USAToday Column

September 24, 2015
Is the auto industry ripe for disruption?

By Bob O'Donnell

FOSTER CITY, Calif. — Given the news of the past few days, it certainly appears the auto industry is due for some serious transformations.

Between the ongoing Volkswagen emissions scandal and widespread reports of Apple’s intention to enter the business, even casual observers can’t help but think that change is in the air.

Of course, there are very good reasons for this type of thinking. From the growing interest in electric cars, early experiments in autonomous driving, and the increasing influence of technology in both the operation of and interactions with our vehicles, it’s clear we’re entering a new era of smarter, “techier” automobiles.

Combine this with increasingly public, or at least publicly reported, efforts by large companies like Google and Apple to build technologies specifically designed for cars, and you create a perfect storm of expectations for today’s beloved tech companies to completely uproot the established players in the auto industry — especially when they pull the kind of staggeringly stupid moves that VW did.

But a quick reality check suggests it may not be that easy.

For one thing, though technology is already incredibly important in today’s vehicles — and only going to be more prevalent in the future — it still represents just a fraction of the total costs and total components used to manufacture cars. Data I’ve seen suggests that only about one-third of the costs and an even smaller percentage of the components are directly related to the technologies that companies like Apple and Google would presumably bring to the auto industry.

To put it another way, while we all love the expanded infotainment systems, maps, integrated WiFi and even sensor-driven crash-avoidance features of modern cars, they still can’t go anywhere without engines, transmissions, brakes, seats, bodies and lots of other decidedly non-“techie” elements.

In fact, the mechanical systems in cars, particularly things like engines, are likely to be a key differentiator for not just years, but decades to come. Whether they’re powered by battery-generated electricity, traditional petroleum-based fuel, or even hydrogen or some other yet-to-be invented auto energy source, the engine and the physical drive train it powers will be essential for any car maker.

But even if tech companies or other auto industry upstarts manage to develop, buy or otherwise obtain all the components they need to build cars, the business models are extraordinarily different between the two industries.

Arguably, the current means of doing business in the auto industry are actually the most ripe for disruption from tech companies. Product development cycles between the two industries literally differ by orders of magnitude — tech products are developed in months, while cars are developed in years.

In the auto industry, the coolest new products are called concept cars and are rarely, if ever, actually sold. In the tech business, the coolest new products are the ones we can buy in stores the day or week after they’re announced.

At the same time, there are good reasons for auto companies, and the industries that support them, to function the way they do. In the case of manufacturing, for example, there is no equivalent in the auto industry to the ODM model that companies like Apple use for having the products they design built by other companies. Yes, there are a few small contract manufacturers for cars, but even auto innovator Tesla recognized early on that they had to have their own car factories.

Additionally, the multi-tiered auto components supply chain is not the most efficient means of doing business. However, it does reflect the extraordinarily wide range of different components used to build a car, as well as the specialization and expertise necessary to do them well. Of course, there are also the legal and regulatory requirements for vehicles — something automakers live with every day, but tech companies are just starting to figure out.

There’s no question that certain elements of the auto industry are overdue for some significant changes. The introduction of companies like Apple and Google into the mix is likely to drive some of those much-needed changes faster than they would have otherwise occurred.

Changing certain elements does not necessarily translate into a complete industry disruption, however. Unless there are fundamental changes to the basic physics of automobiles, it seems the impact of larger tech companies on the car business may not be as dramatic as it first appears.

Follow USA TODAY columnist Bob O'Donnell on Twitter: @bobodtech

Here's a link to the original column: http://www.usatoday.com/story/tech/columnist/2015/09/24/auto-industry-ripe-disruption/72735930/