lundi 3 mars 2014

The future of the automotive industry: who will invest in intelligent transportation systems?

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Photo Rémi Maniak / Associate Professor at Telecom ParisTech and Researcher at Ecole Polytechnique / February 11th, 2014
The automotive industry is directly affected by two dominant trends: the integration into large information systems and the advent of shared mobility. Technological developments during the twentieth century have not significantly challenged the economic fundamentals of automotive mobility: governments make roads, manufacturers make cars and consumers... buy them. Will the ongoing technological and societal changes create a disruption? The advent of intelligent transportation systems creates opportunities for many players, from the Internet giants to the pioneers of the sharing economy... including smart, local public authorities. But who will invest? How to share costs and profits?
Challenged by technological and societal changes, the automotive industry – starting with manufacturers and suppliers – faces several tempting choices.
The first is to consider that markets in developed countries are doomed to degrowth and that product commoditization will necessarily lead to a natural selection, where only those who have excellent operational capabilities – built on volumes acquired on growing markets – will survive.
The second, more offensive, temptation is to extend the existing business model by focusing on a renewal of concepts associated with cars. Renault’s Logan has created a new segment (“Entry”) by responding to both the needs of foreign customers (Europe, North Africa and South America) who are quickly moving up the social ladder, and to the desires of new Western customers who wanted an affordable car with minimal equipment. The development of the electric car is another initiative based on heavy societal trends, such as urbanization and ecology. Prius, Twizy, Zoe, Tesla are all attempts to rekindle the desire of consumers for new cars. These embedded technologies, including systems of driving assistance, could revive demand
ITS Image
Source : US Department of Transportation
The third temptation is the integration of new technologies. Car manufacturers have an advantageous position built on decades of experience. Car radios and GPS first appeared as external objects. They have been integrated inside the product architecture, offering unprecedented ergonomics and safety. Smartphones could follow the same fate. Tablets and smartphones are already available in mass production with telematic services and applications adapted to the driving environment. It is now time to integrate sensors and cameras, robust and precise enough to support a smart vehicle (precision, reliability and durability of the capture of such a signal).
On this specific point, new players can hardly compete with the design and integration skills of manufacturers and suppliers. But they have other weapons, and their dynamism has brought new challenges to the automotive industry.
The last decade has seen the rise of a powerful and voracious digital economy. This economy is driven by giants (Google, Facebook, Amazon) and hyperactive ecosystems (Silicon Valley, Israel, MIT) who have begun to integrate and monetize all everyday uses.
Recent history has shown that the surge of digital technology could revolutionize entire industries within a few years. Oft-quoted examples include music, tourism, the newspapers. But convergent signals, such as the development of the Google Car, the acquiring of Waze, the development of the car sharing economy, indicate that the transport sector could very well be their next target.
Individual transport meets two fundamental dimensions of their business model. The first is information. An autonomous vehicle, packed with sensors and cameras, provides a wealth of real-time data that can be used to update maps and traffic information. It opens countless economic opportunities. The second dimension is the intermediation of purchase. Can you imagine a more captive prospect that a person locked two hours a day in his/her car and freed from the driving activity?
The integration of the automobile in large digital ecosystems could disrupt the industry, by drastically changing the organization of value chains and forcing manufacturers to strike deals with digital giants. In this prospect cars would be considered as hardware: their value comes from their integration in data flows. But other emerging developments could just as easily lead to a very different future.
The rise of mobility services
The transition from possession to use has been considered imminent during the last decade. In fact, buying a car is tantamount to an economic aberration, when you know that the average annual cost of vehicle ownership is around 6000 euros. But old habits die hard, and all other possibilities seem to have failed: rental, car sharing, carpooling, self-service vehicles have existed for decades but, whether impractical or not profitable enough, they have never established themselves as credible alternatives to car ownership.
But we may be on the cusp of profound changes. Again, societal and technological changes of the last decade can catalyze a transformation of uses and business models.
From the demand side, signals are numerous: younger generations are clearly less interested in car ownership; the increase of practical and regulatory constraints associated with driving, the increase of generational inequalities in terms both of capital and wages, and the increase of the purchase age of the first vehicle… In large cities of Western Europe and North America, everything seems to indicate less motivation to own a vehicle. Coming generations won’t give away driving, but they appear to be much more open to different uses.
If this trend is confirmed, then we will have to consider much more drastic breaks in different forms of sharing economy: leasing, pooling, self-service car… The market for self-service vehicles could finally take off, with a significant evolution of its business models. Massification, for example, will allow to improve the rebalancing of car fleets. Prohibitive costs are currently a major obstacle to the implementation of this type of offer but lower prices could further increase this momentum.
With a rebalancing in favor of large clients, the activity of manufacturers could also undergo deep changes. Standardization would break the tendency of customization and proliferation of options followed by the industry during the last thirty years. In a sense, we would return to Henry Ford’s famous joke about his Model T: “You can choose any color as long as it is black.”
One can also easily imagine the emergence of new services: for example, the market for rental vehicles, deliveries in pickup-and-go locations or even at home. The rapid spread of smartphones paves the way for attractive solutions such as dynamic carpooling or car self-service by making information (including car availability) accessible and foreseeable at all times.
The uses that are developing today will have significant economic consequences. The automotive industry will shift from a goods economy to a service economy. The production system will also be affected. But that’s not all. This technical and social revolution is also forcing the public sphere to review its models in depth, by changing its representation of the value of the transport systems and logic of investment.
As long as cars were primarily a vehicle for economic and social development, public action was concentrated on investments in infrastructure: road and street networks and equipements, highways. These investments were justified by the benefits in terms of job creation, attractiveness of countries or cities.
In developed countries, it seems that we have reached a limit. Increasing urbanization makes it difficult to build new infrastructure. The scourge of congestion extends around major cities. At the same time, environmental concerns have made their way into the political agenda, whether through regulation or elections.
In this context, smart transportation systems are subject to a thorough reflection. And the two broad dimensions of the revolution that is deeply affecting the automotive industry – i.e. the integration of large information systems and the advent of shared car – bring us to reconsider the meaning and nature of public investment.
Smart transportation systems reintroduce a certain degree of freedom into public investment and help them achieve their goals of quality of life and attractiveness. Local communities, in particular, are now central players in intelligent transportation systems, active both in implementing infrastructure as in providing mobility services. They should also take advantage of the many optimization opportunities enabled by the combination of information collected by vehicles and smart infrastructure, automated private/public vehicles and carpooling services.
Ultimately, these optimizations achieve gains in terms of fluidity of traffic, lower noise levels, free urban space, reduce emissions of local particles, decrease the accident rate…
Creating and stabilizing new ecosystems
We could continue with the list of players that could take an advantage of intelligent transportation systems: parking companies, insurers, telecom suppliers… All of them have an interest in the development of these systems, but which of them will be able to trigger the initial investment? If each of them follows their traditional business models, no one will ever take that first step.
Local communities will never be able to recover in attractiveness and fluidity the investments needed to fund the massive purchase of autonomous vehicles and intelligent infrastructure necessary to build the famous smart cities. Mobility intermediation companies (peer-to-peer renting, carpooling platforms and dynamic carpooling…) will not have a sufficient business volume to survive with commissions on trade only. Advertising revenues will not, alone, drastically reduce the cost of a vehicle. Manufacturers will not be able to finance the massive investments dedicated to the development of a fully autonomous vehicle, nor can they make their customers pay to cover these costs…
This reminds Hardin’s tragedy of the commons: considering the difficulty to agree with other stakeholders, each of them may try selfishly to play alone or simply extend its own business model. Manufacturers will seek to make their products more intelligent, digital players to make advertising cars, local authorities to develop smart cities without industrial players… At the end, nobody will be able to achieve any results. This is hardly surprising, nobody willing to invest enough to achieve the desired results.
While clearly, there is lot of wealth to create and share, the development of local, sluggish, non-viable business models will – it can be feared – suffocate the possibility of more viable ecosystems.
How can we avoid this risk? By building joint investment pools and imagining new contribution-remuneration systems. The consortium built around Autolib’, in Paris, is a form of joint investment and sharing of public and private benefits. Another example: General Motors has partnered with RelayRides, a peer-to-peer company that provides a service to rent your own vehicle to another person. Many other initiatives are currently being designed in China, South Korea, the United States, but also in France, in the Versailles-Satory-Saclay cluster.
Autolib’ in Paris
Partnerships are clearly the most appropriate solution. The central question is to provide new forms of interaction between public and private players.
The automotive industry and digital giants can provide technical solutions and they could also participate in the upstream phase of projects by defining the offers and even proposing projects. Communities act as customers (or as customer representatives); their role is to express the needs and to assess the usefulness and added value of proposals. The State of California, one of Google’s partners, made its decision after considering the human lives that could be spared by investing in autonomous vehicles. Paris has invested in the Autolib’ project presented by the Bolloré company, considering the CO2 savings but also the effects in terms of image. The role of authorities is to develop the conditions for the emergence of the best possible offers : financial assistance, but also service advertising, facilitated handover, sharing of benefits…
An extensive set of formulas is emerging. To start with, completely public projects: the specifications are designed before seeking industrial partners. Other offers originate from communities but are supported by industrial players from an early stage: this is the case of Autolib’, but also of a number of projects in Korea and China. Some offers are supported by manufacturers with more or less explicit support from communities: this is the case of Daimler’s Car2Go and Renault’sTwizyWay. And last, some offers are completely driven by manufacturers: communities will find a place – one way or another – unless they renounce to the value they could capture in terms of information flow and attractiveness.
These different formulas define different forms of public action, from a strong initiative to the position of a simple customer. We can already imagine some guiding principles to constitute the framework for the action of public players: ensuring privacy, ensuring fair sharing of costs and benefits between users, tax-payers, private and public players… without discouraging private investments; supporting the multi-stakeholder project from the design phase of the system by funding a coordination layer that no other player can take over.
Not innovating is a greater risk that daring to innovate. Without handing over the “keys of the city” to industrial and digital giants, we can integrate them into real projects prepared for real service operation, without hiding behind “research projects”: it’s all about preparing real services that will really exist.
Public authorities must absolutely take the initiative. We often think that external conditions will trigger the changes. We look at the side of regulations and incentives. We expect the market to be ready, the technology to be mature… But clearly, it’s the environment that acts as a facilitator: the appropriateness of the management methods of these projects will determine their success.
The devil is in the details… and these details are real barriers. Organizational barriers to start with: as we mentioned earlier, businesses and administrations are dedicated to extending their structure of performance, rather than striving to invent a new world they could share with others. Cultural barriers maybe: the issue of innovative transportation systems and new forms of mobility is too often simplified as “Who will win? Will Google sell cars? Who will use the data?” Legal barriers, certainly: in most developed countries, the public-private rules of collaboration make it difficult to launch joint-innovation projects. Strategic barriers: the challenge is to ensure that the business model of the ecosystem is sustainable. The ecosystem will be attractive for investment only if no actor can, on the medium term, strengthen a dominant position. Each actor also needs to realize the potential value generated by these projects. Bolloré had the insight to combine the development of the electric vehicle with his energy storage activities. Barriers in terms of marketing, finally: the challenge is to build a collective passion for individual transport, just as Apple managed to reenchant the phone.
But digital ecosystems provide a specific model that needs to be reflected. The Apple, Android, Amazon, Microsoft-Nokia platforms were launched by players who were able to organize and coordinate themselves to bring technological breakthroughs (2G-3G-4G, capacitive technology) into innovative offers based on new, shared and viable business models. The field of innovative mobility must also get there and reactivate the principles of coordination and recovery it inherited. In the worst case scenario, we will witness a tragedy in which players with the motivation and capabilities to create an innovative future will stay trapped inside their powerpoints.

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