These are interesting times to think about cars. For years we’ve been talking about the rise of electric cars and how cars will work in the future. This was an isolated technical issue: ICE vs. Electric. But the debate is not (only) about this anymore, it’s way deeper.
The car industry is on the verge of a profound shift that will redefine what a car is, how it’s designed and the entire ownership structure. The best part though, is that we might be fortunate enough to see all this story unfold. Let’s break the problem down to pieces: this post explores the challenges that the transition to electric might suppose from a technological point of view.
The Engine: electric is simpler
The shift to electric is going to happen. Sooner or later, but it’s getting closer. The incumbents hold onto ICE because it creates huge entry barriers to their business and therefore it protects them from potential new competitors.
Moreover ICE cars have historically benefited from the unaccounted cost - negative externality - that’s harming the environment, and at the end, is misaligning their incentives with customer's best interests.
The main problem for incumbents though, from a technological point of view, is that electric motors outweigh ICEs in every single way. Electric motors reduce mechanical complexity in ways we can’t even imagine: they are simpler and have fewer moving parts. There’s no transmission, nor pistons going up and down thousands of times per minute. This means less friction, less heating, less energy wasted, and ultimately, more efficiency.
But it’s not only that, the moment cars are based on electric drivetrains, critical pieces from the ICE, like gear boxes, could turn into software in the same way that electromechanical calculating machines or cameras turned into software a few years ago.
This ultimately has a huge impact in the performance and gives electric vehicles a competitive advantage that their ICE counterparts can’t match. The implications of this shift range from the technology, the design of the car, up to the industry structure, for example:
- Vehicles get silent and smoother because there’s no vibrations coming from the engine.
- Acceleration is improved because torque is immediately available.
- Brakes don’t wear out as fast because 90% of the retention is done reversing the operation of the motor.
- Cars need less maintenance, therefore a whole subsection of the market - dealerships, repair shops… - has to be rethought.
- Cars can be charged at home, so they don’t stop to fill the tank, in a way.
But the bigger issue, by far, is that in this scenario cars get easy to build. So the entry barriers of actually bringing a car to the market fall apart. Which leads us to the second point.
Manufacturing: rethinking how a car is made
The transition from ICE to electric only tells part of the story. Because while it’s true that it lowers some challenges when building a vehicle, the key for a new entrant to disrupt the car industry goes back to the manufacturing.
The car industry works the way it does because of how cars are built. The sheet metal process determines capital expenses, cost structures, labor, the way factories are deployed… So at the end, the cost of putting a car to the market and in a sense “what is possible” is constrained by the production process.
Therefore as history has already shown several times, if a new entrant wants to turn the market upside down, a necessary condition is tied to a competitive advantage in the production process. This leads to an interesting intersection where changes in both the power train and the production process collide.
The moment a vehicle is powered by an electric engine, less capital is required to design and build it. This has a direct implication into who can build them and how they are built, manly because the huge entry barrier ICEs suppose and the production process. The car assembly is currently vertically integrated, factories belong to the auto groups and lots of capital and labor are required to put a new car into the market.
But in a new environment where cars become simpler and easier to build, same way happened with PCs and smartphones, a new entrant might end up buying commodity components off-the-shelf.
This means that the industry moves almost entirely from in-house factories to outsourced contract manufacturers, like Apple does with the iPhone. These also presents new challenges for the incumbents. Because in this scenario all the supply chain gets layered and optimized, and companies like Mediatek start to pop up, brining costs down in each layer of the supply chain.
So, with these simple tweaks, all the industry landscape has been turned on its head. Entering the car business would need much less IP and much less capital, so companies without factories, just buying components out of the self and outsourcing manufacturing to a specialized contractor might be putting cars on the road.
Redefining what is important
In an environment like the one we’ve described, there’s a clear change of what’s important when it comes to build a car, at least, from a technological point of view.
Batteries are the most important component of an electric vehicle and some design constraints of the ICE vehicles simply don’t apply to EVs. Tesla is a great example of this.
A quick look to the Tesla Model S and you’ll spot a big front grille. OK, there’s nothing out of place with a front grille… or maybe there is? Why an electric car needs a front grille? They don’t, but this are some cues that EVs are carrying on, in this case maybe to give a sense of sameness to the Model S. But things like a huge front hatch, a spacer and a stick between the front seats… you won’t need any of this in EVs. So there has to be a moment in the future when we get rid from useless design inheritance from ICE cars and we start building from a blank slate.
How could Tesla possibly compete with the decades of supply chain refinement? The answer is that Tesla doesn’t need to compete directly, because different rules apply to them, they’re not playing the same game.
In this particular area, Tesla is way ahead of the game, but the breakthrough is not complete, because its production process is still the same than BMW or Volkswagen, to name a few.
What Tesla has accomplished with the electric car is arguably the best thing it has happened to the auto industry in the last decades. Despite, nothing is preventing other automakers to go all in with a full electric vehicle. Sure, it might take years and effort to eventually match Tesla’s product quality, but there’s nothing preventing them to get there in the mid-term.
Up to this point it makes sense to speak about the technological side of the issue, because we can imagine an isolated environment where social and utilitarian aspects remain the same.
The problem though, is that the moment we look past this mid-term, deeper questions like "how a car will be used" or "what it will mean to own one", start to surface and to influence the debate in many ways.
For this post I wanted to lay out and isolate the technological and industrial factors that will define the transition. But in the coming weeks I will continue discussing the other sides of the issue.