There is no massive disruption of the transportation industry - but companies are disrupting themselves from within
- "Disruption" has become the buzzword of buzzwords in the transportation industry.
- But the supposed disruption isn't true disruption at all - it doesn't fit into Clayton Christensen's theory of disruptive innovation, as explored in his book "The Innovator's Dilemma."
- Nonetheless, automakers are actually disrupting themselves from within.
- The "disruption within" isn't about cheap, small, fast. It's not about catching the industry off-balance and ill-prepared to respond.
- It is about big companies that have a lot of money recognizing that they can spend literally billions to attack a new business opportunity.
- Visit Business Insider's homepage for more stories.
This story is part of Business Insider's "On the Radar" series, a collection of stories, analysis, and interviews revealing how the transportation industry will evolve over the next decade.
Disruption.
I've heard it. You've heard it. We've all heard it.
In the global auto industry, a multitrillion-dollar business that employs millions directly and indirectly, there is no more potent a concept these days. Disrupt now! Disrupt or be disrupted! Prepare for disruption!
In almost two decades of covering the car business, I've never seen such a frantic effort to pile into a once relatively obscure idea, one that's both useful and widely misunderstood when not outright misinterpreted or misapplied - which is often.
It's time to correct that and make an effort to describe what's really going on in the transportation industry. I'm calling it the "disruption within," and it's going to shape the future of this global industry.
The first thing you should know is that I'm a disruption purist. Let me use a story to explain. In 2015, I went up to General Motors and interviewed CEO Mary Barra.
Barra had been in the chief-executive role about a year at that point, and she had landed right in the middle of trench warfare, on the heels of the ignition-switch recall, and five years removed from GM's bankruptcy. It was hardly an ideal beginning for GM's first female CEO and the first woman to run a major automaker. It would have been a rough start for anyone, regardless of gender. But Barra was clearly under extra pressure.
I'm on record for thinking that Barra is the finest CEO in GM's history and one of the best business leaders America has ever produced. She has also put together the best management team in the industry - a critical achievement because GM is always a management challenge, first and foremost.
However, when Barra and I sat down in her office to talk, she said exactly what I didn't want to hear.
Do that disruption thing
"We're going to disrupt ourselves, and we are disrupting ourselves, so we're not trying to preserve a model of yesterday," she said.
"Oh no," I thought. Another CEO from an old-line company who thinks it can beat the disruptors at their own game. You know, somehow do that disruption thing itself, getting ahead of all those nimble merciless companies with a dozen employees, venture capital, a WeWork space, some laptops, and cold brew on tap.
I was immediately reminded of a TV commercial for some tech service from years back in which some young guys in casual dress are pitching their talents to a stuffy old firm run by aging people in suits. "We have a website," the dudes say nonchalantly because everybody has a website.
"You have a WEBSITE?!" the oldsters respond, incredulous. "On the WORLD WIDE WEB?!"
So yes, when Barra said that word - "disruption" - I cringed.
I wasn't convinced GM was going to be able to figure out Cadillac, much less fight off the Ubers and Lyfts and Teslas and Google Cars and everybody else who was preparing to storm the Detroit battlements and knock people like Barra out of their lovely high-rise offices.
I had another reason for not believing her: I had read Clayton Christensen's seminal book "The Innovator's Dilemma." (Christensen, a Harvard Business School professor who was widely admired for his character and scholarship, died in January.) For what it's worth, I was also familiar with Joseph Schumpeter's "Capitalism, Socialism and Democracy." Christensen's book contains the theory of disruptive innovation, and Schumpeter's lays out the idea of "creative destruction" in modern capitalism.
Disruptive innovation isn't supposed to happen in large incumbent firms. The whole point is that with their established expensive systems, they're vulnerable to new players who, in a nutshell, start out with a cheaper, crappier product that's still good enough to get the job done.
Gradually, the disruptor acquires customers, grows its business, and consolidates its innovation. By the time the big slow incumbent figures out that it's in trouble, it's too late. The disruptors have already changed the game, and the incumbent is doomed.
That's the shorthand version, but you get the idea.
Tesla isn't disrupting anything
By this analysis, Tesla isn't disrupting anything. Christensen told me that Tesla is essentially improving on prior innovations. In other words, it is improving the automobile - an invention that has been with us, more or less, since the late 1800s.
I would build on that insight to argue Tesla has absorbed the risk of creating a new car company - and basing it on electric propulsion - and that that is Elon Musk's true innovation. He has developed a growth market for risk in an industry that has always been averse to it.
More power to him. But again, the notion that Tesla and its rather expensive cars are disrupting anything, at least as far as the actual theory goes, is ridiculous.
In fact, pretty much all the touted "disruptors" are bogus. Waymo is hoping to replace human drivers with robots, but the businesses that they're attacking - ride-hailing and freight - are what economists call nontransferable and not susceptible to being undermined by anything except price slashing in mature markets. There's no cheap way to replace the hardware or software, so labor is the only thing that can be taken out of the equation. The technology is staggeringly expensive, but the bet is that removing people could change the cost structures of taxis and semitrucks, and boom, all those billions spent were worth it.
(They might also be worth it if we could drastically reduce auto-related fatalities and provide easier transportation for the elderly and people with disabilities.)
Mind you, I'm not disagreeing with this strategy. I've talked to numerous folks at Waymo, including CEO John Krafcik, and their ambitions are noble, their talent is considerable, their dedication is impressive, and their intelligence is indisputable.
Thinking all this through has led me to the conclusion - debatable, of course - that there's disruption in the sense that Christensen defined it and a new sort of disruption, of the type that I think most of the established well-capitalized players in the traditional industry are talking about.
I call this the disruption within.
What the 'disruption within' is all about
The disruption within isn't about cheap, small, fast. It's not about catching the industry off-balance and ill-prepared to respond. It is about big companies that have a lot of money recognizing that they can spend literally billions to attack a new business opportunity.
That business opportunity is appealing because, as we all know, the economics of the car business are difficult. My go-to quote in this matter comes from Bill Ford. A few years ago, I was sitting between Ford and Jim Hackett at a dinner in Detroit. I asked Ford to describe the auto industry and he said, "It's a tough business - you have to fight for every sale."
So it is, and if you do that very well, you can achieve a profit margin that might break 10%.
That's not bad, but it isn't Apple, either (the tech giant's margin has averaged 21% from 2015 to 2019). It isn't Porsche (the Germany luxury automaker enjoys 15%). And it isn't Ferrari (which pulls down a comfortable 22%). If your life meant managing a 10% margin for the next few decades, you might also want to "disrupt" your business.
This is what drove Barra and Dan Ammann to buy an obscure self-driving startup in San Francisco for what wound up being an all-in price of $1 billion. Their plan was relatively clear: acquire an autonomous-mobility firm whose tech could be integrated with GM-made vehicles and commercialized in an urban setting - because that's where the ride-hailing customers are.
Integrated is the key word here. Yes, Cruise Automation is now just Cruise and a separate company, with Ammann as CEO and cofounder Kyle Vogt as chief technology officer. But the overall "stack" of the undertaking is highly vertically integrated, with GM and some other investors owning pretty much the entire thing. It's their talent, their management, their capital, their cars, their technology, and ultimately their business.
After a lot of follow-on investment, Cruise is now worth almost $20 billion. That valuation has cost GM a few billion at this juncture. There is no better example of disruption within. Does it look like classic disruptive innovation? No. Is it innovation? Yes. Does it fulfill Barra's directive for GM to disrupt itself? I think it does.
Sticking with GM, let's talk about electric vehicles, which I considered to be yesterday's mislabeled disruption. After having their dominant narrative of what Michael Lewis once called the "New New Thing" stolen by self-driving schemes, EVs are back.
Electric cars aren't disruptive - in fact, they aren't even all that successful
But why? Objectively, EVs have been a bust. The most successful EV company in history is Tesla, and it has taken them more than 15 years to sell about 350,000 vehicles annually. That meager output has also been achieved without yearly profits at a cost of billions and billions of dollars. After a wild rally in early 2020, the stock is up over 3,000% since Tesla's 2010 initial public offering, so I don't think investors are unhappy. And even the evil short sellers, in Musk's mind, have been rewarded from time to time.
Ten years ago, I stood in the parking lot of Dodger Stadium and listened to Carlos Ghosn predict, while standing next to a Nissan Leaf, that EVs would capture 10% of the global market by 2021.
EVs fell about 8% short of that. In fact, the market for EVs would have to double from 2 to 4%, then double again to even get within striking distance of Ghosn's goal.
You might ask yourself: "Why is there any excitement around this at all?
You might also ask yourself, for example, why Barra recently said the focus of GM's future research-and-development investment would be on electric vehicles - and why she and her extremely capable right-hand man/chief car guy Mark Reuss intend to roll out dozens of EVs in the next few years and have made Cadillac into GM's main electric brand.
The reason is China, but I'll get to that in a minute.
No rational business person - even with just a passing acquaintance with the theory, much less a Harvard MBA who might have spent time with Christensen in person - would intentionally disrupt their business. To do so would be extraordinarily difficult. Your goal would have to be taking established products and cheapening them, then convincing your customers that these products are suitable replacements for what they're used to.
Some customers might go for this, pleased by the much lower price. But most wouldn't, and in the end, even if you pulled off a textbook self-disruption, you might do so much damage to your brand that it wouldn't have been worth it. Forget the degradation in profits and downgrading of your production capabilities.
The threat of true disruptive innovation is that its progress is largely out of the control of the enterprise being disrupted, unrecognized until it's too late: a viable alternative before the established player can mount an effective counterargument.
When faced with those odds, why wouldn't a company invest some winnings in self-disruption? Instead of a chaotic, unpredictable scramble to catch up - usually hopelessly - you get to update Wall Street every three months on how you're doing (if you're a public company). In this context, disruption isn't agony. It might actually be fun.
Why the auto industry is the perfect framework for disruption from within
The auto industry is the perfect framework for disruption from within because, quite frankly, it's all but impossible to start a new car company, as the notable lack of them over the past seven decades demonstrates - as does the dismal track record of EV startups from that optimistic 2010 period. I would go so far as to insist that the only EV efforts from that time period that have endured are Tesla's and what GM has been doing since it "killed" the EV1 in the 1990s.
With this understanding, it should be obvious that disruption within is actually just a savvy form of research and development - a skunkworks mentality that encourages the development of new business ideas.
Newsflash: This isn't disruption in the Christensen sense. Rather, it's what mature companies are always trying to - wisely invest their profits in remaining competitive and capitalizing on new opportunities
So why is there so much fear and trembling around the whole disruptive framework?
It could be because of a more anxious society. Businesses were disrupting from within in the 1950s, but the pace of life, certainly the pace of media, was slower. In the 21st century, whole consultancies have been built around the notion that all success is under constant threat and only a warrior mindset can keep an enterprise from insolvency.
But it could be thanks to the Silicon Valley-fication of business thinking. Software allows a small number of people to capture total market control very rapidly at a low cost of entry. So we have Google and Facebook worth many billions of dollars but with modest physical footprints relative to, say, Ford with its numerous factories and army of workers. However, software-driven companies are under relentless threat of being undermined by the very system that allowed them to grow so big so fast. In transportation, this can lead to chaotic efforts of apparent disruption, such as scooter startups invading cities and wrecking quality of life.
Disruption from within is more orderly. Take for example Cadillac's Super Cruise hands-free self-driving technology. It was introduced several years ago and does exactly one thing - allow for true hands-free highway driving - quite well. It has been available on just one vehicle since its debut, as GM has sought to refine the technology and ensure that it's safe. There have been no accidents, so the carmaker is adding it to several new models.
Legitimate Christensen-style disruptive innovation is coming to the car business. Before his death, Christensen himself offered the case of small cheap electric vehicles in China - simple transport that's ideal for congested cities. Local manufacturers could create fleets of such microcars and threaten larger Chinese and Western automakers hoping to capture millions of new vehicle sales in the region.
It might not go that way, and that's why GM is pressing to electrify its range; the company sells more cars in China than in the US.
That said, disruption from within and disruptive innovation could happen simultaneously. After all, while Chinese buyers might start out with an inexpensive basic vehicle, Cadillac beckons, as it always has.
This story is part of Business Insider's "On the Radar" series, a collection of stories, analysis, and interviews revealing how the transportation industry will evolve over the next decade.