By Louis Rumao:
The anticipated growth of Autonomous Connected Electric (ACE) vehicle segment may blindside some current auto parts suppliers
The term “disruption” and “disruptive” always had a negative connotation – disturbance or problems that interrupt an event, activity or process. But in 1995, Clayton M. Christensen and colleagues coined the term “disruptive innovation” to describe the development of better things or processes that would disrupt for better the existing products and processes. About 130 years ago, the first automobiles were looked upon as expensive fads that would never replace horse-drawn buggies as a dominant mode of transportation. However, Henry Ford’s disruptive innovation of moving assembly line process began the era of affordable automobiles as the single-most popular mode of transportation. Disruptive innovationshave also made possible widespread use of televisions, computers and personal communication.
Today disruptive innovations continue at even more rapid pace, fuelled by Internet of Things (IoT) and morphing into Exponential Technology (ET). The IoT and ET will be the new buzz words, as globalisation was in the early 1990’s.Automotive industry is also undergoing radical changes driven by these forces.
The auto industry is facing a double whammy of disruptive innovations and regulatory directives arising from health, safety and environmental concerns. Many countries are tightening the emission limits so strongly that the only way to comply is through very expensive technology or by restricting manufacture and sale of internal combustion-powered (IC) vehicles. For instance, in China, it is already decreed by legislation that cars without electric engines will be unsellable in the near future. It is expected that electric cars will be the norm in China, which recently joined Norway, the UK, India and select other countries in seeking to phase out cars that burn gasoline or diesel. India aspires to have every new vehicle in the country run on electric power by 2030. Both the UK and France plan to ban the sale of fossil-fueled cars by 2040.
What remains to be seen is whether electric vehicles will gain market share as rapidly as predicted. However, the automobile producers have recognised the signs of the time – some after a bit of hesitation – and have begun to position themselves for the shift. For example, the Swedish car manufacturer, Volvo, wants to introduce only partially or completely electric models to the market from 2019.German car manufacturers are paying more attention to the electric vehicle turnaround. VW announced that in 2025, it plans to sell two to three million fully electric cars annually. Daimler wants to introduce more than 10 new electric car models to the market by 2022. And these are not just empty phrases – an ambitious e-mobility strategy is considered vital for car manufacturers’ future.
Fate Of Parts Industry
The changeover from IC engine to electric motor has implications for the entire automotive supply chain, as EV powertrains are less complicated. Consider a typical four-cylinder engine, which has two camshafts, a crank, 16 valves, 16 lifters, 16 valve springs, 16 valve guides, 12 or more piston rings, 8 gudgeon pins, 4 pistons, 4 spark plugs, 4 coils or a distributor, cam chain or belt plus tensioner(s), 8 or more camshaft bearings, 4 injectors, 2 fuel pumps, 2 pressure regulators, and other moving / wearing parts. An eight-cylinder engine consists of around 1,200 parts.
Compare that to an electric engine which is composed of only about 20 parts. That difference will affect parts suppliers. With the decline of the IC engine, also comes the decline of complex engines with cooling systems, elaborate gears, fuel tanks, fuel delivery systems and expensive exhaust systems. Suppliers of these parts, for OE fitments and for aftermarket service, will not be required anymore!
Suppliers of wheels, tyres, brake pads and passenger compartment parts will see only evolutionary changes and will continue to be in business. But steering wheel, brake & accelerator pedals will disappear, instrument cluster will look like a pod with only LCD touch screens and voice-activated controls. With TESLA targeting a one-million-mile lifetime for their vehicle powertrain, after-market service needs will be vastly reduced. Oil & filter changes, new spark plugs, antifreeze/coolant, new timing belt – all common engine maintenance services will go the way of the dinosaur in an ACE-vehicle world. Internet connectivity will now take care of many car upgrades and recall issues.
Current business models of car dealerships, and after-market auto service providers are built for a world where humans drive fossil fuel-powered vehicles. But the ACE vehicles will cause so many changes that these businesses will be very different.Auto dealerships earn significant revenue from auto repairs. But EV’s may require far less maintenance, and upgrades to the car could be done over-the-air via software. So, dealers’ service revenue will be slashed.
In the ACE era, car dealership business will decline within the next decade, forcing severe consolidation of existing dealer outlets. OEM’s may begin direct marketing with outlets in shopping malls and other consumer locations, similar to what Tesla is currently initiating. BMW is beginning to experiment with the new marketing and sales techniques, recently showing their latest 7-series sedan via exclusive Uber rides.
Petrol pumps will be replaced by charging stations and locations where vehicles are parked for longer than an hour, such as at shopping malls and office complexes, will likely have charging outlets.
Car rental business will be faced with the question: why would anyone rent a car and drive it himself, if driverless cars – both ride-hailing and ride-sharing vehicles – are readily available? Will the rental companies own a fleet of ACE vehicles for rental? Possibly car rental companies will either be driven out of business or merge directly with Uber, Lyft, or one of the other ride-hailing services.
Car rental companies typically renew their fleet every few years on a planned schedule. But rarely does an entire fleet of cars go completely out of date at once. With ACE vehicles, car rental companies will have major capital expenditures leading into the future. And these capital costs won’t be easy to pay when your customer base is collapsing.
Once it becomes clear to the average consumer that ACE vehicles are the future, many buyers may skip new and used IC-powered vehicle purchases to save up for the new ACE models, adversely affecting value of old cars.
So, what can the current parts suppliers do? One service station manager says, “It’s just staying relevant. Our goal continues to offer customer service and customers’ time, and that’s how we’ll evolve.”