Business

Challenges in the automotive industry’s business model

How have 21st Century technologies allowed companies in the automotive industry to change their business models?

Since the beginning of the 21st century new players from the technology and communications sectors are entering the automotive industry and dramatically changing its chain value and traditional business model.  The main segments that were altered significantly are production, sales experience, key partners, product innovation and R&D.  Today the companies that follow have a chance to leap at the front of the game and those ahead might stay behind if their business model is not flexible at its core.

1)     Transition from push production to demand pull and modular production

We have seen this change in an innumerable amount of industries but Dell is the first name to come in mind when talking about modular production.  The automotive industry has been taking in at a late stage technological advances that arise in other industries.   In this way production transitioned to offer products with attributes selected by the client, sometimes ordered through internet and delivered within 15 days; for instance, Toyota’s upstart Scion.

2)    Changes in sales experience

Car dealers as sale points are being swept out as in the case of BMW and Tesla.  BMW chooses to change the buying experience by introducing the ‘BMW product genius’ who will educate the customer on all the lines of products.  The motivation of ‘BMW product genius’ is not to sell (they do not earn commissions per sale) but to build customer loyalty.  It certainly takes after the service offered in Apple Stores.  As to Tesla S1 electric car sold directly to customers is more aggressive and is reprimanded by car dealers.  Not because they are direct competitors (Tesla’s sales represent 0.1% of US auto market) but because out of fear that other brands might follow.

Technology has disrupted the way people make their buying decisions; today people use platforms to determine who to trust and what to buy.  Above that, consumers today value innovation in automobiles.  They want to buy from the companies they perceive as brining new technology first to the market.

3)    Product Innovation and R&D: Sustainable cars, Electric cars, Autonomous cars

In the ‘2016 EU Industrial R&D Investment Scoreboard[1]’ 6 automakers are among the top 30 and the number of patent filings in the automotive industry also reflect an increase.  Volkswagen was the company with the highest investment in R&D worldwide, until it stated struggling after falsifying environmental testing protocols.  Innovation has become a top priority for automotive companies.  Today there are at least 50 hybrid models in the market whereas in 2001 there were only 2.

Focusing only on downsizing internal combustion engines and fuel efficiency may mean leading companies may fall behind innovative companies in the future.  Changes in their products must be timed as to gain acceptance and not lose their loyal customers.  

The main product changes from mechanical to hybrid to electric to partly automated which shifted the sales motto of ‘faster, stronger’ to ‘sustainable, innovative’.

4)    Shared ownership

Going a step further the ‘Car2Go’ by Daimler and ‘DriveNow’ by BMW services suggest no ownership.  Another different example is ‘Autolib’ where the service is run by the government, a key partner, and the company providing the cars is unknown to the public.

Altogether there is more to technology innovation than changes to the product itself.  It enables new business models and relationships between stakeholders.  The emerging model is still to come but it is certain it will be driven by technology.  The chain value and business model will be shifting as new stakeholders enter the industry with the advances in electronics, communications, alternative fuels and materials.

 

REFERENCES:

[1] https://www.iriweb.org/sites/default/files/2016GlobalR%26DFundingForecast_2.pdf

SOURCES:

Ø  www.forbes.com

Ø  www.bcgperspectives.com

Ø  www.bain.com

Ø  www.bloomberg.com

Ø  www.economist.com

Ø  www.kpmg.com

Ø  www.ibm.com

Ø  https://www.iriweb.org/sites/default/files/2016GlobalR%26DFundingForecast_2.pdf

 

 

MERCOSUR is dead

With more than 1 million square kilometers, with a GDP of more than 4 trillion dollars and with a population of approximately 275 million inhabitants, MERCOSUR is characterized by a history of impulses and stagnation. After being born as a process that was disruptive for the time, and especially, to mark the end of the confrontation thesis between the two biggest countries of South America, MERCOSUR has been losing its impulse.

During the month of March 2016, MERCOSUR had its 25th anniversary, an event that was little promoted, which happened almost unnoticed for civil society and to which governments did not give much importance. The media, although they did not refer to this anniversary as an event of transcendence, recalled it in their publications with titles that reflect a pessimistic perspective: “25 years of MERCOSUR and very little to celebrate” (La Nación, Argentina https://goo.gl/s2ju3R), “A sad regional birthday” (El Observador, Uruguay https://goo.gl/ENlIOL), “MERCOSUR will celebrate 25 years of creation and will be without pain or glory” (ABC , Paraguay https://goo.gl/VxSKNE) or even Globo (Brazil https://goo.gl/YrL3E7) detailed that: “… the anniversary comes amid the political crisis in Brazil and the wear and tear of the bloc”. However, there were two optimistic headlines: “MERCOSUR, 25 years of success” (La Razón https://goo.gl/3oomlE) in Bolivia, which is currently in the process of joining, and Telesur (https://goo.gl/fNrXXI): “MERCOSUR celebrates 25 years betting on economic integration” highlighting the progress in social and cultural issues.

However, the current situation shows that there is a crisis and an opportunity for the process of integration. There are two possible ways, self-criticism and call to action, or resignation. The international system up to 2016 demonstrated the importance of every State to belong to broad integration processes and to large trade blocs, since it increases the possibilities of commercial transactions, with enormous political and economic opportunities. But last year was a turning point in the history of integration. The Brexit and the election of Donald Trump to the US presidency who withdrew the country from the brand new Trans-Pacific Partnership (TPP) shows an uncertainty in the economic, geopolitical and also social area, especially after a time when diplomacy and international negotiations had created a conducive environment for the trade blocs, from the Trans-Pacific Partnership itself to the Pacific Alliance, in an attempt to focus the world economy on Asia-Pacific, which is interpreted as the engine of the international economy in the next years.

According to many analysts, nowadays MERCOSUR is the moment of the ‘Black Swan’. This theory develops the possibility that unexpected situations lead to a rebirth of the bloc after a long hibernation in an unpredictable and uncertain international political and economic context. Among other things, this new impulse is brought about the emergence in Latin America of a new integration process, the Pacific Alliance, which calls itself as an innovative process which follows the patterns of the new international system focus on the new center of geopolitics and world economy. In contrast to MERCOSUR that was born in 1991 inspired by neoliberal ideas, after the change of political climate there were only advances in the social, cultural and, in some cases, political areas.

MERCOSUR needs to adapt to the new regional and international situation. Since it was born in the 1990s in a neoliberal context, it developed in the 2000s in a political climate framed in the ‘turn to the left‘ and is now in a different regional climate with the so-called ‘turn to the right‘ (1), into an international environment where it seems that the status quo is going to have an unpredictably change. This is precisely one of the weaknesses of the MERCOSUR project; it depends almost exclusively on ideological complementarity, extreme inter-presidentialism and pro-tempore presidencies pendulums. However, it should not be forgotten that this harmony between governments and presidential diplomacy is the success factor of the bloc (2), a bloc that does not fit the models of classical integration, because there is neither a significant institution nor a supranational level. We could say that MERCOSUR follows its own model (3) which is precisely the cause of its progress but also of its obstacles. There is no single model for the integration and cooperation processes, because each one is adjusted to its member’s reality (4). MERCOSUR was born with the deficiency that it followed the priorities and objectives of the governments of turn, reason why before each political change, MERCOSUR is stalled.

If we see the present, it is possible understand that after the first phase of economic complementation the bloc did not have more advances in that field, but it did cross with strength the 2008 crisis that was originated in the developed countries, the congruence of the politics of the ‘Turn to the Left’ made it advance in the social and cultural level, and the leadership of Brazil, on the one hand at regional level, on the second hand as an emergent power (5), gave some dynamics to the process but that could not cross political climate changes.

Nowadays, MERCOSUR is immersed in a crisis, but it is not the only integration process that is on crisis, even the European Union (EU) which is considered the deepest process of integration and the example to follow, is in its greatest crisis (6), or the Trans-Pacific Agreement which few months after seeing the light, goes through its first moment of darkness. However, MERCOSUR is marked by a change of political conjuncture of the ‘turn to the right‘, the strongest partner, Brazil is in a social, political and economic crisis, Argentina is politically divided but in a stable situation, Uruguay is in a cautious mode, Paraguay is expectant of the Bolivian incorporation to be able to increase the commercial flows and thus to leave the mutual geostrategic prison, and the most problematic partner, Venezuela, that after Chávez’s death, the country entered a political-social crisis that divides the country and makes the member be suspended from the bloc, but having the pro tempore presidency, a big deprivation.

That is why MERCOSUR is dead, because the bloc is experiencing a credibility and survival crisis. It was unable to adapt to the new era, to the new international and regional reality, and neither was there political efforts to have an economic deepening. It is necessary that the projects transcend political administrations and be guided by the wishes of the people, which at first are forgotten. Furthermore is needed a common external agenda, because that was built for the majority partners (Brazil and Argentina) for the benefit of their own interests, which sometimes are not complementary and even hurt the smaller partners. A common agenda would give the bloc the tool to go on new international negotiations, deepen current alliances and having a voice in international forums. With Brazil immersed in its internal sphere, it would seem the moment for Argentina to be the leader of the process, but for that to happen it must prioritize the interest of the bloc to the national interest, and generate instances that allow a better complementation after the changes of the administrations.

Between the 20 and the 24 of March, the XXVII Round of the Committee of Bi-regional Negotiations between MERCOSUR and the European Union will be held in Argentina to promote stalled trade negotiations. But the bloc also has several open fronts, negotiations with the European Free Trade Association (EFTA), and the rapprochement with Korea, China and Japan. In a Multiplex World, all actors have the potential to increase their international insertion, if they maintain a clear strategy (8). It is time to see if MERCOSUR can achieve this strategy.

 

(1) Carné, Jonatán. “¿América Latina da un Giro a la Derecha?”, SABF Blog, 2016, http://blog.sabf.org.ar/2016/04/06/america-latina-da-un-giro-a-la-derecha/

(2) Malamud, Andrés. “La diplomacia presidencial y los pilares institucionales del MERCOSUR: un examen empírico”, Revista electrónica “Relaciones Internacionales”, 2010.

(3) Bizzozero, Lincoln. “Los primeros 20 años del Mercosur: del Programa de Liberalización Comercial al Plan Estratégico de Acción Social”, Revista Densidades, 2011.

(4) Peña, Felix. “Los 25 años del Mercosur y opciones en el camino de su evolución futura”, Newsletter, 2016.

(5) Carné, Jonatán. “¿Qué pasó con las potencias emergentes? El Caso de los BRICS.”, SABF Blog, 2016, http://blog.sabf.org.ar/2016/07/06/que-paso-con-las-potencias-emergentes-el-caso-de-los-brics/

(6) Domínguez, Emiliano. “La encrucijada europea: ampliación y Brexit”, SABF Blog, 2017, http://blog.sabf.org.ar/2017/01/30/la-encrucijada-europea-ampliacion-y-brexit/

(7) Acharya, Amitav. “From the Unipolar moment to a Multiplex World”, YaleGlobal Univertisty, 2014.

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