Automotive Structural Changes: OEM Positioning

How do you look at the major players of each part of the value chain and their positioning in the face of the shift that we're currently seeing? Firstly, how do you view the OEM's position?

Well, I think, as I said earlier, when Ghosn and Dudley were interviewed, they said they made more money from the services than they did from selling the product. In the case of Daimler, that's probably still true as well, even though their product is somewhat more expensive than Renault.

I think it's probably still true that they make more money from the services, so they're going to want to keep hold of the services as long as possible. The issue is that someone needs to pay for and own the vehicle. But the finance of these companies is very strong, and if they are making the vehicle then they can operate the financing of the vehicle. What they're saying here is that they could even own the vehicle and lease the vehicle out I suspect.

Does that make sense to you?

I think it does. That’s where they make their money today; they have to sell the vehicle in order to catch the customer. When I look at these boxes over here: asset provider, fleet operator and service platform. The first two is what they do today, it's part of their business model today and it's quite a significant profit generator. Financing and maintenance and servicing is a significant profit generator for them. What they don't do today is have a mobility service platform. And there seems to be more competitors over there on the service platform side than there does on the others. The service platform is where there's a risk that they could lose the customer.

I think there’s another question around the shift to EV that you said that you spent time on. Because they make their money in ICE [internal Combustion Engine] vehicles, as the shift to electric takes place, I think there’s a question around the profitability of the OEMs on a per vehicle basis, in manufacturing and selling these vehicles. The manufacturing process changes, the supplier base changes and the value in procuring and assembling battery versus IC engines is completely different. How do you view the profitability relative to ICE vehicles for OEMs?

Absolutely right. If it was a startup company and they didn't have all this legacy investment in place, then actually you would say this is a great business model. It's an electric car, it will cost less to manufacture, the batteries don't need to be as big, and therefore there's a real opportunity to set up a company - like Tesla has done - and make a profit.

The challenge on the electric vehicle is that the battery is a huge chunk of cost. So whatever their strategies are going to be regarding batteries, whether they choose to make or buy is absolutely key. Tesla has decided to make their batteries and I think they believe that that gives them an advantage over a company that buys the batteries because they can control their costs, they can engage in continuous improvement to bring down their costs et cetera. Plus they may have some technology advantages as well that they can only benefit from by doing it themselves.