Second Inflection Point In Mobility Will Be More Profound

By Rajeev Goyal

Rajeev Goyal is the Chief Financial Officer- Automotive Sector at Mahindra & Mahindra, responsible for complete accounts and finance function of this division. He also oversees finance, accounts and compliances function for overseas group companies in North America and Europe. Presently, he is spearheading organisation-wide transformational initiative to improve the end-to-end cost structure of the auto sector to make the organisation more agile, lean and market responsive and through that to deliver class-leading financial performance parameters.

 

Everything we have known about mobility in the last century – individually owned cars, IC engines, gas stations, types of cars manufactured, customer preferences and touchpoints – is on the verge of disruption. A McKinsey report terms this as ‘mobility’s second great inflection point’ undergoing a “horses to cars”-sized shift that will have far-reaching effects across businesses and societies for generations. As we speak, mobility is continuously becoming affordable, cleaner, safer, more convenient and is offering better customer experience through interconnected, customer-centric ecosystem. The reverberations of this disruption will affect the 4Cs of mobility-Cars, Cities, Customers and Competition.
Cars are becoming ‘autonomous’ and ‘connected,’ enabling ‘getting from Point A to Point B’ a lot more productive. Cities are exploring smart mobility options focused on reducing carbon footprint and improving last-mile connectivity. As mobility becomes less about a car and more about a service, ecosystems will evolve around the consumer. New opportunities will emerge to address the needs of the connected consumer, while the make and model of the vehicle will matter less. McKinsey predicts that 56 percent of revenues in 2030 will come from disrupted business areas that can be well understood using the four evolving S-Curves of Innovation in the Auto Industry (exhibit 1). This will intensify competition amongst OEMs, technology giants and startups, all vying for a position in the new mobility ecosystem. With this context, auto OEMs can no longer stay away from these competitive dynamics playing out from disparate mobility operators. It’s time they reimagine their strategies towards investing in new product technology, Industry 4.0, Digital 3.0, capacity expansion and people. Aligning the organisation’s time, energy and resources in a balanced manner will be a key success metric. Adopting Vijay Govindarajan’s Three Box Solution, OEMs will have to rethink their investment philosophies to successfully manage the present, selectively forget the past and collectively create the future.
First, OEMs will have to maintain their turf and build core competencies around it. In the last decade, UV share in passenger vehicles in India has doubled from 14 percent in 2010 to 28 percent in 2019 (exhibit 2). Simultaneously, a shift in trend towards cleaner fuel options and reducing diesel-petrol price parity, is resulting in declining share of diesel vehicles in passenger segment from over 50 percent five years back to 36 percent today. Although, on cost comparisons, diesel is not favourable in the BS-VI regime, OEMs will still need diesel technology to adhere to prospective 2022 Corporate Average Fuel Efficiency (CAFE) norms as it gives 15-20 percent higher fuel efficiency than gasoline. That leaves a huge opportunity for UV and diesel players like M&M in the medium term of five to ten years. Most OEMs will find it difficult to recover investments for an India-specific diesel vehicle and may collaborate to reduce development costs. Regulatory push requires automakers to keep investing in safety features like ABS, Airbags, RPAS, pedestrian protection, and in BS-VI technologies, or risk going out of business.
Second, OEMs must realise that old workhorses will not continue firing for them in future. They may need to streamline their product and market strategies to justify value scale economics. Recently, General Motors chose to de-globalize from certain markets like India, Europe and possibly Australia, to strengthen and expand in their dominant home markets of North America and China by offering a wider portfolio. They narrowed focus on limited geographies but invested in new technologies in electric and shared mobility, for instance, Lyft. As competition intensifies, OEMs will have to take a hard call on some of their old brands and regions, to divert critical resources to future white spaces.
Third, to stay relevant, OEMs will have to reinvent themselves across products and services and invest in emerging mega trends. As more people ‘consume mobility,’ what will matter is ‘Customer Delight’ through differentiated and addictive experience, whether ‘IN’ the car (read drive experience), ‘WITH’ the car (think Android Auto or Apple CarPlay) or ‘OUT’ of the car (through showroom and service experience).

OEMs, startups and technology giants are aggressively investing in automotive technologies known by the acronym ACES -autonomous, connected, electric and shared.

  • ‘Autonomous’ is still some distance away, at least in India, but drive assist features are becoming increasingly important to today’s consumers.
  • ‘Connectivity’ experience has moved from reactive to predictive. It comprises cognitive Digital / AI / IoT-based devices, advanced sensors, and ultimately, Vehicle Command Centres resulting in constant dialogue with the vehicle to improve driver comfort and smoother & safer traffic management.
  • Improvements in battery technology, use of renewables and government’s push will be key determinants for a wide-spread ‘Electric’ ecosystem. The Indian government recently announced an outlay of Rs 10,000 crore for FAME II policy to boost electric adoption, including Rs 1,000 crore for setting up charging infrastructure. If the measures under FAME II policy are successful, Niti Aayog predicts a sales penetration of electric vehicles to 30 percent private cars, 70 percent commercial vehicles, 40 percent buses and 80 percent two and three-wheelers by 2030. Moreover, EV will play a key role in Government’s vision for ‘Smart Cities.’ While different countries are at different stages of electrification with Japan focusing more on hybrids and China leapfrogging to a full-blown electric ecosystem, India needs some giant leaps that will also help reduce its oil dependence and improve its fiscal and geo-political position.
  • ‘Shared’ mobility has become more prominent with the advent of Olas, Ubers and ZoomCars of the world. Consumers today, have multiple options to choose from, whether ride-hailing, ride-sharing or self-drive.

A future business model that may emerge will be a ride-hailing co, using autonomous electric vehicles and having connected platforms, offering services on a ‘pay-per-use’ or ‘pay-per-mile’ model.
Also, the changing demographics and lifestyle of the urban consumers have implications on the ownership of the vehicles. Companies are exploring disruptive business models like ‘leasing’ or ‘subscription’ to offer flexible ownership to consumers.
Therefore, companies need to invest in both product level and non-product level interventions, using their present ‘cash cows’ to fund future ‘big bets’. While it will certainly generate enormous value for the consumers, generation of economic profits are still some time away and that poses a huge risk to survival.

Some checks that the companies may need before investing:

  • Does the company have an appropriate capital allocation policy?
  • Size of big bet investments in future technology?
  • Is the return expectation annual or back-ended and number of years to turn profitable?
  • What market and non-market forces will impact the project?
  • Is the risk to broader stakeholders (suppliers, dealers, partners) considered?
  • Are there pre-set ‘Go / No Go’ criteria at different milestones of the project?

In the end, the second inflection point in mobility will be more profound than the first one. It will radically disrupt the well-established business models and blur the lines between OEMs, technology companies and startups. No single player will have the capabilities or resources to capture, defend and win in all the relevant areas within mobility. Meeting customers’ needs will require serious collaboration, not just among OEMs but also with startups and technology companies. Some recent examples are Ford and VW alliance in Europe, Toyota and Suzuki global partnership, Ford’s strategic investments in ZoomCar & Rivian, and GM’s stake in Lyft. This will also significantly revolutionise the investments, resource sharing, profit pool generation and distribution as well as risk-sharing among various partners and stakeholders.

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