Can Ford survive the disruption in mobility after enjoying Henry Ford’s business model for 100+ years?

For the first time ever, the future is very uncertain for the automotive industry. The ones who can collect and leverage data to transform their business models will be more likely to survive and dominate the market.

Why is Tesla’s market cap significantly higher than Ford if it lost $717M in 2018 Q2 while Ford earned $1.1B? [1][2]

Market cap comparison of OEMs [3]
The way Henry Ford’s Model T was produced and sold in 1913 is not very different than what major Original Equipment Manufacturers (OEMs) still do today. Auto industry has been very traditional and players did not feel the need to change their business models, instead focused on vehicle development and operational improvements. Companies also did not work with big data before, since sales models through dealers did not give them access to consumer data. Now companies need to find a way to transform to survive a disruption: Mobility is shifting towards shared, autonomous, connected and electric driving, each with tremendous implications on the OEMs. There are many trends behind this shift, but machine learning is the prominent driver of change and offers vast opportunities:

  • Shared: A study at University of Michigan claims that car ownership could shrink by 43% due to increased adoption in ride sharing services [4]. As these services know more about customers, they leverage data to offer more affordable and flexible systems. OEMs need to think about other ways than selling cars to sustain and grow revenues (e.g. monetizing data, innovative sales and pricing models)
  • Autonomous: According to IHS Markit, 33M+ autonomous vehicles will be sold globally in 2040 [5]. There are already ~50 key players on this space utilizing machine learning, many as partnerships between large tech companies and OEMs [6].
  • Connected: As a platform of IoT devices, cars are communicating with drivers, each other, and the broader mobility ecosystem. OEMs need to be successful in collaborating with many different stakeholders to enable the connected ecosystem and get opportunities to leverage data.

A sample connected car ecosystem [6]
Faced with these challenges and opportunities, 10 key automotive OEMs are expected to spend $345B targeting these issues [7]. Moreover, according to an MIT study, 78% of OEMs already claim to have invested in skills and training for AI [8]. Within this context, as a 115 year-old auto giant, Ford has been going through a significant commercial and cultural transformation to turn these into a competitive advantage. The company has been researching on AI for 20+ years, but initial focus was mostly on product development [9]. In 2015, Ford announced its Smart Mobility business line to innovate in connectivity and autonomous driving with a long term perspective. It has been addressing the above challenges/opportunities since then [10] [11]:

  • Ford established Greenfield Labs in Palo Alto as a business incubator in partnership with IDEO to explore opportunities in mobility with a human-centered-design approach (currently 205 employees).
  • Ford, Uber and Lyft announced a commitment to SharedStreets, a data platform designed to better leverage data to improve urban mobility. It also acquired Chariot, a San Francisco-based start-up that runs group shuttles for commuters.
  • It acquired a majority stake of Argo AI (autonomous driving) for $1B and bought Velodyne (sensors) and Autonomic (connected car software). Ford is planning to invest $4B in total until 2023. It also partnered with Dominos Pizza to develop a fleet of self-driving pizza delivery vehicles.

Ford appointed the ex-chairman of its Smart Mobility division, Jim Hackett, as CEO in May 2017. Hackett is known as a successful visionary, but market cap trends above imply that so far investor expectations were not met on company’s outlook [12]. Mobility segment is burning cash ($479M loss in 2018 Jan-Sep) with uncertainty of success going forward [13]. Meanwhile traditional competition is moving fast: BMW’s mobility services (e.g. DriveNow) claims to be profitable since 2016 and BMW merged its mobility operations with Daimler this year, everything from car-sharing and ride-hailing to parking services and electric vehicle charging [14] [15].

In my view, going forward Ford needs to address following points:

  • Build more internal capabilities to leverage early gains through machine learning applications (e.g. cost improvements in supply chain, data monetization, financing, targeted advertising) and clearly communicate the results to the shareholders to manage expectations
  • Beyond the significant investments in the connectivity and autonomous driving technology, build more partnerships globally to expand its role in connected car ecosystem, therefore enable collection and utilization of more data to monetize (data integration with dealers can help)
  • Build a unique value proposition to attract and retain talent for software engineers and AI experts to compete with giants such as Google and Facebook.
  • Develop alternative ways to diversify business using AI applications in long term (e.g. innovation in business portfolio, leveraging predictive power of AI in after-sales)
  • Ensure collaboration with government to limit exposure to political risks as much as possible (e.g. tariffs, taxation)

Future is uncertain for car manufacturers as the expanded mobility ecosystem continuously increases competition and creates new trends. How can traditional OEMs like Ford utilize machine learning and data to transform their businesses?

(782 words)

References

[1] Dawn Kopecki, “Ford’s profit plummets by almost half, cuts 2018 outlook”. CNBC, July 25, 2018. [https://www.cnbc.com/2018/08/01/tesla-earnings-q2-2018.html], accessed November 13, 2018.

[2] Rebert Ferris, “Tesla shares surge as upbeat Musk sees profitable second half”. CNBC, August 1, 2018. [https://www.cnbc.com/2018/08/01/tesla-earnings-q2-2018.html], accessed November 13, 2018.

[3] Michael J. Coren, “Tesla has emerged as America’s most valuable carmaker”. Quartz, August 2,2018. [https://qz.com/1347031/tesla-is-americas-most-valuable-carmaker-again], Accessed 12 November, 2018.

[4] Brandon Schoettle, Michael Sivak, “Potential Impact of Self Driving Vehicles on Household Vehicle Demand and Usage”. Ann Arbor: University of Michigan Transportation Research Institute. Paper no. UMTRI-2015-3. http://umich.edu/~umtriswt/PDF/UMTRI-2015-3_Abstract_English.pdf, accessed November 13, 2018.

[5] IHS Markit, “Autonomous Vehicle Sales by Region, 2020-2040”, January 02, 2018. [https://www.businesswire.com/news/home/20180102005159/en/Autonomous-Vehicle-Sales-Surpass-33-Million-Annually], Accessed 13 November 2018.

[6] CB Insights, “46 Corporations Working On Autonomous Vehicles”, September 4, 2018. [https://www.cbinsights.com/research/autonomous-driverless-vehicles-corporations-list], Accessed 13 Nov. 2018.

[7] Vijitha Chekuri, “The Next Big Automotive Revolution”. DMI, June 7th, 2016. [https://dminc.com/blog/next-big-automotive-revolution], Accessed 12 November 2018.

[8] Frost & Sullivan, “Global Key Automakers’ Autonomous, Connected, and Electrification Strategies, Forecast to 2025”. September 18, 2017. [https://ww2.frost.com/news/press-releases/rd-autonomous-connected-and-electrification-technologies-creates-double-digit-growth-opportunities], Accessed 12 November 2018.

[9] Michael Schrage, David Kiron, “Machine Learning in the Automotive Industry: Aligning Investments and Incentives.” September 28, 2018. MIT Sloan Management Review. [https://sloanreview.mit.edu/article/machine-learning-in-the-automotive-industry-aligning-investments-and-incentives], Accessed 12 November 2018.

[10] Medha Agharwal, “Adopting AI in the Enterprise: Ford Motor Company”. Suly 20, 2017. [https://www.oreilly.com/ideas/adopting-ai-in-the-enterprise-ford-motor-company], Accessed 12 November, 2018.

[11] Ford Motor Company, 3Q Earnings Review, Ocotber 24, 2018. [https://s22.q4cdn.com/857684434/files/doc_financials/2018/3Q/2018-3Q-Corp-Earnings-MEDIA-No-Script-NO-SECRET-(002).pdf], Accessed 12 November 2018.

[12] Kevin Roose, “Can Ford turn itself into a tech company?”. New York Times, November 9, 2017. [https://www.nytimes.com/interactive/2017/11/09/magazine/tech-design-autonomous-future-cars-detroit-ford.html], Accessed 12 November 2018.

[13] Greg Gardner, “Ford’s smart mobility is still a long way from being profitable”. Forbes, 26 April, 2018 [https://www.forbes.com/sites/greggardner/2018/04/26/fords-smart-mobility-is-still-a-long-way-from-profitable/#66e7cfc5784c], Accessed November 13, 2018.

[14] Dave Guilford, “BMW’s Drivenow is profitable now”. AutoNews, October 3, 2016. [http://www.autonews.com/article/20161003/GLOBAL/310039970/bmws-drivenow-is-profitable-now], Accessed November 13, 2018.

[15] Kirsten Korasec, “BMW and the owner of Mercedes-Benz are going into business together.” Fortune, March 28, 2018. [http://fortune.com/2018/03/28/bmw-daimler-merge-mobility], Accessed November 13, 2018.

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3 thoughts on “Can Ford survive the disruption in mobility after enjoying Henry Ford’s business model for 100+ years?

  1. I’ve been watching OEM battles with deep interest, and the more I think about it the less I am convinced that Ford’s and GMs approach of getting into AV through acquisitions will prove to be successful. My primarily concern is the lack of in-house expertise and the furious war for talent. In this specific talent pool they’re competing with companies that software engineers really want to work for – Waymo, Apple and Tesla being the most obvious examples.
    An alternative approach to buying expertise is a partnership – FCA and Waymo being the most obvious example. FCA provides fleet for Waymo and are already testing in multiple cities in the US. Now this approach has its downside – whether FCA will end up taking the AV market ultimately hinges on Waymo’s success. Which model – partnerships or acquisitions, or perhaps some combination of both will prove to be the fastest to market and ultimately the most financially sustainable in the long run only time will tell.

  2. I absolutely agree that the rise of artificial intelligence and machine learning are transforming the automotive industry in multiple ways—ranging from manufacturing to business model innovation. What strikes me about this new landscape is the pressures this has put on traditional manufacturers like Ford. Tesla positions itself as a technology / battery company rather than a car manufacturer. Will Ford need to adopt a similar mindset? If so, can it make the transition given its history? Will Ford be willing and able to radically shift its business model and become more integrated with alternative energy and transportation companies has Tesla has with Hyperloop / Boring Company / SpaceX / SolarCity?

    Additionally, you mentioned Ford installing Jim Hackett as CEO, but I’m curious if the organization itself needs to make a greater shifts in how it is structured. Given that companies like Tesla have comparable market value while taking on significant losses and attracting top talent, how can Ford compete? Much like networking infrastructure businesses in the modern era, it seems that Ford may need to make bold, significant moves—larger acquisitions, dedicated teams, lateral moves, leadership disruption—or face a slow decline over time. I would assert that Ford is not making fast or large enough moves to stay competitive as Google and Apple begin encroaching on its traditional OEM market.

  3. There does appear to be a race to the top when it comes to autonomous vehicles. Companies like Ford, Tesla, and Lyft are all competing to innovate and acquire companies that will give them a competitive edge in the development of AI related to mobility. Perhaps Ford is at an advantage due to its well-established supply chain and production processes; however, as you mention, I believe the most successful AV companies will be those that invest heavily in new technology, attract top talent, and engage in partnerships, particularly with government which has a vested interest in keeping roads as they are today. Challenges include safety hazards and foregone taxes from parking tickets. To standout in what’s quickly becoming an oversaturated industry, Ford must focus on the technology integrated in its vehicles and how that technology speaks to other devices in the “internet of things”.

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