Opportunities in the future of transport

In the emerging mobility ecosystem, how and where will value be captured – and by whom

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Time Travel

Let’s take a journey back in time to 1935. Ford’s V8 flathead engine is three years old and hugely popular with American motorists delighted to be able to afford such power and performance in their private cars. Imperial Airways (later BA) has just joined forces with Qantas to fly weekly from London to Brisbane. For £195 you can travel 12,754 miles and arrive 12 days later! Back in England botanist Arthur Tansley sits at his desk wondering how to encapsulate the complexities of cooperation and competition that take place between soil, climate, microorganisms, animals and plants. In a moment of inspiration Tansley picks up his pen and scrawls a word - ecosystem.

Jump forward to today

Ecosystem is now a buzzword of the business world, shorthand for the complex networks of producers, suppliers, innovators, customers and regulators that are evolving out of the unbundling of formerly vertically integrated industry sectors (as in financial services), releasing a swarm of cooperating and competing producers jostling to fill the void; or, conversely, from the convergence of sectors that were previously distinct (such as video games and entertainment), often driven by technological and regulatory change, in which a related and interlocking set of firms combine to offer advanced products (like the smartphone) or sprawling value propositions (like mobility solutions) which require inter-operability and sophisticated orchestration.

Consider for example the huge changes taking place in the transport arena. The future of the privately-owned and driven car looks uncertain as the number of young adults taking their driving test falls, and car clubs and car-hailing schemes become part of everyday life. Electric cars are increasingly popular, and given mounting concerns about global warming are becoming a priority for public authorities and car manufacturers alike. Meanwhile autonomous vehicles continue to make rapid strides, even if they are not quite there yet. Looking further ahead, engineers on the west coast of America are working on the ”Hyperloop” - a high-speed transport system of capsules shooting along an enclosed tube that promises to cut journey times between Los Angeles and San Francisco – a distance of 380 miles – to just 43 minutes; flying cars too are becoming technologically straightforward to build.

More important, perhaps, mobility services are on the rise. Faurecia, a tier-1 automotive supplier, has developed car seats that monitor heart-rate and blood pressure to respond not only to health issues but to signs of driver fatigue; Daimler is building “fit and healthy” services around diagnostics available on board; builds platforms of offerings around its cars, allowing for instance service providers to deliver groceries direct to the car boot or wash your car while you wait. Excitement is high and investment pouring in – even if these new services currently have more red ink than profits to show for their efforts. No one would dispute that mobility, with its diversity of customers, suppliers, startups and technology, is now one of the world’s most dynamic and exciting ecosystems. But with so many actual and potential participants and so much at stake, that leaves one jumbo-sized question: how and where will the value be captured – and by whom?

The value of drinking

A walk along the aisles of your local off license provides a useful illustration of value capture. Suppose your pockets are deep and you want to buy some top-of-the-range Bordeaux – Chateau Petrus or Chateau Margaux, say, wines with lofty French names and prices to match. Or how about some vintage Port? You could choose among others from Sandeman’s, Dow’s, Warre’s, Taylor Fladgate. Why do Portuguese wines have English names? To find the answer we need to return to the early 19th century, when during the Napoleonic Wars English customers saw their supplies of Bordeaux cut off. Turning to Portugal for a remedy, English shippers guaranteed the quality of the wine they selected and bought by putting their names on the label rather than those of the Portuguese growers. When French wine exports to England resumed, the English shippers attempted the same ruse. But the Bordelais weren’t fooled: they understood that if they lost the ability to differentiate their wine in the eyes of the customer, with it would go their profits. A rigid system introduced by Napoleon III, the classification officielle des crus classés de Bordeaux, established firmly that the only thing that mattered when choosing a wine was the terroir, the area and soil where the grapes are grown. The French viticulturists realised that what makes one product more attractive than another to the consumer – its differentiability – is not a given but can vary and move along the value chain (or within the ecosystem!). Value – and hopefully profits – will be captured by whoever is able to guarantee quality: French growers in the case of Bordeaux, the English shippers of Port.

Driving value

Car manufacturers have experience to fall back on here. Research I undertook with John Paul Macduffie of the University of Pennsylvania’s Wharton School and C. Jennifer Tae of the University of Bath’s School of Management showed how car manufacturers or OEMs (Original Equipment Manufacturers) narrowly avoided skidding over a value cliff edge in the early years of this century.

In the late 1990s, the OEMs decided to ramp up their levels of outsourcing in a bid to boost the modularity of their cars – the degree to which car-parts could be mixed and matched, Lego-style. Outsourcing, they hoped would improve their competitiveness by speeding up innovation and making it easier to customise their vehicles. Just in time, however, the OEMs spotted the danger: continuing this strategy risked allowing the value of their brand, built up over many years, to migrate to suppliers of key modules – as had happened in personal computers when Microsoft and Intel determinedly differentiated the operating system and processor from the commoditised final product. As one supplier we interviewed put it, "Even if they like the design improvements we offer, they don’t want to take the risk of having us take over the whole package."

As a result, from the early 2000s OEMs de-emphasized modularity. And while outsourcing continued to account for 75% of their manufacturing, they calculated that by continuing to shape the driving experience through designing complete vehicles they could achieve a differentiated ”look and feel” sufficient to allow them to maintain their hold on the value. In other words, they understood that it was in their (strategic) interest to keep control of the sector hierarchically, by using captive groups of suppliers arrayed by tiers, who cannot be interchanged to serve other OEMs, rather than allowing an ecosystem to form as we saw in the PC sector, with any supplier being able to work with any buyer seamlessly.

Ironically, one of the features that allowed the OEMs to keep control of their sector was the fact that, to their chagrin, they were saddled with liability if something went wrong. If airbags fail to inflate or brakes seize up, it is the OEM that takes responsibility for repair or recall. It is a case of short-term pain for long-term gain – a small price to pay for maintaining a reputation for reliability. In automobiles, as in other sectors, strong system integrators capable of managing the whole system are in a strong position to benefit, increasing their own value at the expense of others that by the same token they render more replaceable.

Yet their very success sowed the seeds of the OEMs’ next challenge. Ironically, they had been a little too effective. They exercised so much control, and kept their suppliers on such a close rein, that new technologies and options that should have been available never saw the light of day. Cars, rather than being at the core of our digital lives, could hardly interface with them – even charging your phone or linking your iPod was a tedious, after-thought affair. As tech giants such as Apple and Google impatiently announced their own forays into the automobile world, observers began to notice that valuable opportunities were going begging. The auto industry was about to change again: this time, enter the era of services.

Learning from the past

As we start to think about mobility less in terms of personal car ownership and more as a user-centric combination of services integrating other parts of passengers’ lives, much can be learned from the OEMs’ experience in coming to understand where value lies and how to retain it. The evolving mobility ecosystem, the product of opportunities generated by the blending of gene pools from previously incompatible industry species and partners, is in full mutation, with insurgents and existing players launching a succession of technological and business-model innovations. The new, broader set of needs that can be addressed expands the scope of the sector, as it invites a variety of outside players with different knowledge bases and skills to come together through collaborations or acquisitions.

The automotive OEMs, knowing that they must again adapt to survive, are repositioning themselves. They have invested in ride-hailing startups - Volkswagen in Gett, Toyota in Uber and GM in Lyft – and are working with technology firms such as Intel-owned Mobileye, the designer of collision-avoidance software, to develop innovative products. They seem to have realised that competition is no longer confined within their sector; instead the contest is to shape the part played by their sector within the larger mobility ecosystem, and then to secure their role in it. This is a shift of mentality. Rather than quibbling about how they will capture value, they seem (also) to be looking at the bigger picture, going back to the basic principles of what customers want. Size of the pie first, share of the pie second, they are telling themselves. That’s the way to add value.

Looking to the future

Until the arrival of autonomous vehicles or driverless pods, or even the advent of the flying car, the greatest change to our mobility system will be brought about by data. How we use our existing infrastructure – which would be prohibitively expensive to alter or replace – will be transformed by numbers rather than hardware, as the volumes of data generated by automobiles are used both to reorganize the production process and to identify attractive service offerings for drivers and passengers.

As the most obvious example, since cars spend only an estimated 5% of their time in use, the vehicle fleet could in principle be significantly cut without reducing the number of people and packages carried, with all the attendant side-benefits in terms of reduced traffic, decreased journey time and diminished pollution. Space previously monopolised by parked vehicles could be used in new ways to create value. On the other hand, if people can be effortlessly driven around by their cars or, say, a comfortable Uber robotaxi, demand for travel might increase, prompting regulators and transport authorities to revisit their regulatory stance – or refresh their own value propositions.

The way mobility services are packaged and promoted will become increasingly important. Using personal data, it is possible to envisage a monthly ‘take-what-you-want’ mobility subscription service – a sort of transport Netflix in which we could choose a combination of public transport, private car, taxis, and car- and ride-sharing services to suit our particular circumstance.

Even for those not directly involved with getting people and things from A to B, there will be new revenue streams to be tapped into. On example is entertainment for a captive passenger audience. If you think about it, electric cars are both vehicles and giant batteries, storing and transporting energy that could be used for other purposes. That raises the intriguing possibility that eventually these secondary sources of value become so lucrative that mobility comes free in return for our personal data, as with online search and social media. And these changes will affect the value of other services from insurance to healthcare, to the need and value of parking. Intertwining needs, enabled by technology, are reshaping the map of opportunity in an ecology that stretches far beyond the automotive sector.

More broadly, we are witnessing today a wholesale reorganisation of sectors across business and society. We are now seeing the rapid growth of ecosystems, groups of firms bound together by co-specialisation around core standards and principles, often driven by powerful hubs like Amazon, Alibaba, Microsoft or Google- and potentially Uber. While rearguard battles for hierarchical control of sectors continue to rage, opportunities emerging in these wider ecosystems will demand new ways of organizing. Software may be not so much eating as modularizing the world, making the boundaries between sectors and technologies more porous, and at the same time increasing the need for close coordination.

Welcome to the world of ecosystems, which rely on multilateral coordination rather than hierarchical control. Because we all need to get around and have firsthand experience of the mobility ecosystem, we can use it as a springboard to think about the true drivers of value in our own sectors and ecosystems. Understanding the changing nature of production and how different firms might combine to achieve it is the first step to creating and capturing value.

5 lessons from the mobility ecosystem

1. Be innovative. Identify and put together new services and be ready to form alliances and partnerships in unfamiliar ways. Think value creation rather than value capture. Size of the pie first, share of the pie second.

2. Turn your customers into groupies – make or do something that makes them really, really happy. Keep in mind Google’s ‘toothbrush test’ for their new acquisitions: Does it relate to something they do every day? Is it part of their routine? Will it make a difference to their lives? Think Uber and Deliveroo (rather than flying cars).

3. Manage your supply base carefully - make sure you have at least two (and preferably more) suppliers. If you’re reliant on just one you risk transferring value to them. Remember how close the OEMs came to handing value to suppliers of key modules for their cars.

4. Become more visible and more important for your final customers. Make your product irreplaceable – or at least try to make your customers believe that it is. Become the scarce one in your ecosystem and capture more value. Academics call this relative replaceability.

5. Take responsibility promptly if something goes wrong – ‘short-term pain, long-term gain’. Remember how the OEMs, albeit reluctantly, recall cars rather than blame the supplier of a faulty part, in the knowledge that this gives them the coveted role of system integrator; and consider how KFC recently made itself accountable after its new courier’s delivery failures caused franchises to run out of chicken.

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