Digital Matters - Issue 41

"The future of the auto industry is building your own car over the Net."

Take a trip to the new General Motors plant in Sorocaba, Brazil, and you will see the automobile-manufacturing facility of the future. At one end of the enormous campus there's an assembly plant that looks very much like every other GM plant. At the other end are buildings of various shapes and sizes that serve as the headquarters for all of the plant's suppliers. What used to be called "just-in-time" delivery has become same-time, same-campus delivery.

The goal is for all of GM's automobile-manufacturing facilities to look like its Brazilian "plant of the future" someday and for all of those plants to be connected on the Web. The idea is to eliminate inefficiency, creating a perfectly seamless manufacturing process. It's a staggeringly ambitious goal, but then, it's a staggeringly big business with very little margin for error.

When you make a bet in the global automobile business, you are wagering billions of dollars in a marketplace that suffers from an estimated overcapacity of 2 million units. Put more simply, there are 2 million more cars than there are qualified customers to buy them. The implications of that number are not complicated.

Overcapacity haunts the auto industry and is the driving force behind its consolidation. Chrysler made too many bad bets over too many years and was acquired by Daimler-Benz. Jaguar couldn't keep its cars out of the shop and was acquired by Ford. Saab Automobile AB, which pioneered front-wheel drive, got squeezed by the demand for SUVs and minivans and was acquired by GM.

In the auto industry, you've got two choices: Be big, or don't make mistakes. And even if you are big and don't make mistakes, your chances of survival are still slim. A few years back, Roger Smith, the former chairman of GM, told a visitor from Boston that by the year 2010 there would be only two global car companies: GM and Toyota. A small group of niche manufacturers would carry on, he said, but their influence wouldn't amount to much. Many industry analysts believe that Smith's assessment may underestimate the speed of the industry's consolidation.

As hard as it is to survive, however, there is still a ton of money to be made in the car business. Margins on high-end products (such as Lexus LS-400 sedans and Chevy Suburbans) are steep, and the notion that every family must own at least two cars is firmly fixed. So even in the lower and middle range of the market, most families own (or lease) two cars.

The question is whether the Internet enables new entrants to attack the luxury market and the economy market — key links in the auto industry's value chain. The short answer appears to be maybe (and good luck to you if you're in either one of these areas). Take them one at a time.

At the high end of the market are well-made, high-quality cars such as BMW, Lexus, Lincoln, and Mercedes. These autos are selling like hotcakes in the current economic boom. And along with the high margin earned on each unit comes a goody bag of fees for financing, insurance, and service. Lexus and Mercedes customers are happy campers indeed. But at the highest end of the market, where hard-core car enthusiasts reside, there's a sense that something is missing: Their car is like everybody else's car. Their car is not uniquely theirs.

Enter Model E Corp., which bills itself as the first Internet build-to-order automobile company. Model E, based in Fremont, California, has a new proposition: The future of the auto industry is building your own car over the Net. Model E thinks that your car should be your car, built one mouse click at a time to your exact specifications.

Model E also thinks that the customer experience should be seamless, so the first thing it does is handle all of the time-intensive stuff for you. All of it. You just go to its Web site, choose from a portfolio of premium automobiles (from such brand-name manufacturers as Audi and BMW), add the features that you want, and Model E takes care of the rest. The car will be delivered to your home a few days later already inspected, plated, insured, full of gas, and good to go.

When your car needs to be serviced, someone will come to you and pick it up, leaving a loaner for you to drive while your car is in the shop. That person will have your car serviced, and then he will return it to you the following day — or even that night. You never have to visit a dealership. You never have to wait in line. All you have to do is drive the car.

The only thing that you have to do is pay the monthly fee for the whole package: the car itself, financing, insurance, and service. This adds a few hundred dollars to your monthly payment, but nets out at roughly zero. And that's it. You're completely covered.

But it is the second-generation Model E customer experience that holds the greatest promise: custom-car building. What most people don't know is that companies like Magna can already build-to-order a Mercedes sedan (minus the emblem) and deliver it to your door next week. Model E wants to take that capability and customize cars for auto enthusiasts everywhere.

The second-generation Model E will be the "Model E brand." In this version, the base model will be cut not from an existing Audi or BMW design but from a set of template designs that the consumer can work with to build his or her own car. These template-design cars will be manufactured and assembled by Magna or by one of the other independent manufacturers in the marketplace. This is what car enthusiasts have been anxiously awaiting for years.

If Model E can win over the special-vehicle customer niche, then it can become a very profitable business. After all, the margins are highest at the top end of the market. Once established, the Model E "customer experience" could become the industry standard. And just as "luxury cars" became affordable in the 1990s for millions of customers, special Model E cars might well become the status symbol of this decade and of the next. All of which would require the incumbent car companies to fight for what they now consider to be their sacred turf.

In the middle and lower echelons of the market, a Model E car simply isn't affordable. Indeed, for many of the people who are part of these customer segments, any kind of second car is a financial stretch. So what's the average family to do? He works, she works, and maybe one or two of their children have a driver's license. They have no choice. They need to have a second car — maybe even a third one (with all of those fees piling up on top).

A company being incubated at MIT called Zipcar Inc. has a different idea. Robin Chase, Zipcar's cofounder and guiding spirit, asks a break-the-mold question: Why not put a car on every block, in every neighborhood, and in every major metropolitan area? Why not have a membership club that allows people to walk down the street and drive off in a Zipcar? Why not create a car utility?

Zipcar is the best thing to come out of the Boston area since Pedro Martinez. It's a remarkably simple concept. You pay a fee to become a Zipcar member. You offer up your DMV data (you are denied membership if you have had two or more moving violations in the past three years) and a credit card for direct billing. If you are accepted as a member, you are required to attend an orientation. After that, your Zipcar passkey card is mailed to you. Then you go online and reserve a Zipcar for however long you might need it on whichever day you choose.

Next, you walk down the block, wave the passkey in front of the Zipcar door, open it, and drive off to your destination. When you're done, you just return the car to its designated Zipcar parking space (either on the street or in a municipal lot).

Along the Red Line MBTA-station stops in Cambridge, there are Zipcars parked within a block or two of every exit. Robin Chase is planning an aggressive expansion program over the next year, adding cars and parking spots and signing up commercial real-estate operators and universities so that they can make Zipcars readily available to their customers and staff members. A number of parking spaces have already been designated at MIT as "Zipcar-only" spots, and Chase hopes that eventually, every neighborhood in Boston will have Zipcars on every corner.

In its first three months of operation, Zipcar gained 20 to 30 new members each week. It now has nearly 400 people sharing its cars around Boston. Assuming that it can manage a fleet of cars and that it can convince local and state officials to provide more Zipcar parking spaces, it's possible that Zipcars will be all over Boston within two years. And the beauty of it is that there are no marketing costs: Zipcars sell themselves whether they are zipping around town or they are parked.

The value proposition that Zipcar (along with CarSharing Traverse Inc. in Traverse City, Michigan and Flexcar in Seattle) has to offer is a compelling one: The company provides a large customer base with access to 1.4 cars. Each customer would buy or lease one car for his or her own personal use. Then, as an inexpensive add-on, a Zipcar would be available at his or her convenience. For corporate customers, the cost savings of Zipcars are compelling. At the very least, replacing car and taxi service with Zipcars would dramatically cut personnel-transport costs for travel to and from meetings. State and local governments are also highly motivated to adopt the Zipcar model, since it reduces air pollution and traffic congestion. More and more people would use public transportation, knowing that a Zipcar would always be available to fall back on (which would be especially appealing to working parents who would need quick access to a car in the event of a child-related emergency).

Watching Model E and Zipcar — the yin and yang, representing the high end and the low end of the Internet auto business — develop during the next three years will be job one for executives at every major manufacturing and global rent-a-car company. If one of the two concepts is successful, then the business gets tougher. If both catch on, the automobile business will be transformed.

The majors will have to rethink how they do business. Mass production will have to become mass customization. The niche players will be squeezed as never before. They may be mere dots on the horizon now. But Model E and Zipcar are emblematic of the future of the automobile business. It isn't about car companies. It's about customers.

John Ellis (jellis@fastcompany.com) is a writer and consultant based in New York.

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