How Disruption In The Auto Business Actually Works

Authored by Nicholas Colas via,

If you want to understand how technological disruption actually works in the auto industry, you need to know the story of the radial tire. Don’t worry – this isn’t just a history lesson. We’ll get back to current issues quickly enough.

The background

Immediately after World War II, French company Michelin started producing radial tires. These differed from the existing global technology, called bias ply, in basic construction.

The primary benefit to radials was a longer operating life (2-3x) than bias ply, but they were also more fuel-efficient and had better handling characteristics. As the European auto industry got back on its feet after the war, they optimized their suspension designs for the new radial tire. Japanese tire company Bridgestone followed suit in the 1960s with its own radial design for locally made cars.

In the United States, however, the pre-war bias ply tire lived on happily and successfully through post war years. Fuel efficiency wasn’t an issue and American drivers liked the admittedly vague but soft ride and steering that bias tires provided. Imported cars with radials were a rare sight and replacements were typically only available at dealerships.

The catalyst for change

The 1973 oil shock more than tripled US gasoline prices in just a few months, and in the resultant recession the fuel efficient and durable radial tire finally became relevant. That combined with another oil shock in 1979 and increasing penetration of European and Japanese cars signaled the end for bias ply tires.

What this did to the US tire industry

Remember just how much longer radials last: instead of wearing out in 20,000 miles, they can go 40,000-60,000 miles. That means you need 50-66% less manufacturing capacity to supply a country running on radials than bias ply. Revenues, of course, will also be far lower even with a modest premium for the product.

Every tire manufacturer sitting in the US knew that math in 1973. Shifting capital expenditure budgets to produce more radials seemed like a ridiculous move, all the more so in a recession. Why spend money to create a product that would cut your revenues by half over a few years?

Only Goodyear Tire really took the plunge, shifting production aggressively to radials in the mid-late 1970s. The rest – names like Uniroyal, BF Goodrich and Firestone – were slow to switch, entered a long period of decline, and were all eventually purchased by Michelin, Bridgestone and other foreign tire makers. Who all, of course, were making radial tires all the while.

Why we bring this up today

Auto industry consultant AlixPartners was out with a study today warning of a “Pile up of epic proportions” as global automakers invest in electric and autonomous vehicles with uncertain futures. Alix is a serious firm, with deep roots in the car business, so their warnings deserve an airing:

  • “By 2023 a whopping $255 billion in R&D and capital expenditures is being spent globally on electric vehicles”
  • “Some 207 electric models are set to hit the market by 2022, many of them destined to be unprofitable”
  • “Meanwhile, and additional $61 billion – just the opening ante on that front – has been earmarked for autonomous-vehicle technologies, even though … consumers say they are wiling to spend just $2,300 for autonomy – compared with current industry costs of around $22,900”

OK, so what does this mean?

I can assure you every senior auto executive on the planet knows the story of the radial tire in intimate detail; I suspect no one in Silicon Valley does.

Car companies know disruptive technologies come along infrequently, but when they do you’re either all-in or you’re selling the business. If you choose to fight for survival, you basically invest as much as you can and hope for the best. Much of that investment is in capital equipment, and the numbers start at $1 billion/project and go from there.

Technologists think of capital as primarily human rather tangible. On the plus side, 1,000 coders are usually cheaper than the paint booth of an auto plant (those are +$500 million each). On the other, there may not be 1,000 coders on the planet who have the skills you need when a new technology like autonomous driving comes in. In that case, you will be spending a lot more than a paint booth’s worth to train them and keep them.

This, in a nutshell, is both why the AlixPartners warnings are both spot-on and irrelevant; both tech and car companies will spend whatever it takes here, regardless of return on capital. The global auto industry is in a “Radial tire moment”. The funny thing to me, having covered the industry for +25 years, is that only the car guys/gals seem to know how dangerous such periods can be. The tech industry, not so much.