Digital Matters - Issue 41

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.