LAUSANNE, SWITZERLAND (Reuters) – It’s difficult to work in the automotive sector. When there’s so much money to be made, competition can get out of hand. Take a look at the market capitalization of the big boys. Tesla, the world’s most valuable car firm, is valued at US$650 billion. It also dwarfs JPMorgan Chase and Alibaba in terms of size.
Toyota is next, with a market capitalization of almost US$240 billion. It’s around the same size as Netflix and Coca-Cola. VW is the third largest company in the world, with a market capitalization of US$140 billion. It’s midway between Hermes and Dior in terms of price. What’s more noteworthy is that the world’s fourth most valuable carmaker is the newest and is based in China: BYD, a battery-turned electric vehicle (EV) manufacturer that Warren Buffett’s Berkshire Hathaway invested in 13 years ago. It now has a market capitalization of about US$100 billion. Daimler, GM, and Nio are all hanging around the US$80 billion mark. Another Chinese electric vehicle manufacturer, Xpeng, went public in Hong Kong last week. It’s the company’s second public offering, following its initial public offering on the New York Stock Exchange in August of last year.
Xpeng and BYD are just two of several new Chinese electric vehicle firms benefiting from a booming capital market, including Nio and Li Auto. It’s a market that favors newcomers disproportionately. READ: Commentary: Owning an electric vehicle has been a worthwhile experience for me. Whether it’s a pension fund or a foreign sovereign fund, institutional investors already regard automobile firms as having rather strong, resilient growth prospects in comparison to other industries. Is there something about these new EV manufacturers, though, that seems to entice investors even more? What makes electric vehicles so unique? After all, creating one isn’t difficult. Every automobile manufacturer is capable of producing one. Do you recall the Nissan LEAF? It was first released in 2010, over a decade ago.
WHEN DISRUPTION COMES TOGETHER WITH CONVERGENCE Disruptive innovation is a classic victim of old EVs like the Nissan LEAF.
On January 15, 2018, a 2019 Nissan Leaf hybrid car is on exhibit at the North American International Auto Show in Detroit, Michigan, United States. (Image courtesy of REUTERS/Brendan McDermid)
Nissan’s batteries were not exactly high-performing in the beginning. When the capacities are low, drivers experience range anxiety. Furthermore, putting together an electric vehicle is more expensive than putting together a standard sedan with an internal combustion engine. That is why, according to the late Harvard professor Clayton Christensen, incumbents like Nissan are never motivated to expand disruptive innovation. At least in the short term, doing so does not result in profitable expansion.
However, there is a recent discovery that is altering the game for electric vehicles.
The advancement of computing technologies is enabling the development of a new type of electric vehicle (EV) that is more connected and intelligent. In other words, an EV is more like a supercomputer on wheels than an electrical gadget. READ: Commentary: For parents, giving up gasoline cars is a lot more difficult. Electronic components will soon account for half of the cost of manufacturing a car. That should come as no surprise given that electrical failures account for over half of all vehicle recalls, rather than mechanical breakdowns. Traditional automakers, on the other hand, will find it difficult to put the new EVs together. While electrifying the drivetrain is simple, the new electronics and their interconnections can be extremely complicated. All of the safety features, as well as the entertainment and navigation aid, must be controlled by the driver. Sitting on top could be a prerequisite for autonomous driving, which is still in development but becoming better all the time. Several car executives have told me that this is a fundamental architectural shift at the product level. They claim that this represents a shift in how we think about how an automobile should be created. TESLA’S ‘ARCHITECTURE’ BY ELON MUSK As a result, Elon Musk’s pursuit of vertical integration as he scales Tesla is apt. This method offers Tesla complete control over all of its components.
The Tesla branding is visible on the V3 supercharger equipment at the EUREF site in Berlin, Germany, on September 10, 2020. (Photo: REUTERS)
Visitors at Tesla’s Palo Alto headquarters may see the company’s in-house production operations. A traditional carmaker would have outsourced those functions. The startup wants to learn about battery chemistry from the ground up. Its gigafactories in Shanghai and Nevada are expected to generate batteries in unprecedented quantities. Tesla’s plan to stimulate expansion in infrastructure building included SolarCity, an apparently unconnected manufacturer of solar panels. Tesla creates a new type of user experience by tackling difficult problems inside. This instruction is also represented in the design of a passenger car. In order to reduce complexity, Tesla has completely overhauled the electronic architecture under the hood. The general design is divided into four controllable domains: autopilot, central information display, instrument cluster, and drivetrain and energy storage. READ: Why I’ll probably never purchase a car, even if it’s an environmentally friendly one The architecture is optimized for always-on connectivity when configured this way. It enables over-the-air software updates, such as anti-virus updates and new operating system updates, without requiring the driver to visit a repair shop. It’s a product architecture designed for data collecting, algorithm testing, and interaction with other vehicles and driving infrastructure. While doing so, it makes place for new features to be developed and downloaded in the future. Most traditional carmakers, on the other hand, have electronic architecture that reflects their historical experience. It’s a design that works with many vendors’ setups. The powertrain and chassis, driver assistance systems and safety, infotainment, climate and comfort, and connection are the five traditional domains. It’s difficult to “upgrade them.” There are much too many features “hardwired” into the physical components. We can now observe that automotive firms are no longer competing with car models. They’re squabbling over the design of the product. THE STANDARDS CAMPAIGN When something gets digital, it typically leads to a competition between old and new standards. Some would claim that the German automobile standard is still the safest in the world. A product architecture built on traditions and experiences has advantages.
Octillion, a Chinese EV battery maker, has a production line in Hefei, Anhui province.
(Reuters/Aly Song/File Photo)
Tesla and other EV upstarts, on the other hand, can and will improve safety over time. And we must remember that an industry standard is typically established by a variety of elements that satisfy immediate customer requirements rather than by technical supremacy. After all, a slew of lower standards have risen to the top. Although Sony’s Betamax had significantly superior picture quality, VHS gained the market due to its extended recording time. READ: The Greatest Book Ever Written: It’s all systems go for Singapore’s electric vehicle dream after a decade of fits and starts. READ: Commentary: For cities to achieve net-zero emissions, cycling is ten times more vital than electric vehicles. Despite the fact that Google Android has a much larger installed user base, everyone agrees that Apple iOS is safer and better safeguards personal data. As investors pour money into new EV startups, the fundamental question is whether Tesla’s architectures and those of other EV upstarts’ new versions will overcome traditional car architecture that has changed over time. Which product architecture and industry standard will provide the most tangible benefits to consumers? Looking at Refinitiv’s valuations, we can see that the market has a strong opinion on both counts.
Automobile manufacturers are valued on the open market. (Author’s illustration.) Refinitiv is the source of this information.
Tesla and these new Chinese EV businesses, which are pioneering this new form of the car of the future, are surely thought to be it by investors. They believe that the EV industry is convergent, and that it will one day become the dominant vehicle type on our roadways. And it’s not a view shared by individual investors like you and me. Your pension funds and the world’s most sophisticated institutional investors, including Warren Buffett, share this position. The LEGO Professor of Management and Innovation at IMD Business School in Switzerland and Singapore is Howard Yu. This essay was written in collaboration with Angelo Boutalikakis, a researcher at IMD’s Center For Future Readiness./n
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