We should really do a series on this topic. For now, though, I just want to quickly highlight an article I published last year along with new comments from Fiat Chrysler Automobiles (FCA) CEO Sergio Marchionne.
As I noted yesterday when discussing a Q&A with Renault & Nissan CEO & Chairman Carlos Ghosn, Sergio Marchionne admitted very directly at the Detroit Auto Show a key reason he detests the EV revolution: it takes away the core competitive advantage of FCA, as well as other major automakers. Automakers have outsourced much of the core work of building cars. What they still specialize in is building internal combustion engines (ICE) and ICE drivetrains. If the world transitions away from those, automakers no longer have much of a competitive advantage to hold their privileged places near the top of the economy.
Here’s more from The Financial Times and Sergio’s statements and message:
He warned the adoption of electric technology risked continuing the process that he called “disintermediation”, under which carmakers have gradually lost control over elements of a vehicle’s contents to suppliers.
“It’s been a very steady, rigorous process of disintermediation,” said Mr Marchionne.
Having initially manufactured all their own components, carmakers currently retain primary control of making only vehicles’ powertrains — their engines and transmissions — he added.
“If we start losing any of that . . . we will not be able to hang on to any proprietary knowledge and control of that business,” said Mr Marchionne. “We won’t be manufacturing the batteries. We won’t be manufacturing the electric motors that are part of that powertrain.”
This is nothing new, but it’s something not many people are aware of.
Actually, this was discussed at length by Tesla Motors cofounder Marc Tarpenning in a video I shared back in 2013 and then again last year in the article “#1 Reason Why Big Auto Isn’t Big On EV Revolution?,” so I will just repost that article to inform any new readers of the story and remind long-time readers of why so many major automakers (maybe even all of them) are quite anti-EV:
I wrote about this years ago when summarizing and discussing this wonderful presentation from Tesla cofounder Marc Tarpenning, and I’ve brought it up in numerous comment threads, but it is still something that is little understood and very infrequently discussed. I’m talking about what I think is the #1 reason why large automakers are not throwing themselves into the EV revolution, why their electric offerings and electric programs don’t match Tesla’s. That is: the competitive advantage of large automakers is almost entirely in their knowledge, experience, and intellectual property (IP) surrounding the internal combustion engine (which, of course, is not a component of a fully electric car).
Marc highlighted the fact that auto companies have been outsourcing more and more parts of the car in the past several decades, resulting in almost no competitive advantage outside of the engine (and basic manufacturing economies of scale and supplier connections). He said that the sluggish pace at which Big Auto was moving toward electric transport was one of the key talking points they initially used to attract investors, but after leaving Tesla and consulting a bit for these large automakers, he found out… it was much worse than they had been saying!
Of course, outside of straight patents and IP, the top executives of these auto companies have extensive experience and knowledge of internal combustion engine (ICE) vehicles. Most of them, especially as they approach the ends of their careers, don’t feel comfortable with a massive product shift that basically wipes out the usefulness of their expertise. It’s understandable, even if not morally “right” or “good.”
This is not a situation unique to the auto industry, though. This is basically what happens with any big technology “disruption” or shift. There is great difficulty for a giant incumbent leader to go against 95% or 99% of its expertise and business in order to shift with the market. It’s why we’ve seen the likes of Kodak, Blockbuster, and countless other large companies go under. A great book on this topic you may want to check out is The Innovator’s Dilemma.
This is one reason I’m a Tesla investor. I’m convinced the future of cars is electric, and it’s hard to see anyone competing with Tesla in this realm in the near future. But we’ll see.
Image by ZRyzner / Shutterstock.com
So basically the argument is that horse and buggy companies are reluctant to transition to horseless carriages. We all know what happened to horse shoes and buggies, yet Sergio doesn’t know?
If they hadn’t been dragging their feet to begin with, the major auto companies would have lots of IP in electric motors, controllers, product architecture, etc. by now. It’s a testament to the simplicity of the electric vehicle that big companies can’t rely on patent law to keep their privileged position intact as much as they can with the complicated ICE car. What the big car companies are going to be reduced to if they don’t vertically integrate as much as Tesla is a marketing firm with a bunch of brands & distinct body styling at their disposal. It might be easier for smaller companies to run final assembly on contract for the OEMs if trends hold.
Or an even BETTER idea would be for an automaker to buy an electric motor manufacturer that manufacture motors for industrial applications. Plenty of guys there know their stuff. In fact, GM could have used the knowledge they had from EMD to build all the components needed for an electric car. But noooooooooo, they sold the EMD division to Caterpillar!! Now caterpillar actually builds electric motors!!!! I would have never thought in a million years that Caterpillar would start making electric motors, but it makes sense if you think about since they bought out EMD.
Panasonic Putting $1.6 Billion into Tesla’s Gigafactory. That should have been FORD.
Exactly right about this. Specially the point about them being at the end of their careers. Marchionne knows this is coming but he doesn’t want to be the one in charge when they could get wiped out. Thankfully, he knows the other automakers don’t want this either, so he’s confident no one will make a credible push for pure EVs. Makes you appreciate outsiders like Elon Musk & Tesla Motors even more.
With much less proprietary knowledge involved and most parts, including motors, controllers and batteries available from other suppliers, it will become much easier for new car manufacturers to gain entry to the market. Interesting times ahead for customers. For the existing manufacturers too, but more in the “Chinese curse” sense of interesting.
Don’t the carmakers still build their own bodies? I would think this could be an area of expertise and a point of value. (The old “coachmakers” are long gone!)
Some may, but there are many design shops, and sheet metal build factory is better elsewhere. For example, precursor to SparkEV was designed as all electric vehicle to be used by Fiat pre-2000 by another company.
http://sparkev.blogspot.com/2015/11/sparkev-destiny.html
I know a guy whose company did some some body work for Faraday Futures. Try as I might, he couldn’t, wouldn’t, can’t tell me a dang thing about it, even now. Makes you wonder how much of other car stuff is outsourced that no one’s talking about.
Suspicions confirmed.
This guy doesn’t care about the planet. The almighty buck is his priority and this attitude could be the end of us.
Didn’t Tesla design and build their own motors? Sergio is full of s**t, and so are the rest of the legacy automakers, and we’ll see how many of them are still standing in 2030.
Tesla contracted with AC Propusion of San Dimas, CA to supply the drive train for their first 500 Roadsters. Once they had modified the original drive train enough to gain their own patents, they dropped ACP and have been making their own drive trains since.
I was going to say the analogy to Kodak doesn’t work well but then I read this article:
http://mashable.com/2012/01/20/kodak-digital-missteps/
I didn’t realize that Kodak actually invented the digital camera and produced a line of digital cameras for many years before they went bankrupt. The problem was they never innovated or made their cameras lightweight or look good. Just like big auto, they didn’t want the digital revolution and became foot-dragging followers until it was too late and they ran out of money. HMMM…
Blockbuster… I guess it’s the same idea but they really seemed to have very little time to adapt. I could be wrong but it felt like only 2-3 years between when redboxes appeared and when a majority of people realized it was much cheaper and easier to rent movies from them. Blockbuster also had to contend with Netflix a few years earlier than Redbox and Blockbuster managed to come out with a competing mail rental service that I thought did pretty well. They also had a smattering of competing movie rental boxes for Redbox but I guess they were too slow or not aggressive enough because it’s all gone now. Looks like the only thing they still do is movies on demand through their web site. I do feel like Blockbuster made pretty good attempts to try to adapt but they probably got caught in the same trap of not wanting to destroy their brick and mortar stores by pushing the new models too hard and then it was too late.
All of a dealers overhead is paid for by the repair department. Electric cars will seldom be in the repair department. So, how will the overhead be paid?
It won’t. Dealerships, as they are configured now, will be mostly out of business inside of 20 years.
I would venture that Sergio is wrong. The average car buyer already does not care about the engine and gearbox.
She cares about the styling and configuration and those are the major decision-making criteria.
However, eco-conscious buyers will choose a viable EV over a gasmobile. That’s when the engine is important.