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What does the transition to electric cars actually mean for the automotive industry?

August 2, 2023
4 minutes

Strategy | Business Models | Tech

“How did you go bankrupt?” In two ways. Gradually, then suddenly.” – E. Hemingway

 

If it were an average industry, we might overlook the current changes, but according to the International Organization of Automobile Manufacturers, the auto industry, directly and indirectly, generated 50 million jobs, bringing in a value of more than two trillion dollars. If it were a country, then it would rank sixth in value.

According to ACAROM (Association of Automobile Manufacturers in Romania), the automotive industry generated 27.6 billion euros in 2021, representing approximately 12% of the country’s gross domestic product. Seeing these numbers makes you realize how important the automotive industry is for Romania, especially since it is integrated with the European economies, so you can’t help but feel a chill when you see the statistics below:

Global exported cars

According to the BBC , China will be the largest car exporter in 2023. Some questions we should ask ourselves?

  1. How did a country that mainly produced products of low or medium complexity become the No. 1 car exporter globally?
  2. Cars are complex things, why would anyone prefer to buy a product just because it’s cheaper?
  3. If the number of new cars remains somewhat constant globally, how will that affect me? (ie. in Romania, Slovakia, or Germany?)
  4. What solutions does Dacia (and other brands) have for what is happening with the transition to electric cars?

I’ve been discussing these questions and more for at least two years in the Technology Entrepreneurship course I teach as part of the Master in Digital Business and Innovation* ( MDBI ). We have always started from the competitive advantage of each type of industry.

What are the competitive advantages of internal combustion engine cars?

Before mentioning the competitive advantages it should be said that internal combustion engines have been used for over a century and have undergone continuous improvements and refinements. The technology is well-established, reliable, and familiar to manufacturers and consumers. Today, the largest companies producing internal combustion cars rely on:

  1. A high-performance engine, developed and perfected from generation to generation.
  2. Engineers trained right out of college to revolutionize the engine and other critical systems and components (eg transmission, exhaust system, radiator and cooling systems, injection system, and on and on).
  3. A manufacturing plant for the production of these machines (ie platform) generally costs 1.5 – 2 billion euros (a reasonable price for most players in this industry).
  4. Design and distribution. If the design still remains in-house or in collaboration with legendary design firms for decades, the same cannot be said for the distribution. For example, most car brands do not have representatives in Romania, but work with certain dealers, thus sacrificing the customer experience. The last time I entered a showroom of a premium brand, the first question the sales representative asked me was ” How much money do you have?” “.

 

“You can’t pass 15 cars in the sun…but you can in the rain.” Ayrton Senna

 

What are the competitive advantages of electric cars?

  1. Much fewer components. how many It varies from one electric car to another, but a Tesla has 10 times fewer components than a traditional car (Note! 10x, not 10%). Fewer components mean far fewer service stops, so far lower maintenance costs.
  2. The size of factories. The new ones are not called “gigafactories” for nothing. The one in Berlin (Tesla) cost about 5.5 billion dollars, and the one that is being built in Mexico is estimated to cost 10 billion dollars. These costs have led Brian Gu, vice president of car manufacturer Xpeng (a Chinese second-tier manufacturer), to say that only ten manufacturers will last in the global electric car market.
  3. The design remains only in-house because it is easier to manage and innovate (e.g. from seats to upholstery; external suppliers are eliminated because they lengthen the production process, which means costs; including the production process is now more innovative, thus reducing costs by 20-40%)
  4. Distribution is done directly through showrooms that are somewhat reminiscent of Apple stores (ie. the experience is central to the interaction between the customer and the company, thus ensuring a true omnichannel experience)
  5. A new set of skills: software. The car becomes a place of entertainment, a phone like any other where you update software and applications via the Internet. A final step is a self-driving car, and chances are we’ll have it this year, according to Elon Musk.

So this last point is critical and is up to software developers, not engineers. If you could find engineers and recruit them in considerable numbers from the benches of faculties, how are you doing now with software developers? It is known that only 20% of these developers are very good, being the main target for recruiters of large companies.

What can you do as a company in Europe when the best software developers are paid 10,000 euros per month (net) and shares by companies like Apple, Google, or Amazon? Currently, in the automotive industry, a software developer does not earn more than 2,500 euros. In some companies, unions occupy up to 40% of the board of directors and have already negotiated a salary scale that favors engineers. (e.g. BMW, Mercedes, WAG Group).

Would a young software developer want to work at Dacia today? I doubt. Currently, the Dacia Spring is entirely produced in China and imported as such. What plans does Dacia have in the face of this change that probably happens every hundred years? However, we are talking about approximately 14,000 internal employees and several tens of thousands more who work for Dacia suppliers.

What global software applications has Europe launched in the last 10 years? What about China?

About all these questions and what to do in a future article. The ‘iPhone’ moment for cars continues on automatic fire.

 

* The registration period for master’s programs will be between September 1-4: https://admitere.ase.ro/masterat-2023/index-septembrie.asp

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