It is April 27, 2010, and Kate has decided she wants to buy a new car. Out of many sites that her Web Pad brings up, she narrows her choices to two: Ford.com and Buildyourowncar.com.
Kate, a little tired from having spent a couple of hours looking for cars, takes a break to think about her options. She doesn't really believe her parents when they say they used to spend days or weeks looking for new cars, and still not end up with one they really wanted.
This scenario, created by Susan Helper of Case Western Reserve and John Paul MacDuffie of the Wharton School, offers two possible images of how the Internet could change relationships between customers and manufacturers in the auto industry. The Internet is expected to move the auto industry to a build-to-order model, as it has in computers (such as the Dell Direct model where you can custom order your computer directly from the company, eliminating any retailers). But how this evolution occurs, and how quickly, depends on major changes in the industry. A mix-and-match car that combines components from different manufacturers would require a level of standardization that has yet to be achieved in the industry.
In contrast to electronics, auto parts are not standardized across manufacturers, so supplier relationships tend to be highly idiosyncratic. There are few standards for anything, even such pedestrian parts as tires and batteries. Issues of ride and smoothness in the automobile--how the system of parts works together--also create limits on how far manufacturers are willing to go in standardization.
Helper and MacDuffie point out that even the most optimistic observers don't see the level of standardization needed to create a true end-to-end build-to-order-system emerging earlier than 10 to 15 years from now. But this model offers an illustration of some of the trends that are already being seen in the industry.
How quickly consumers are willing to buy cars on the Internet will affect the evolution of relationships between consumers and manufacturers. Today, very few cars are sold online although the majority of new car buyers do research online before going to a dealer. "How online sales develop depends on how strong consumer demand is," MacDuffie said. "This will keep pressure on to be more flexible in manufacturing and move to modular design."
One compromise may be to offer great variation on fairly cosmetic items--color and accessorizing--rather than building each product from the ground up. "Cars can be designed with an imbedded interface that you could plug a lot of different electronics into," MacDuffie said. "The software is the customized piece. For example, you might control the driving feel through software. If a lot of this desire for customization could be funneled off in this direction, that would have many fewer implications for core manufacturing tasks."
The customized car process could also give consumers control over a variety of manufacturing processes. For example, they might choose the option of having the vehicle painted at a zero emissions facility, choose low-emissions options or deliver the vehicle in a way that reduces energy use. Again, the willingness of customers to order these types of options--and particularly to pay extra for them--is very uncertain. But build-to-order systems and flexible manufacturing would put many more options at the fingertips of customers.
From Products to Access
In the long run, this new relationship with consumers may focus more on delivering experience rather than hard products. Already, companies are distinguishing their automobiles with global positioning and communications systems such as GM's OnStar. Does the move to differentiation through "software" make the actual car more of a commodity such as computers?
This focus on experience could lead to giving away the car while selling the add-on services. In remarks to the Wharton School Fellows in e-Business Program, Stephen Andriole, Vice President of Technology at Safeguard Scientifics, predicted that within several years, companies would be giving away low-end automobiles to sell ancillary services such as financing, insurance, global positioning, communications and computing access.
Jeremy Rifkin, author of The Age of Access, sees an even broader shift from selling products to offering experiences, not selling cars but leasing the experience of driving the car for a certain period of time. He says the value and margins are shifting away from products into access to these experiences. He offers the example of a sprinkler company that now uses satellite weather information to provide the ideal watering to customers' lawns. Instead of buying a sprinkling system, customers buy the access to "sprinkling." He also cites the example of Carrier shifting its view from selling air conditioners to selling "air conditioning." When it is selling a product, its incentive is to sell the largest BTU air conditioner (with highest price and margins) without consideration for how efficiently it is used by the purchaser. In contrast, if the customer is paying for the experience of cool air, and Carrier is responsible for paying for energy costs, the company has a strong incentive to tightly seal the home and deliver cooling in the most efficient way possible.
Mix-and-Match Environmental Regulation
As noted in the Carrier example, the evolution of these customer relationships to focus on access could lead to greater corporate responsibility for a range of environmental issues.
But a mix-and-match car could lead to a more difficult environment for environmental compliance, because it would be harder to affix responsibility or blame to a single manufacturer when, say, Honda produces the engine and Ford creates a body. The focus of regulation in that scenario may be on the company such as buildyourowncar.com that brings it all together. MacDuffie points out that, as we have seen with the Bridgestone-Firestone tire problems on the Ford Explorers, the ultimate assembler of the product will be held responsible--as well as the makers of the components. "The liability issues will be pinned down fairly precisely," he said.