Volatility, uncertainty, complexity and ambiguity used to be characteristics that many Western managers associated solely with so-called emerging markets such as India. Dealing with such environments was thought to be fundamentally different from running the well-oiled machine of mature markets. Country managers were met with stunned disbelief when they reported local challenges back to remote headquarters.
Today, the world has fundamentally and irrevocably changed. Basic assumptions about how we can do business locally and globally are voided as the global order evaporates in the face of protectionism, supply chain disruptions and wars. Rather than becoming a larger and larger playing field enabling peaceful co-operation and improved living conditions for many, the global fabric has started to rupture. Retrenchment in blocks will limit access to innovation and drive inflation even further.
Yet, Covid, the war in the Ukraine and semiconductor shortages are not the only things that keep managers up at night. Take the transportation industry as an example. The industry has seen solid growth over the last 20-plus years. Markets like the EU and North America have seen a CAGR of 3.8% during this time frame, emerging markets like India are even more dynamic with growth rates close to 10%. While a well-oiled logistics industry was taken for granted in the past, the COVID crisis and related supply chain constraints have reiterated to all just how important it is to be able to move goods and people from point A to point B.
Considering positive fundamentals and a renewed appreciation, the industry should be feeling positive. Yet, a certain nervousness seems to be pervasive, a feeling of uncertainty that is not only driven by pandemic and geopolitical events, but by a fundamental transformation that is enabled and driven by technology. As can be seen in the figure below, the industry and related sectors face numerous challenges.
Changing truck ecosystem
On the trucking side, a continued push for sustainable freight transport drives large investments in electrified and/or hydrogen powertrains. Autonomous trucks with their massive cost savings potential will disrupt established business models and shift the power balance in the truck ecosystem. Asset tracking, predictive maintenance and other digitization efforts improve efficiency and transparency in the logistics chain and change the way we do business. Warehousing will have to adjust to some of these trends, e.g., regarding process flows and operating hours to enable autonomous trucks.
In addition, technology innovations such as AMRs and AGVs impact and change warehouse operations. Last mile delivery needs to be more efficient, especially due to increasing e-commerce volumes, and will drive adoption of new vehicle concepts, decentralised depots, delivery robots, etc. Customers will drive transparency along the supply chain both from a delivery as well as sustainability perspective enabled by blockchain and other technologies.
As a result, the environment in which companies operate is more interconnected and complex than ever before. New trends emerge quickly and can arise from non-traditional sources. Understanding this environment, separating the noise from the essential, and translating this into clear strategic roadmaps for companies is a tremendous task.
New challenges for OEMs, suppliers
Who will win this multi-legged rat race? Established OEMs or up and coming startups? The transportation industry is very conservative; hence a base assumption could be that established OEMs and suppliers have the upper hand. Yet, they face several challenges, a few of which are mentioned here in no specific order.
Capabilities in the new world of transportation are often very different from the old world. Take the current semiconductor crisis as an example. OEMs and suppliers in the automotive industry by and large did not understand that semiconductor suppliers could not be treated like traditional component suppliers. Reducing orders during COVID meant that supply capacity was allocated elsewhere. When orders picked up again, capacity was no longer available.
The overall semiconductor buy of the automotive industry is about USD 50 billion, about the same volume that Apple buys yearly. Automotive customers require a large amount of complexity and variation, Apple hardly has any. Clearly, the automotive industry could not force its way back into allocations as the industry is tiny when it comes to semiconductor purchases.
Investments are large to the tune of 10s of billions. Investment cycles in the semiconductor industry are long, it takes about 4 years from starting a factory project to delivering chips to an automotive plant. Hence quick fixes by adding capacity are not feasible either. The result was a continuing crisis that is likely to accompany us during 2022 as well.
Culture is another challenge. A lot of the new technology companies focus on service-based business models. A service culture is very different from the product centric culture of today’s OEMs and suppliers. Several players are deploying significant resources to achieve this transformation either organically or in-organically. Many have found it difficult to make the transition and earn money in the process.
This transition becomes even more pressing as traditional business models are under threat. Take OEMs as an example. With electrification and autonomy, OEMs potentially lose two areas of competitive differentiation and value addition – the powertrain and the cabin. Compensating these losses in revenue and profit must come from new business ideas, many of which will be service- based.
Legacy is another area of concern as well as an area of strength for the existing players. Investments in internal combustion engines are today investments in businesses that have a residual value of zero sometimes in the not-too- distant future. Yet, they are necessary to be competitive in the short term and bind significant financial resources.
The brand promise of safety and reliability is an argument to buy new technology from existing players, but implies longer testing and validation cycles and a lower risk tolerance than startups leading to longer development times and delayed launches of new technology. Existing relationships with dealers and customers are based on a thorough understanding of the industry and its use cases, but limit operational flexibility, e.g., in the transition to online sales or the exploitation of autonomous driving technology.
Funding is equally a concern for players. Traditional players are listed and have a difficult time attracting venture and other risk capital for the development of new technology. This leads to investment constraints and can impact development times negatively, especially when competing with entities that are backed by powerful investors or cash rich parent companies as is the case in autonomous technology.
Funding constraints also imply that traditional players can’t pursue all the different technology angles that are relevant for their business at once. They need to carefully pick their battle fields while at the same time competing with 100% focused startups in each area.
Collaboration is the new way
Looking at these challenges, OEMs and traditional suppliers are unlikely to drive the technology transition in the transportation industry in its entirety. Does this mean that they will ultimately succumb to more nimble and aggressive players?
This scenario is equally unlikely. OEMs and suppliers have built up industry and use case understanding over decades that is relevant for the development and deployment of new technology and difficult to be replicated quickly.
Brand reputation, solid networks and customer reach as well as global scale are the other factors that clearly strengthen the hands of the existing players. More importantly, many of the players today recognize that they simply do not have a choice.
Managing and succeeding in the technology-driven transformation of the industry has become an existential, do or die question. All organisational resources will be mobilised to ensure business continuity. A good example are the passenger vehicle OEMs and suppliers who after initial reluctance are going all out to win the electric car race.
Lack of alternatives is a very powerful catalyst for the changed behaviour. Beyond the careful portfolio management that was always crucial for optimally allocating scarce R&D investments, companies have realised that some of the challenges are too large to master by themselves. Cellcentric, the joint venture of Daimler and Volvo in the fuel cell space, is a good example. Here leading players in the trucking space are trying to establish an open powertrain platform to defray investment costs and risks.
Partnerships cannot be limited to the automotive ecosystem any longer. The challenges, for example, with cost-efficient hydrogen production, distribution and fuelling cannot be left to chance. Automotive OEMs must partner with fuel producers, distributors and fuelling stations to enable and establish hydrogen as a relevant ZEV technology.
Downstream, partnerships with insurers, finance companies, customers, etc. help share technological and operational risks. Clearly, managing and operating in these complex ecosystems requires very different skill sets compared to the automotive companies a couple of decades ago.
Many of the existing OEMs and suppliers in the commercial vehicle industry are here to stay. A few may not be able to successfully manage the transition. The ones that do, will be very different from what they are today. They may also find themselves among new companies. Take Tesla, for example. If Tesla’s Semi lives up to its promise of a reliable vehicle with a range of 500 miles/day and a price of USD 180,000, it will change the composition of the market and further accelerate the speed of change and volatility of the industry.
(Disclaimer: Dr Wilfried Aulbur is a Senior Partner at Chicago Roland Berger. Views are personal)
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