Rarely has there been an industry as stable as the car industry. Except for design modifications, the basics of the automobile as a product haven’t changed in half a century. And while the Big 3 of Detroit did face new competition from overseas competitors, the structure of the industry has generally remained remarkably stable as well – at least until the last few years.
Ever since the Great Recession, the car industry has changed more in a decade than it has in the last 70 years. Today almost every aspect of the car business is being rethought from the product itself to the business model. And that should make investors in the industry very nervous – change creates risk after all.
Tesla is still a very small producer of cars, but their products appeal and Elon Musk’s marketing acumen are sufficiently powerful that every Tesla product gets 100 times the press that a new product from GM or Ford does. Moreover, Tesla’s cars completely upend the traditional manufacturing process including avoiding unions, as well as obvious fundamental changes to the car itself. Tesla’s cars are actually a better comparison to Mercedes Benz and BMW products rather than those of its domestic rivals. While Tesla’s volume may be tiny now, there is a real chance that the company will emerge as a major player in the auto space in the next few years.
If Tesla alone were the sum of the automaker’s problems, the situation would not be all that challenging. Perhaps the bigger threat comes from the slew of powerful adversaries emanating out of Silicon Valley. Google and Uber loom large among new tech companies threatening the traditional automaker business. Indeed, if persistent rumors are to be believed, Apple is also a potential foe. In particular, Uber and Google change the way cars are used through different ownership structures and self-driving technology. Related: $1 Trillion In Spending Cuts Could Lead To An Oil Price Spike
Detroit is not sitting still against these threats though. General Motors started making aggressive overtures to Silicon Valley in recent years, and after a trip to Silicon Valley last year, GM top brass realized how far behind the curve they are. This trip led GM to accelerate its own efforts in ridesharing and autonomous driving, but it also led GM to begin exploring opportunities to work with potential emerging competitors. The magnitude of GM’s failure to date is captured by one statistic – GM has been investing in self-driving cars and rolling 4G hot spots since 2008 – before Uber ever existed and when Google was still in its infancy.
GM seems determined to change that legacy. Unable to strike a deal with Uber, GM instead has turned to Uber rival Lyft, investing $500 million in exchange for a 9 percent stake in that company. GM’s President now sits on the board of Lyft. More recently, GM spent almost $1 billion to buy self-driving software maker Cruise Automotive.
GM is not the only old line Detroit car company interest in doing deals. Fiat Chrysler is attempting to work with Apple, while Ford is in negotiations with Google. It is conceivable that if ride sharing of driverless cars take off, car sales could fall 40 percent over the next 25 years. Against this backdrop, only time will tell if the car companies can make significant enough changes to their business models to avoid becoming obsolete, but none of the big 3 are resting on their laurels. That’s a good sign for current shareholders.
By Michael McDonald of Oilprice.com
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