Reference no: EM133334608

Case Study: Instead of running the internal combustion engine and mostly being purchased for private consumption, the automobiles of the future are likely to be battery-powered, driverless, and shared. The automobile industry in the next 20 years will look strikingly different from how it has looked over the last 100 years. Since the establishment of the automobile's dominant design in the 1920s, the industry has focused on massive economies of scale centered on vehicles running the internal combustion engine (ICE), which are mostly purchased for private consumption. Led by automakers from the United States, Europe, Japan, and South Korea, the ranks of top competitors worldwide have been relatively stable. Intense rivalry has mostly taken place among them. No major component supplier has undertaken forward integration to become a viable automaker. No new entrant has successfully challenged the dominance of incumbents. As income rises throughout emerging economies, many consumers are eager to buy their first vehicles. Despite the emergence of discount airlines, high-speed trains, light-rail trains, and motor coaches, the substitute for the (ICE-based, privately-owned) car, which is prized for its convenience and versatility, seems hard to imagine-until now. A series of new entrants-ranging from Tesla to Google to Uber to Foxconn-have recently invaded the industry. Founded in 2003, Tesla aspired to mass-manufacture battery-powered electric vehicles (EVs) to displace ICE-based cars. In 2009, it took advantage of the Great Recession, which resulted in overcapacity, by spending only $42 million to grab a manufacturing plant worth $1 billion in Fremont, California, from Toyota and GM that had previously produced 450,000 cars a year. In 2010, Tesla Motors became the first new US automaker since the 1950s to go through an initial public offering (IPO). On January 5, 2021, its gigantic market capitalization of $692 billion was larger than that of the top eight ICE-based automakers combined.Footnote However, even though Tesla has achieved remarkable success marketing its high-end EVs (prices start at $70,000), it has had a bumpier ride since launching its lower-end Model 3 ($35,000) in 2016. At the same time that EV makers are challenging ICE-based incumbents, how cars are operated has also been disrupted by ride-sharing operators such as Uber, Lyft, and Didi. Because most privately-owned cars stay parked 23 hours a day, keeping cars running can clearly reduce precious urban land wasted on parking. If a shared car can get people to where they want to go at any time, private ownership may become less relevant. At approximately 90 million vehicles a year, car sales worldwide may have peaked. The average American family may cut its car ownership from 2.1 vehicles in 2020 to 1.2 by 2040. In fact, one of Uber's core visions is to "end private car ownership." Although the COVID-19 pandemic has made people fearful of public transportation, how it has stimulated more private car sales remains to be seen in the long run. Approximately 60% of the cost for ride sharing is the driver. If no driver is needed, autonomous vehicles (AVs) can further bring down the cost of rides. In addition to cost savings, other benefits are obvious. Worldwide 1.25 million people die in road accidents every year, and AVs can greatly reduce such tragedies. AVs have superhuman response time and can slam on the brakes in less than one millisecond, whereas human drivers need a second or so. Being superbly alert and never tired, AVs can also be more tightly spaced on the road, thus reducing congestion. By liberating people from driving, AVs can give hundreds of hours every year back to individuals who normally drive a lot. The benefits are beyond mere time savings. "You can be drunk," noted one expert, "you don't have to look for parking, and your kids can take the car." In 2009, Google entered the AV industry by launching the start-up Waymo, which is now a stand-alone subsidiary. In 2017, Waymo started a limited trial of a self-driving taxi service in Phoenix. In 2018, it launched a commercial self-driving car service called Waymo One. Users in Phoenix can use an app to request a ride. Uber has been test-driving its robotaxis in Pittsburgh. Overall, one of the common "dreams" shared by Google, Uber, and other AV entrants is to deploy a large fleet of self-driving cars ready to pick you up wherever and whenever you need a ride. At the same time, incumbents are not sitting around. They hedge their bets in two ways. The first is to unleash their own EV, AV, and hybrid models. While full EVs are being introduced, most models initially will be plug-in hybrids, such as Toyota's Prius. Given the limited number of charging stations, having an ICE in hybrids can reduce range anxiety of EV drivers. However, an ICE also adds cost, complexity, and weight compared with a pure EV, which has simpler mechanisms and fewer required parts. In 2010, Nissan launched the world's first EV, the Leaf. Now in its second generation, the Leaf is the world's all-time best-selling EV, with global sales of more than 400,000 by 2019. GM's AV start-up Cruise has been testing its vehicles in San Francisco. Volkswagen is the most ambitious incumbent, planning to spend $33 billion in the next five years, promising 70 EV models with 22 million vehicles delivered by 2028. For dozens of years, incumbents are involved in highly capital-intensive, logistically complex, organizationally large-scale operations. Incumbents feel they possess the capabilities to mass-produce EVs that can bring the price down. Tesla, after all, was a niche luxury automaker prior to its 2017 launch of the Model 3. Its lifetime volume was only 800,000 vehicles (by the end of 2020). In fact, Tesla ran into a wall when trying to beef up Model 3 production. Although incumbents may feel threatened by Tesla, entry barriers centered on economies of scale are still significant. David Teece, a UC Berkeley professor who is a leading expert on dynamic capabilities, argued that "until an EV-only entrant achieves mass-market acceptance and high-volume manufacturing, it will be hard to argue that lower barriers to entry pose a threat to incumbents." A second response is to transform how incumbents view themselves. Instead of viewing themselves as manufacturers that sell cars to (and then forget about) private buyers, incumbents are experimenting with new business models such as ride-sharing services. For example, Daimler and BMW merged their ride-sharing businesses in 2018 to form a new joint venture Reach Now to compete head-to-head with Uber and Lime. For a monthly fee, GM is allowing customers to switch in and out of different models of Cadillac up to 18 times a year. Overall, incumbents face a classic dilemma: When can they abandon the very products that are the foundation of their reputation and switch to the new EV-based and AV-based capabilities that may transform them into transportation service providers? Going forward, the automobile industry is clearly facing its greatest-ever transformation. Electrification, autonomous driving, and car sharing represent the biggest disruptions to the industry since the car displaced the horse-drawn carriage. The car in the future is very likely to be battery-powered, driverless, and shared. Stay tuned.

QUESTIONS:

1. From a resource-based view, before the recent arrival of EVs, AVs, and ride sharing, what were the valuable, rare, and hard-to-imitate organizational resources and capabilities that were required in order to succeed in the automobile industry? (VRIO framework)

2. From a resource-based view, what will be the characteristics of the valuable, rare, and hard-to-imitate organizational resources and capabilities possessed by winners of this industry 20 years from now?