Economy

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

 

 

The technological revolution: freedom or servitude?

We live today a period of acceleration of time and complexity of the space. The moment when a new type of society is born. This is reflected in the constant transformations, both from the macro point of view, at the state level and the global order as well as in the micro level: attitudes or way of doing things in everyday life.

The application of technological advancement holds many advantages but also many challenges. Within the first thing we can list advances that have been simplified, improved and even prolonged human life. On the other hand the risks of this fourth revolution are not only challenging but also dangerous.

The application of the technological revolution to the labor market represents a serious challenge to the quality of life of millions of workers. It is a global risk the concentration of wealth in hands of a global minority. Today we live in a structurally unequal world, where a group of hundred people concentrate the same percentage of wealth that half of humanity, 3.5 billion people.

Technological developments and their profits concentrated in few hands will only lead to the end of society as we know since such conditions can not sustained in the medium and long term. Technology has increased the gap substantively. It has left many out of the benefits from the technological revolution and  it has concentrated the fruits in a few hands.

The concentration of wealth and high levels of inequality are contrary to liberal democratic state. But this is not the only thing that affects the state as we know

The real challenge of this new revolution is considering the human being in the heart of it. Scientific progress and technology development is meaningless if it is not serving humanity.

It is therefore essential the role of governance, both local and international, to guide the changes in benefits of all and thus enable sustainable development in the medium and long term. It depends on this a successful and fair transformation of our world.

Finally doing an analysis of our current situation, we are not very encouraging in the short term as global structures and effectiveness of state for allocating resources does not work properly. Perhaps the complexity of today’s world and the resurgence of anti-establishment and extremist elements can be understood from a model that does not answer to the needs of the human being.

In the policies adopted at regional and global levels we will see if the challenges become or not a opportunity to live in not only a more efficient but also more fair world. The fruits of innovation belong to humanity.

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.

Good neighbours

The Malthusian Trap.

Malthusian ideas are always present. The contribution of the great English economist, Sir Thomas Malthus was simple: populations can grow infinitely, probably food production will grow infinitely too, but in a much slower rate. Therefore, as food is necessary for existence, there will be an endless struggle for resources. Rephrasing it, even though food production may grow continuously over time, human reproduction is faster, and the amount of people will eventually surpass the available food. Thus, we will constantly face the “Malthusian trap”: the increase in productivity -which increases the food production- will be outweighed by the increase in people, so we should expect the income per capita to stay stable over time.

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Causality in times of Excel: the relationship between Emission and Inflation

Each Excel spreadsheet is designed to process 17 billion data (17 thousand columns x 1 million rows). And, with the possibility of adding one thousand sheets, each Excel document is capable of processing over 17,179,869,184,000 data. Certainly is an unthinkable amount of data, which distance us from the “I don’t have enough space” problem, but face us with a new question, “what do I do with all it?”

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The way we buy soap helps fighting poverty

On Monday May 4th I attended a keynote on the latest report of the World Bank on economics and behavior in context of public policy development in Latin America. The director of the World Bank for Argentina, the economist Anna Fruttero of the same bank and Dr. Facundo Manes were present in this presentation. Read ahead the summary of this interesting dissertation on how to apply more efficient public policies.

Anna Fruttero, co-author of the World Development Report 2015: Mind, Society, and Behavior explained that paying attention to how the human beings think and how the environment affects their decisions allows the improvement of the design and the application of development policies in the world.

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The eye on the SMEs

On April 9 I had the pleasure of participating in the conference organized by CAME (Argentina Confederation of Medium Enterprises) to over 1000 entrepreneurs, representing 323 chambers of 23 provinces and the Autonomous City of Buenos Aries.

Speakers at the event were the Minister of Economy candidates for each of the major candidates for running for President: Rogelio Frigerio by Mauricio Macri; Miguel Peirano by Sergio Massa and Silvina Batakis by Daniel Scioli. Following is the summary of the day.

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We are imprisoned by the bolivar

When the Venezuelan bolivar is called “strong”, it is no longer because of its promised – and never achieved – sturdiness and stability; instead it seems today to be due to a fortification.bolivar-venezuela

The strong bolivar is the largest Venezuelan prison; most of the population is found in it, all deprived of liberties that were possible a few months ago using local currency: purchasing vehicles and its parts, international air tickets and imported medicine.

With the exception of Colombia, a borderline nation, no other country accepts the bolivar in their exchange houses; not even the politically-alike countries like Bolivia, Argentina, Nicaragua or Ecuador. This last one adopted the US dollar 15 years ago, achieving – among other things – the stabilisation of the inflation levels by unabling public authorities to print currency without any backup (situation which has protected the real income of Ecuadorians, whose minimum wage is around 354 USD, unlike those of Venezuelans who cash 32 USD at a rate of 174 bolivars per dollar, at the time of writing these lines).

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Economy, the science of a chessboard

During my 10 years of teaching courses on introductory economics, I take more time in defining what economy is/ the concept of economy. I remember that the first years, as soon as the lesson started, I defined it as the following: “The economy is the science….” Independently if I used a classical definition, a neo classical one or a Keynesian one (if there were one), I always started in the same way. Currently, I take more than a lesson to come to a definition.

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Inflation, problem solved

The discussions and palaver that revolve around inflation abound and redound. Many debates that long ago were overcome reappear as if they were novel or problematic (… it is unclear if inflation is so bad, it is hard to determine which levels are dangerously high, it is still unknown how to combat/prevent it, etc., etc.). It would seem then that there is a problem in the economic theory, that hasn’t given yet answers to these and other questions concerning inflation.

However, if we went through the economic discussions currently arising in any university or central bank in the world, we would find that this topic is not part of the discussions. That’s right, there is no country in the world where the causes of inflation are discussed or where it is even thought that high inflation rates may have positive consequences for the economy (to avoid ambiguities, let’s say that at least there is no doubt that an inflation rate that reaches two digits is high and dangerous).

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