The auto industry plays the game #2

Productive Thinking

The auto industry plays the game #2

In this newsletter, we continue to examine how innovation in the auto industry’s capital creation recipe can have massive impacts on market share. This dynamism results in better products and lower prices. In this multi-part newsletter, we trace progress from BMW to BYD.

Key thoughts

  • A capital creation system recipe becomes more complex as an industry matures
  • Knowledge capital = human capital + organisational capital

BMW

Chris Bangle
BMW Design Director

“We make ‘cars’ moving works of art that express the driver’s love of quality Many people are eager to pay a small fortune to experience a car as we define it”

Chris Bangle became BMW’s design director in 1992. His mission was to revive the faded brand, which he did by implementing a cycle of revolution and evolution in car design. Bangle realised that luxury products require innovative design and product quality. His perspective reflects that of haute couture and the creation of symbolic capital through attention-grabbing clothes that anticipate the future. While initially controversial, the BMW 7-series, the first car of the revolution cycle, was ultimately successful.

Premium brand models account for 12% of the volume and 50% of the profits of the entire car industry. The segment leaders compete on symbolic capital, giving them market returns in double digits from 2016 to 2021, while the mass market experienced low single digits. Bangle’s design philosophy and the resulting uplift in symbolic capital was a vital factor in BMW surpassing Mercedes as the global leader in luxury car sales in 2004, and it held this lead until 2016.

Porsche

Ferry Porsche
Son of Ferdinand Porsche

“I couldn’t find the sports car of my dreams, so I built it myself”

Porsche Ad


“Honestly now, did you spend your youth dreaming about someday owning a Nissan or a Mitsubishi”

Ferry Porsche ran Porsche for 20 months when his father, Ferdinand Porsche, was under arrest, but never tried, for war crimes following the end of World War II. Ferry took the opportunity to build the Porsche 911, the defining symbol of the company that attracts buyers for its other models.

Many US military officers and State Department officials stationed in Germany after WWII, purchased a 911 and shipped it to the US when their tour of duty ended. As a result, there were many Porsches in the Washington DC area. The owners, needing advice on repairing and maintaining their cars, created the Porsche Club of America in 1955. Clubs were set up in other countries, and with more than 140,000 Porsche Club members, it is the largest single-brand club in the world.  

Club members have the opportunity to join a group tour driving Porsche’s iconic cars on some of the world’s most scenic roads, The Porsche Experience Center Atlanta, adjacent to the Atlanta International Airport, offers two tracks for the fans to spend ninety minutes at the wheel of a Porsche car of their choice with a driving coach.

Porsche was extremely fortunate. Its customers developed and nurtured a social capital creation system that enhances Porsche’s ability to attract and retain customers. Porsche Club Coordination is an integral part of Corporate Marketing.

In the automotive industry, Porsche’s complementary combination of social and symbolic capital enables it to achieve an operating return on sales of more than 20%.

BYD

Wang Chuanfu
CEO of BYD

“For new-energy cars, we believe we can become the global leader. From the technology standpoint, 10 years should be enough…

The cost is too high (for European and US automotive and software engineers)”

Wang Chuanfu established BYD in 2002 when he took over a failing state car manufacturer. With a background in non-ferrous metals research, he understands battery technology. In 2023, BYD is expected to surpass Tesla as the world’s largest EV seller, with gross margins exceeding Tesla’s.

BYD is a vertically integrated manufacturer of EVs. It controls a supply chain from minerals to vehicles—and even manufactures its chips and batteries. BYD is today’s version of Henry Ford’s supply chain, from rubber trees to autos. While China’s labour costs are low, BYD factories are highly automated.

BYD employs over 20,000 engineers, about 10% of its workforce. An automotive engineer in China earns an average salary of USD 44,000, significantly lower than a US salary of USD 104,000 and well below a German salary of USD 88,000. Rapidly climbing the new EV mountain depends on engineering and technological innovation. Thus, assembling a large cadre of engineering and software talent creates a competitive advantage for BYD.

To leverage its human capital advantage, BYD needs supporting organisational capital. Engineers need automotive performance data, digital design tools, digital wind tunnels, and collaborative processes for effective teamwork. They must be able to create a digital twin of a car and run it through a digital twin of a robotic factory before one piece of metal is formed.

knowledge capital = human capital + organisational capital

BYD’s knowledge capital is a major advantage in the competition to climb the new mountain’s productivity curve.

Tesla

Elon Musk
CEO of Tesla

“If you’re trying to create a company, it’s like baking a cake. You have to have all the ingredients in the right proportion “

Tesla’s business model sharply departs from the automotive industry norm. Indeed, we liken it to creating a new mountain (see the following figure), which has become the climbing challenge for the entire industry. For over a century, the car industry has been competing to summit an old mountain based on the internal combustion engine (ICE) of around 2,000 components, expensive recalls to fix problems, and an extensive dealership network. As the first to start climbing a new mountain, Tesla has generated symbolic capital that nullified the need for advertising until recently.

The EV Mountain

For Tesla, software is integral to a vehicle’s operation. Some describe the cars as “software on wheels.” By releasing a connected car, Tesla learns from the millions of kilometres its customers drive, and it can apply that knowledge to update software to enhance an owner’s driving experience continuously. At the same time, Tesla can generate revenue by selling software to add extra features to a vehicle. Tesla’s databases and software (organisational capital) sustain its advantage over traditional auto manufacturers who have to switch drive platforms, build a connected card, and learn how to turn data into knowledge that improves the driver’s experience.

Tesla’s EV innovation is complemented by symbolic and organisational capital that enable rapid growth.

Rick Watson

Research Director

Digital Frontier Partners

Email

Comments and conversations are welcome.

Share on social media