The ultimate quest for a viable electric vehicle business model: are car manufactures looking at the right problem?

“Prices on electric cars will continue to drop until they’re within reach of the average family” could seem quite a reasonable statement today. What is weird is that this very point was reasonable also in 1915 when it was made on the Washington Post columns. 

As a matter of fact, a century later, just around 1.25 million battery electric vehicles (BEVs) and plug-in hybrids (PHEV) were on the road according to the IEA and half of these cars were speeding down the North American and Chinese highways.

Is this a big number? If compared to the more than one billion gasoline - and diesel-powered cars on the world's roads the number is ridiculously small, a niche product for a few extravagant - and high income - greenies, but if we consider that the total number of electric vehicles worldwide has tripled just since 2013 and the big push to clean up the planet going on, it's worthwhile trying to understand if this is a product that will change the transport sector or not.

A few years back a navigated manager like Sergio Marchionne, the CEO of Fiat Chrysler Automobiles, declared that the future was in natural gas powered cars (more environmentally friendly than diesel and gasoline) and not in EVs because for the latter there was no viable business model that could support the success of the product.  

Mr. Marchionne elaborated his thoughts in several occasions explaining why no sane car manufacturer would seriously invest in the expansion of EVs: it takes away the core competitive advantages of any major automakers. 

What are these advantages then? As of today not many: mostly brand, dealers and engines and they are falling apart one by one.

Source: BNEF

1. The Brand

Millennials don't love cars the way their parents did. For most of them a car is just a mean of locomotion not a status symbol. They want to be in a constant state of on-line connectivity, creativity and shared experience. While it was tough for a new entrant to build a strong brand in the automotive industry in the past (look how long it took to companies like Hyundai for example) now competition is coming from a completely and unforeseeable new direction: a new cool, but still with weak foundations, brand such as Tesla but also from consolidated brands such as Apple, Google and Samsung. The strength of an "old" car manufacturer brand could be tough to defend in front of these new age giants. If you add that some of them have been caught cheating lately (ironically enough, hacking software!!) then we can say that this competitive advantage lately has faded away a bit.

2. Dealers

Cars are sold by dealers. In a recent study McKinsey found that "unlike in other industries, such as electronics or publishing, where the importance of traditional dealership has diminished, bricks-and-mortar car dealership will remain a crucial customer touch point", to then add that "industry pressures are challenging dealers' current business model [...]. The financial sustainability of traditional dealership models is questionable in many countries".

Facts: roughly 500,000 cars are traded on eBay Motors' website every year; AutoScout24, Europe's biggest online car market place, registers more than 300 million visit on profile of cars on offer per month; more than one third of customers would consider buying his car online. Commercial networks made of thousands of dealers around the world that took decades to assemble and constituted a competitive advantage apparently difficult to beat are seeing their importance diminishing in the digitized world. 

3. The Engine 

During the last decades automakers have followed a "very steady, rigorous process of disintermediation,” said Mr. Marchionne in an interview with the Financial Times, that brought all manufacturers to outsource 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. “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.

Truth be told  design, battery pricing, battery efficiency, limited driving range, lack of charging station and time needed to recharge an EV are still unresolved issues and could suggest us why car manufacturers are still reluctant and not seriously investing money in this type of technology yet.

For example, one would think that Toyota could easily build a battery-electric car to rival Tesla's Model S, or at least its upcoming Model 3. After all, Toyota has been building hybrids for almost two decades. It has a wealth of experience with batteries. But Toyota last year steered the wheel the opposite direction and decided to go all for an alternative technology: hydrogen fuel cells. Why? Because the technology is more complex, could answer more efficiently to most of the questions still unresolved and has a viable business model behind it. 

What some traditional car manufacturers could discover soon yet is that the fiercest competition could not come from the automotive sector itself and that those competitors might not be interested in just selling a car with a “different engine” because they have a different business model in mind. Take Apple, Google and Tesla: it is pretty clear that their hidden objective is not only to sell a car but to create platforms to manage a plenty of other services that could be enabled by that car.   

What to expect 

Traditional car manufacturers’ point of view is that there is a big difference between making an electric car that people would buy and making money, but it is also true that to make money you need to make an electric car that people will buy and new players are exactly laying down the foundations for that: leverage on a critical mass of new vehicles whose characteristics will disrupt the car industry and overthrow current incumbents.

We all know that a product to be successful needs to fulfill a need, companies have to manufacture it and customers need to buy it so that investors, who have provided the capital, can make their profit. To make this possible the company needs a structure supporting the viability of the business, the so called business model. So what's the business model supporting the EVs future success? To be frank it's not completely clear to me yet, but if the current momentum holds on it could be already too late for traditional car manufacturers to change their minds.