The Ikea Way - Hopefully coming to cars
I’ve been reading The Ikea Way, and lessons from the book have popped up on an almost daily basis.
The basis of Ikea as a company have always been to design functional and “good” looking furniture for the every day person, at a reasonable cost primarily by removing the middle man. This is obviously the dream for most businesses that produces any type of goods, control the entire flow (Ikea didn’t want to control the availability of wood/manufacturing but had to buy Swedwood in the end to ensure delivery capacity).
One industry that is moving faster than it has since the first mass produced product was released is looking more and more to be the Car industry, you have your giants based out of Detroit and Japan. For Detroit based businesses it seems like it’s all going downhill, and i am not sure how they will turn their faith around. Japanese businesses are steaming ahead, and Toyota is set to take the throne as the biggest producers of cars in the world this year. The innovation in the car industry is happening primarily in two categories.
1. Electric cars - You have small new companies that are focusing on using new battery technology to achieve a extremely “energy” saving way of moving forward.
2. Cheap cars - having spent considerable time in China, and also in India and Asia overall you have a thirst for cars, the number of cars being bought in Asia is on a stunning growth curve, obviously the GDP is growing and purchasing power is getting higher, but still far away from that of a western country.
I was reading this New York Times piece on “taking a whack at making a car” the other day, not that it was one of the top pieces i’ve read this year at Nytimes, but it was still interesting. I thought there was one quote in the article that was a bit amusing:
“David Cole, chairman of the Center for Automotive Research, an industry-financed research group in Ann Arbor, Mich., said there was little chance that a start-up could succeed in creating a car for the mass market. The entrepreneurs’ optimism, he said, reflects ignorance of manufacturing costs, regulatory hurdles and intricate technical challenges involving heating, ventilation and safety.”
David Cole might be completely right what do i know, but Cars are made in a reasonable similar way to how they have been made for a very very long time, which brings me to another nytimes piece discussing innovation - One of the largest problems from my view with large corporations is that it’s hard to get innovation through all the way, which is really why start ups exist in some markets.
Also how well David Cole know the cost of production in countries like China and India i do not know, i remember speaking to a friend who runs a apparel factory a bit outside Hong Kong, he told me they had done research and discovered if they factory in towards the middle of China by 100 miles each 10 years, they could continue to pay the same salaries for the next 100 years (adjusted with inflation).
So that brings me to the enormous human powered capacity that exists to create cheap vehicles in these countries, what’s left at cost would be the cost of material which due to the fast growth is however going up.
Which brings me to the point of the Ikea Way - There is currently cars that are very close to arriving on the public market for a lot less money that what is currently out there, primarily the car Tata is set to launch next month that will cost around 2500$ in the Indian market. Being a big fanatic of cars there is only one question left having seen a lot of the so called “cheap cars” that will revolutionize the market.
Why do they have to be so UGLY?
Every year there is ton’s of car shows where car manufactures and design companies (pininfarina etc) show new concepts, a large part of them don’t look all that good, but every year there is a couple that stand out, just as there is ready made templates out there for most designing, i ask myself, why these start ups and large companies taking a shot at a huge market simply don’t buy an existing design that have received good reviews?
Below is an example of 2 cars, one is a concept that was never made, the other one is in production.
Can you guess which one is designed by a manufacturer trying to create a cheap car?
And obviously people in India will like a different look to the people in Sweden, but overall there is almost always points in a design that can be used for different markets and then have it modified slightly depending on market. But as Ikea to have shown is that Design can be “nationless” - The same sofa/bookcase/coffee table/bed etc that gets sold in US also gets sold in Sweden and China.
So i am very exited to see how 2008 will turn out for the car industry, i am not saying it’s easy to make a car, but i believe we will see it being turned around within the next 2 years, now all that’s left for the chinese/indian manufactures is to fly in someone who used to work at Volvo to get the safety working, and someone from BMW so it feels like a quality machine and they should have a good shoot at grabbing piece by piece of the worldwide market.
If you are interested in some examples of cars that are targeting the lower end of the market you can view a slideshow at businessweek (Accompanying article)
PS. can someone please make a lightweight SUV for US market so soccer mom’s can stop polluting the air, lighter car = less pollution. The average US car lets out 4 times the pollution as the average car, and it’s twice as bad pollution wise as the average Chinese car! According to Nytimes piece americans want BIG and powerful cars… how come BMW can squeeze out more power from a 2 liter engine than GM can from a 6 liter one… must just be lack of innovation on GM’s side.
PS2. Andy Grove, Co-founder at Intel spoke about innovation in this Portfolio piece - Where he suggested “Or as my email to Immelt urged, it could be G.E. building an electric car and taking on the energy industry. These are companies big and powerful enough to solve intractable, industrywide problems and produce lasting change.”
I don’t think that’s a bad idea either.
January 3rd, 2008 at 8:34 pm
Good, very good post. Hope you go on posting these kind of thoughts and analysis in this entertaining way. You really should thinking in posting more often.
Great 2008 start.
Here are my 2 cents
Tata has licenced the french patent to build car with compressed air. This for the moms in USA .
Car manufacturers should focus more on becoming transport companies first. They already have internalized financing the car, servicing the car now they should expand on making these cars avaible in the cities as a service like many startup do.
This would help to make the cars more efficient as they should take care of the energy. They ten also will be more directly be involved in the recycling or reusing. For us clients, this would mean a fixed cost including energy and high avaibility. So innovation is also in distribution.
PS
January 4th, 2008 at 8:41 pm
Interesting thoughts Martin. I can appreciate your doubt in the comments from David Cole and his automaker-industry financed research group. Conversely, you should appreciate that start-up entrepreneurship and advanced mechanics and mechatronics seldom meet in successful marriages in our times. I don’t think there are very many “new” companies within the old-economy heavy industries, and the ones I can think of were all founded as buyout companies. It is the challenge of enormous fundraising, advanced R&D and establishing the manufacturing infrastructure that are the main hurdles imo. Large industrials take many decades do create and grow, and when you look at the european industrial landscape, most 10b EUR industrial groups were founded 100 years ago (or more). For instance, consider how Sweden and Denmark are fairly parallel countries, however Sweden has several industrial giants (ABB, Volvo, Scania, Saab, Ericsson etc) - and Denmark has none. The reason for this might be as simple as the fact that industrialization occurred in the late 19th century in Sweden, and not until the 1920s in Denmark. To have the capacity to develop, manufacture and market cars requires decades of experience and growth, and practically every large automaker entered the market back in days when entry barriers were different.
If a start-up is to take substantial market-share in the car market, I requires a radically innovative approach to the entire value-chain - because the current value chain is defined (and owned) by the current automaker giants. This is why I think it is not happening. If, as a start-up, you do something innovative tech wise, you still have the outstanding hurdles of design, manufacturing, scalability, safety, regulatory and distribution. If you innovate in design, technology might be among the outstanding hurdles etc.
The innovation required to make this happen is one that completely disregards the industry practice, and while you can do that with a web app ie. Skype, it is kinda hard with all the variables of a large mechanical production-scalable product.
As far as innovation within large global industrials, you are right on. It is a major problem, and is linked to the decades of company development I mentioned. With that comes decades of tradition and practice, that is very hard to break.
I think the way to go about this is a strategic buyout of an existing (perhaps poorly performing automaker), with a subsequent dramatic turnaround. The problem is that such a deal would require high-volume, high-risk, high-tolerance capital without a chance on earth of being able to provide return-rates that will come anywhere close to matching the risk at hand. It would be like investing real-estate volume money into biotech-like risk, with the patience of a bond-investor and with an outlook to receive old economy manufacturing returns. This is probably why no one has attempted to do so (there have been plenty of opportunities over the past 10 years).
Alternatively, perhaps if a start-up like Tesla Motors could become a permanent automaker in the future. If they pull of the roadster successfully, prove their powertrain, build quality and safety and actually turn profits building them - they might have created a platform from where it is possible to develop an entirely novel diversified line of vehicles for the global market?
January 4th, 2008 at 8:48 pm
M, agree with your thinking, but i don’t always see the need to re-invent the wheel all the time, the large automakers buy their parts from all over the world, parts which to some degrees are also available to anybody whom wish to pony up the money for them. Even if you look at the software industry, not many tries to take on Microsoft by building a competitor to Windows, but they try and take on each application key by key and today there is few applications which are stand alone and is developed by microsoft where there is no better alternatives out there.
Just as some coachbuilders take engines from BMW etc and drill bigger pipers for more horsepower, why can’t someone use existing parts and then slowly but surely change part by part?
Obviously you won’t be able to cut costs as quick, but might also give you a steadier growth curve.
January 4th, 2008 at 10:07 pm
The generic components that automakers buy all around the globe are not essential to the market entry barriers. It is not a question of getting a compressor for the A/C. I am 100% positive, that if say hypothetically BMW buy their power steering components OEM, those same components would not be available for purchase by hellomartin.com
January 5th, 2008 at 8:15 pm
What about easyjet M?
They managed to enter in a market and reshape it with the same components as the big airlines and they are not 30 years old.
I still think that building the new car is secondary, rethinking the use of car comes first. That’s why i liked your Ikea story. It’s not the table or the chair as a finished good. It’s the process.
In Paris Avis teamed with Vinci Park a parking company to offer Okigo. Mobizen another one, includes CO2 compensation. It’s not the big revolution but it’s the comercial step after car pooling 80.000 person in Germany and 70.000 in Switzerland.
So now these new solutions will need new type of cars or at least some customization to reduce energy comsumption and CO2 emisions.
So I think that those start up will slowly show car manufacturers a new market. If cars were all in aluminium and plastic they could reuse nearly 100% of the car.
So the cost of the car is important but now more and more users make numbers and prefer using all that money in the garage to enjoy life better.
They prefer using cars as a comodity. Not all the people all over the world. But more and more people in big cities.
So the real innovation will come with public transport that can be personal and to do that one do not need to be a car manufacturer as Easyjet was not an airplane manufacturer.
But what I say is something usual, before building things it’s better to setup a distribution channel.
January 6th, 2008 at 1:32 am
Well first of all easyjet does not develop and build their A319s and 737s.
I agree that in order to enter this market as a startup, one would have to redefine the market. What I am arguing is that in the current market for cars, it would be very very difficult to be successful as a new company starting from scratch.
January 6th, 2008 at 11:44 am
M,
So basically I agree with you.
I’m glad you could understand my english …
January 10th, 2008 at 6:38 pm
Tata has just announced the Tata Nano at the incredible `price of 100.000 ruppies which is 1.700 euros.
Big milestone in the transport industry.