies digital quickly enough to take advantage of this change.”


Above: Scenario for value shifts in the auto industry 2015-30 (Source: Strategy&)

Strategy& predicts that the overall automotive industry will continue to be healthy, but that automakers’ proportion of earnings will decline. Supplier revenues will shift from engines, interiors, and chassis to electronics, software, cloud services, and batteries. Shared mobility and digital services will capture a large share of the profits.


Above: Tesla Model S (Instagram: auto_car_spotter)

The risk for traditional OEMs is that they will become manufacturers of commoditized vehicles - “dumb pipes on wheels” - while others reap the revenue from connected and mobility services. However, the authors offer several bits of advice as to how automakers can “move up the digital value chain.” Some of these - such as the idea of creating a more customizable automobile that encourages consumers to stick with the same brand - may be embraced by automakers, while others, such as a recommendation to “cannibalize your cash cows,” probably will not.


*Sources: McKinsey & Company, Strategy&

Posted in Car Sharing, Connected Cars, Tesla, Tesla Autopilot, tesla news, TSLA



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