A Brief Future Of Car Manufacturers, Pt. 2
Once upon a time in the West, a band of lawless carmakers roamed through the arteries of our nation and the hallways of our government, being kept in check only by each other’s cannibalistic one-upmanship. Their short perspective eventually dried up the once-bountiful river of consumer confidence. They turned to technology as their savior.
Then, the technology they created turned on them. And here we stand.
Surely, it ought to be a brave new world ahead. Perhaps even a world where revenue growth is no longer gospel, as we embrace efficiency over gluttony. And yet, carmakers persist in using revenue as their constant for exploring a transformative business model. This is the worst possible constant for such a formula.
And they’re not alone — the cavalry’s arrived in the form of overpaid consultants, many of whom have the same motivational poster on their desks:
No shareholder wants to hear that revenue is unsustainable, and nobody funding market studies wants to hear “who the hell knows” as the answer. So the farce persists, with all parties leaning on today’s business models to project an unrecognizable tomorrow.
That’s how you get Morgan Stanley’s ham-handed attempt to put a price on Google’s self-driving car division in the hopes that it creates some rough barometer for what all this “autonomy” means to the average business tycoon. Turns out it’s $70 billion, based on the loose assumption that Google will run up a tab of robotaxi miles like a glorified Uber, and earn $1.25 for each mile.
$1.25 per mile. What an insane figure. But that’s okay! It’s still a figure, and it came from a reputable source, so that’s all most of the business world wanted in the first place. Here’s Trucks Venture Capital positioning that $1.25/mile figure as it translates to traditional carmakers’ revenues, just to give you an idea of what a transition plan would mean to industry incumbents:
Is everyone happy now? We’re all talking about revenues, the warmest and coziest subject matter of any sociopathic executive. Give us a revenue goal, and we’ll hit it! That’s Job 1.
But that allegiance to the almighty dollar is exactly what brought manufacturers to this impasse, and will continue to plague them as they retreat backwards into their own graves, checking the stock price as they descend. If revenue is your constant, the formula is doomed.
Let’s try Toyota as an example, and see what various potential futures hold if they simply must retain their 2016 revenue mark of $252 billion. The chart we’ll build below attempts to envision the replacement business models for Toyota, based on how much they rake in per mobility mile.
Future #1 is the Morgan Stanley future — the one where consumers pay at least $1.25/mi for a driverless taxi ride, even if they share it with a few (or a few dozen) other people. In overly simplified market math:
$1.25 per mile x 14,000 miles per year (U.S. avg.) = $17,500
Today, the average U.S. driver pays about $10k per year to drive, including gas, insurance and what not. So this is nearly double, if we assume it covers every component of user-paid riding costs, which we shouldn’t. And more like triple or quadruple for anyone today who doesn’t make a habit of carrying a car payment.
$1.25 per mile is an almost impossible figure to charge the consumer for rides, let alone take home as just one of the parties who might get a cut of the action (local government, Google, Amazon, Verizon, etc.) This price point only works if you believe you can fool consumers into thinking a technological revolution in cost-effectiveness isn’t a benefit they’re entitled to, and simultaneously squash any disruptive players who — god help us — would try to penetrate the market at a significantly lower price point.
Of course, once you believe that, the rest of it makes perfect sense: 3.4MM taxi vehicles in operation is peanuts for Toyota, who churned out eight million brand new cars last year alone. It also leaves plenty of room for other carmakers to run a profitable global operation, as does the 202B mobility miles metric — that’s only 1/10th of America’s annual mileage, let alone the world’s ten trillion miles driven per year. See? Everything will be gravy! Everyone gets a corner office!
And that’s the problem: any executive who isn’t alarmed to see the $1.25/mile price point come across their desk from an analyst was obviously never asking for a market projection; they were asking for a blankey and a bedtime story. “Please, Morgan Stanley, tell me the one about how my company’s still flush with profits!”
Future #2 is a much more practical scenario for the consumer — there’s real cost savings happening for them as they transition to shared, autonomous transportation here. And having 33MM managed vehicles on the road is reasonable, though at that point, you’ve really got to move your operation towards a stronger maintenance and service-based model, because that’s about five years’ worth of production models running around the globe at once, racking up major miles.
Speaking of miles, that’s where the future would start to get slightly difficult for Toyota: 2.1 trillion miles managed is about 20% of today’s global mileage, which is nothing to sneeze at. That’s a serious task, though it obviously still leaves room for several other competitors to play, and if we buy into the camp who says vehicle miles traveled will increase significantly with autonomous transportation, then Toyota’s share here sounds pretty reasonable after all.
So… is this the real solution? Toyota makes 12 cents a mile, managing a fleet of about 30 million vehicles globally, and their execs get that sweet $252b revenue storybook ending the investors are hoping for? Almost — but check out the description of the replacement model.
To take home 12 cents per mile, Toyota would really need to be one of the biggest contributors to the transit stack — arguably the most important contributor, in fact, because a consumer-facing price point much higher than 12 cents just won’t fly.
Ergo, Toyota would need to do a few things well enough to be an integral piece of the transportation puzzle… but not an irreplaceable piece, otherwise that’d mean every other competing carmaker would be out of business, which is what the auto industry is trying to avoid here. And it would mean Toyota might have to scale well beyond the size of their britches.
So what could Toyota be doing to earn 12 cents a mile? For one, as we said, they could be a regional manager of vehicle maintenance operations. They have their dealer network as a decent starting point to build out that map. And perhaps Toyota also builds a region’s portfolio of vehicles, though I’ll maintain that whatever manufacturing expertise automakers have gathered over the years is basically obsolete in a market where vehicles are appliances that don’t need to be sold, nor engineered for speed or safety.
What that all means is, yes, this is Toyota’s most practical route to a smooth transition… but it involves unraveling their global business model, dissolving at least 75% of their departments, and leaning on a component — service — that they traditionally left up to franchisees. There’s a lot of work to be done in that paragraph, and it seems like you’d fail miserably if you kept trying to align your business reinvention to a nostalgic revenue figure. Keeping this model alive will very much depend on how thin you can keep profits, lest some newcomer with a greater tolerance for low operating margins step in to shake up the party. This model requires constant innovation — no current carmaker is built for it.
Future #3 moves the price-per-mile decimal one place further, so Toyota is now collecting a mere 1 cent per mile.
To achieve that and keep their wallets packed at that magical $252 billion in profits, they’d need a fleet of 423MM vehicles servicing 25.2T travel miles globally per year. For reference, there are currently 1.2 billion vehicles on roads today, or about triple what’s being asked of Toyota to simultaneously service in this model. And, most of us agree the vehicle count will decrease drastically with autonomous shared transit solutions, so it is likely more accurate to imagine this future requires Toyota to service the majority of the world’s vehicles. On a daily basis.
What’s worse, they need to get a cut of arguably every single mobility mile on the planet at a total of 25.2 trillion. There are only 10 trillion of those babies to cash in on today (but again, let’s humor the folks who say total vehicle miles will go up in the future based on this technology.)
What kind of company gets paid a small fee on virtually every single transportation transaction in the world? That’s a great question. They’d have to provide something no one else — on the entire planet — could provide. Not now, not ever. The market would need to be at the mercy of Toyota for some component of the operation. In a world where raw materials no longer command the ransom they once did, I honestly don’t know what this “thing” would be. Maybe it’s a patent on some highly efficient new battery, or some mineral component of that battery… but those are both unlikely, and with extant alternatives, the margin may have to be razor-thin anyway.
This future Toyota might only be a few hundred employees, and half of them lawyers protecting the nest. Odds are pretty long on an automaker — or anyone — pulling off this 1 cent fee on a global scale. So again, we can talk about how this model might work regionally, but if you’re going to force Toyota to generate $252 billion in such a manner, you’d better be replacing the entire company tomorrow with R&D personnel and resource-mining expedition teams to Antarctica. You’ll still fail.
This isn’t a perspective on what will happen to traditional carmakers. It’s a plea to acknowledge what should happen. Twentieth century manufacturers bring virtually nothing to the table of future transportation — what little they do bring is dominated by their bargaining power to stay at said table, which is what they’ve been spending most of their time on instead of actually building effective companies. If auto manufacturers go down, so does the jobs story, and the long-outdated nationalist illusion, and all those other cart-before-horse hot buttons which keep politicians’ constituents harmlessly full of bread and circus. In other words, auto industry elites are peddling fear of a better future, and doing so because that better future is yours, at their expense.
It’s your right and obligation, fellow schmuck on the internet, to keep short-sighted industry speculators in check, and keep the yacht-polishing industry execs from shoehorning their way into the future by sweeping new efficiencies under the rug their pile of money sits on.
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