Navigant Research Blog

Perception vs. Reality: CES and the North American International Auto Show

— January 19, 2017

Connected VehiclesIf there is any one lesson that we should all take away from 2016, it’s the confirmation that perception does not necessarily equal reality. What people perceive to be the truth is often the most important part of their decision-making, a concept now shown in the auto industry’s seemingly increasing participation in the International CES and apparently declining interest in Detroit’s North American International Auto Show (NAIAS).

There has been a lot of consternation in Michigan recently about the impact that CES has had on the Detroit show over the past decade. The two events tend to run back-to-back over the first 2 weeks of January. I was on hand in 2008 when then-General Motors CEO Rick Wagoner was the first major auto executive to keynote at CES after demonstrating the autonomous Chevrolet Tahoe, which won the DARPA urban challenge the prior year. While more automakers and suppliers than ever took part in CES this year, GM actually took a pass for the first time since Wagoner’s speech.

While the Detroit Auto Dealers Association, which organizes the NAIAS, is concerned that manufacturers are increasingly favoring CES, the issues of the auto show are largely unrelated to what’s happening in Vegas. Auto shows are consumer events designed to showcase all of the latest products available for sale, and media previews show what is arriving in the coming months.

With rare exceptions (like 2016, when Chevrolet unveiled the production version of the Bolt EV), new production vehicles are almost never shown at CES. The electronics show is a business-to-business event that isn’t open to the public; instead, the industry flocks to Las Vegas to talk up technology.

NAIAS Is About Reality; CES Is About Perception

For many years, the financial market’s perception of the auto industry has been that of old-school manufacturers of commodity widgets. The view of Silicon Valley and technology companies is that of innovators on the bleeding edge that are poised for explosive growth. Thus, you have investors pouring billions of dollars into startups every year; most of those companies getting all of that investment fail without ever producing anything noteworthy while burning through cash.

Meanwhile, the modern car is one of the most complicated and technologically sophisticated devices ever created and is produced by the latest cutting-edge processes. The industry that produces them employs tens of millions of people globally directly and indirectly, generating trillions of dollars in revenue and tens of billions in profit. Yet the industry gets little respect and low market values.

The presence of the auto industry at CES is designed to reach a group of media that cover companies like Apple, Google, Microsoft, Amazon, and Facebook alongside countless startups, the same media that investors follow. The goal is to change the perception of the auto business from one that looks like it came from the dawn of the industrial revolution to one that innovates on a daily basis.

That’s not a message you can get across by showing off the refreshed Ford F-150, even though it may be packed with far more technology than anything from Silicon Valley. That’s a message you communicate by demonstrating automated cars in Las Vegas traffic jams; partnership announcements with chip designers like Nvidia won’t reach its intended audience in auto shows in Detroit, Frankfurt, or Geneva. These shows have issues to address, but the fault doesn’t lie in Las Vegas. It’s all about perception.

 

Ford Shifts Production Plans to Support Electrification Push

— January 3, 2017

In December 2015, Ford announced plans to invest $4.5 billion to introduce 13 new electrified vehicle models by 2020. The company provided no additional details at the time, but a big piece of that plan just became clear as CEO Mark Fields made a major investment announcement at the Flat Rock Assembly Plant near Detroit on January 3.

Ford has been criticized in the media for a seemingly lackadaisical approach to introducing plug-in electric vehicles (PEVs) over the past several years; however, this criticism is only partially valid. Unlike its more PEV-aggressive competitors Nissan and GM, Ford has avoided building dedicated PEV platforms to date—but that will soon change. The Focus Electric BEV has been called out for being merely a compliance car to meet California zero emissions vehicle mandates. Ford has been focused on pushing the plug-in hybrid variants of the Fusion and C-Max, which have been among the best-selling PEVs over the past 2 years.

Changes to an American Classic

According to Fields, Ford’s powertrain lineup will look very different by 2020. The best-selling vehicle in America for nearly four decades, the F-150 pickup, will be available with a new hybrid system that is expected to retain the towing and payload capabilities that customers in this segment expect. A rear-wheel drive hybrid system will be available for the truck and will also be applied to Ford’s most iconic car, the Mustang, when it gets its next update in 2020.

With the overall market shift away from cars toward utility vehicles, it has been a struggle for automakers to sell PEVs in volume. With that in mind, several of the new electrified vehicles will be SUVs, including the next-generation Explorer, which is built in Chicago. The police interceptor variant of the Explorer outsells the Taurus sedan by more than two to one, and the new generation will be Ford’s first hybrid with a turbocharged EcoBoost engine.

Big Plans for Flat Rock, Michigan

In addition to the Explorer hybrid, Ford will build a new, smaller SUV with a fully electric powertrain that offers a range of at least 300 miles. The electric SUV will be built at the Flat Rock, Michigan plant alongside the Lincoln Continental, Mustang, and a previously announced fully automated vehicle for ride-hailing that will debut in 2021. In order to support these new vehicles, Ford is investing $700 million to expand the plant, as well as adding 700 more jobs.

At the same time, Ford is canceling plans for a $1.6 billion small car plant in Mexico. During the 2016 presidential campaign, then candidate Donald Trump made a major issue of the plan to shift Focus production to Mexico from Michigan. The next Focus will instead be built at the existing Hermosillo, Mexico plant alongside the Fusion sedan. The small car market isn’t growing right now, limiting the need for companies such as Ford to expand the manufacturing of these vehicles. With sales of the Fusion slowing as well, there is plenty of capacity at Hermosillo to support both cars, plus the Lincoln MKZ.

Navigant Research’s recent Market Data: Electric Vehicle Market Forecast report projects that more than 6.8 million PEVs will be sold annually across the globe by 2025. Ford’s new electrification plan shows that the company is focused on applying the technology to vehicles where it believes it can do so profitably.

 

Autonomous Ride-Hailing May Hail the New Era of the Minivan

— December 22, 2016

CarsharingIt’s been more than 3 decades since Hal Sperlich and Lee Iacocca redefined the family hauler with the introduction of the minivan. Over the subsequent 20 years, the minivan segment grew to become one of the largest in the US market before being overtaken by SUVs and beginning a long and steady decline. However, as we move into the era of autonomous mobility services, we may also see a resurgence of what had been derided as the “soccer mom-mobile.”

While the minivan market isn’t as big as it once was in total sales volume, as these vehicles have gained useful amenities, they have become quite profitable. Starting in 2016, the companies that have stuck by this body style have begun introducing redesigned vans, including the 2017 Chrysler Pacifica and the 2018 Honda Odyssey that will debut at January’s North American International Auto Show in Detroit.

Vans On Demand

When Google decided it was time to expand its development fleet of self-driving cars, it struck a deal with Fiat Chrysler Automobiles (FCA) to purchase 100 Pacifica plug-in hybrid EVs (PHEVs) and equip them with its autonomous sensing and control systems. With the self-driving car project now spun out of the X research lab as a separate company called Waymo, it has also announced an agreement with Honda to discuss collaboration on development and possibly commercialization of autonomous technologies. In Navigant Research’s 2015 Autonomous Vehicle OEM Leaderboard Report, Honda was ranked eighth among 18 companies evaluated, so working with Waymo could provide a boost relative to the market leaders.

Since auto industry veteran John Krafcik came on board as CEO of what is now Waymo in October 2015, the program has apparently shifted its focus from developing complete cars to working with existing carmakers to supply its systems as well as potentially building mobility service platforms. As the shape of future mobility services continues to evolve, these platforms are likely to include a broad range of vehicle types to support different needs. One- or two-person pods may be adequate to provide first/last mile transportation in dense urban areas, while something more akin to a minivan can support families or larger groups traveling on a variety of routes that don’t have sufficient density to make mass transit viable.

Ford-owned San Francisco-based startup Chariot is already providing hybrid on-demand services in San Francisco and Austin, Texas with human-driven vans. As autonomous vans become available, they could be deployed in the same way. For these types of transportation services, the easier ingress/egress of a van would be much more practical than climbing up into an SUV.

Growing Trend

Volkswagen will also be joining in on the autonomous van trend at January’s Detroit show. The embattled German automaker will be unveiling a new battery electric micro-bus concept based on the same new modular electric platform that underpins the I.D. concept shown at this year’s Frankfurt Motor Show. FCA will be participating in the 2017 International CES in Las Vegas for the first time and will reportedly show a battery electric version of the Pacifica.

FCA’s program with Waymo only extended as far integrating autonomous hardware into the minivan and does not include system development. However, as one of the companies in the back half of the pack in the Leaderboard rankings, FCA would also be a good candidate to adopt a production autonomous package from Waymo or one of the larger Tier One suppliers such as Delphi or Continental. We’ll probably be seeing a lot more self-driving minivans in the coming decade.

 

Autonomous Vehicles as Both a Sustaining and Disruptive Innovation

— December 9, 2016

Electric Vehicle 2While listening to a recent episode of the Exponent podcast, co-hosts Ben Thompson and James Allworth had a vibrant discussion on one of their regular topics: sustaining versus disruptive innovation. The topic was in the context of whether Apple should acquire Netflix, but as the hosts’ conversations often do, it got me thinking about the auto industry. With self-driving vehicles, transportation is on the precipice of a dramatic change that many argue will be exceptionally disruptive. I’d like to take a slightly contrarian view by arguing that autonomous technology will be sustaining to parts of the auto industry and disruptive in ways that many in the tech industry may be missing.

Sustaining vs. Disruptive

Disruption is an often abused word in the world of technology, but as defined by Harvard University’s Clayton Christensen, it boils down to innovations that create new markets and value networks and eventually displace existing market leaders. Sustaining innovations evolve existing markets and improve value.

An example of the latter is the way that manufacturing automation improved productivity and quality in the way cars are built over the past several decades. However, as in any complex analysis, these things are never simply binary. While new manufacturing technology was sustaining for automakers, it was extremely disruptive to the people that worked in their factories. Similarly, any argument that autonomous vehicles will be purely disruptive of the auto industry is a vast oversimplification. If automakers had followed the path of Nokia in the mobile phone business and ignored the threat posed by Apple when it introduced the iPhone in 2007, incumbent automakers would be facing extinction in the face of autonomy.

Instead, I would argue autonomy will instead be sustaining for many (although probably not all) automakers. Someone will need to build these vehicles regardless of whether they are piloted by computers or humans, and the companies that already have design, engineering, and manufacturing expertise are well-positioned to do so.

Just as other real-world examples are rarely black and white, there will be disruption from the autonomous vehicle. Most obviously it will affect those that make a living from driving, whether by taxi, bus, or truck—society will have to address this employment displacement in the next decade.

Retail Side

Perhaps the less anticipated and more impactful disruption is faced by the retail side of the auto industry. There are nearly 17,000 franchised car dealers in the United States currently selling about 17.5 million vehicles a year with more than 1 million employees. If transportation shifts as expected over the next several decades (i.e., from an individual ownership model to on-demand autonomous mobility services), the business of these retailers will evaporate. It won’t be overnight, but it will almost inevitably happen.

However, someone still needs to own these vehicles, right? Sure, but unlike the Silicon Valley investors that pumped Uber’s valuation to more than $60 billion, I doubt it will be standalone ride-hailing companies. I’m increasingly of the opinion that mobility services will be provided by the manufacturers themselves, leveraging their existing expertise in building, logistics, and financing along with strategic investments in the software platforms needed to connect people with rides.

Disruption by its nature takes people by surprise. The self-driving car will be both sustaining and disruptive, and probably not in the obvious ways.

 

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