The internet shrinks industries – auto is next up

This morning I was talking with an investor in our fund about how when the internet disrupts industries it often makes them smaller and, from the perspective of incumbents, less attractive. Amazon is doing that to much of retail, MySQL and other open source companies have done it to large swathes of the software industries, Craigslist did it the classifieds industry, and I could go on.

Two forces typically combine – automation takes out cost and the internet is used to displace middlemen – allowing new entrants to offer a radically cheaper product which incumbents don’t want to compete with because it means shrinking their companies. The new product typically starts out inferior in some way allowing incumbents to dismiss it as a competitive threat, but then it gets better and incumbents notice too to mount an adequate response. This is disruption in the Clayton Christensen sense that the word should be used.

Something similar is about to happen to the auto industry.

Autonomous cars will be

  • smaller because they don’t need the padding to protect passengers (look at the latest Google cars)
  • simpler electronic drive systems
  • shared more and/or sold direct

This will put massive downward pressure on car sales, both in volume and $ terms. Smaller is cheaper to produce, simpler is cheaper to produce, shared means fewer cars are sold, sold direct means dealer margins get passed onto the consumer.

What’s interesting now, and this was the main point of our conversation this morning, is that smart execs at incumbents know this future is coming and that it poses an existential threat to their businesses, but are struggling to find a good path forward. Execs at Mercedes, BMW, Ford, GM etc have all read Christensen and I would bet my house they have people shouting at them to wake up, but it’s super hard for them to respond to what is no less than an existential threat. That’s partly because they don’t have the data and software capabilities to succeed in this future and partly because the bulk of management and shareholders have become adept at finding reasons for not embracing strategies which would shrink their revenues, profits, teams and returns for shareholders.

  • bookofthefuture

    I think management in companies like this are caught in a serious bind. If they were to take sufficiently radical action early enough to avert doom, they would scare the shareholders to such an extent that they wouldn’t be in post long enough to complete the transformation. By the time the evidence is clear to the shareholders and the more reticent managers, it’s inevitably too late.

  • You are right Nick, but I think there are some major differences between the auto industry and the other examples you make. The majority of customers are not trying to satisfy safety and the need for transportation. Purchasing a new vehicle today is just as much about self esteem and actualization. This is Tesla in a nutshell. The fact that the car is electric is besides the point. It is about driving the future. What are your thoughts? Who and how will autonomous cars cross this chasm?

  • Fantastic opportunities in the auto segment, indeed. Autonomous cars will make us capable to enable on-demand transportation, the future version of the actual Taxi/Car Rentals system. The machine will take care of itself – going back to base, or to the closest new client. It seems that, on average, a car is in standby 95 percent of the time. There are picks, especially in the morning, but multi-sharing will be part of the equation. Transportation theory is so widely taught in universities that I’m confident to believe that the process can be successfully optimized for fuel economy/autonomy, timing, as-close-as-possible pick-up stations etc.

    From an economical perspective, the most affected will be the auto industry itself, car dealers will be out, and auto repair shops will be drastically reduced, as hopefully there will be less car crashes.

    Until then, buy a huge, noisy V8 and enjoy the “golden era”.

  • 🙂 I can’t wait until the ‘golden era’ is over..