Episode 1, new version

The following is Episode 1 from @oliverbruce.  Thanks, man!


Jim: So Horace, you’ve been talking about cars from time to time. I just bought a new car, so tell me what’s happening in your observations of the car business?

 

Horace: Cars are a great subject. I think I mentioned this on the critical path because I think it’s one of these industries that everybody knows and everybody has an opinion on. It’s been around for a hundred years, so we have a lot of data. It’s a huge driver of economic activity especially in developed countries. I read some statistics from an association of automobile manufacturers which claims like one in five jobs is due to the car industry or something to that effect. It’s some huge number about the value of the business and politically it’s very important because apparently large car companies are not allowed to fail. So that means somebody’s got an in on a politician somewhere. But at the same time though it’s diverse because you have, you do have—well it is and it isn’t—you have many countries who produce cars and you have many companies that produce cars and there is turnover in terms of who’s making money selling cars or building cars, but it is also weirdly consistent in many ways across, you know, the world. There was a time when there was a lot of difference between countries. There was a time when cars where differentiable or differentiated by the country they were build in, that I think is going away. It’s sort of become far more—the delta has come down. So the worst performers have gotten better and the best performers have gotten worse to some degree because they’ve tried to become bigger and had to compromise. And then at the same time we have entrance in the form of emerging markets like—mainly I think Korea in the last few decades. We’ve had Eastern European manufacturing going on, although not of new brands. We’ve had brands in Europe consolidate through ownership, through purchase, through acquisition. And some interesting developments—I mean Volkswagen, for example, is becoming a spectacular success in ways that are not so visible.

 

Jim: Right, right; they’re almost the largest now in the world and very vertically integrated, which is [crosstalk].

 

Horace: Exactly. It’s more about the fact that they’re successful with innovation on the business model side rather than on the car, you know, on the product side. So there’s a lot of moving parts, a lot of things you can look at. And there’s of course—the thing I’ve been obsessed about though is that we’ve had this notion of focus on the products. Product has been the thing that we analyze as far as the industry’s success or failure. So we tend to think about whether cars are getting bigger, whether cars are getting more fuel-efficient, whether cars are improving in one or another dimension or regressing on some dimension. And so we discuss the health of the industry in term of the product. And that’s, I think, actually becoming less interesting once the product is very difficult to differentiate between companies. This is why I would say start thinking more about the innovation; not on the product side, but rather on this business model and innovation as we mentioned, you know, Volkswagen becoming more integrated. Toyota came in—we don’t really talk about Toyota cars. I mean, the Toyota innovation has been for decades around their production system.

 

Jim: Production system, right.

 

Horace: Right? So even in the 1950s it wasn’t really that General Motors was the object of admiration for its cars. It was an object of admiration for its branding, its marketing, organization structure, the way it was able to run the ship. That became the thing that made GM rather than product. You know, I read a great book. It was not on the car industry; it was actually on the manufacture in World War II. And the thing was that it’s a great book. “Freedom’s Forge” I think it’s called. I think I mentioned it before. But the amazing story is how the auto industry was the blueprint for manufacturing almost everything during the war. And the people out of Detroit—who become the executives that were hired to solve the production problems for the whole of the US—they came from Detroit; or the school of thought, the school of production. And there wasn’t just in the US. The Soviet Union picked up almost all the tricks and in fact a lot of the tooling from the US in the 1930s. They were able to purchase a lot of spare capacity that was going idle in the US in the form of machine tools and so a lot of Stalin’s factories were tooled by American, you know, American manufactured tooling. Same thing with Nazi Germany; they were enthralled with the forth production system at that time and borrowed huge amounts of US sort of [inaudible 06:33] that sense, making Germany run on a production system that was mass production. And later, actually after the war, it was Japan that was actually built on those principles as well. So to me the fascination with automobiles goes beyond the product. It goes into this whole question of how a car is produced, how a car is marketed, how does a country industrialize even on the basis of this production method—so much learning. I am just now skimming yet another book also on aircraft production in World War II and no scholar of the history of World War II can ignore the auto industry. Even the writers of this book point out how the engines that went into airplanes, for example there were some manufacturers specifically of aero engines. Even in the 1920s and 30s a lot of the knowledge about engines came from the auto industry and there were auto manufacturers who were shipping engines to the aircraft industry. But the book points out how the economic value of the car industry during the 20s and the 30s was orders of magnitude higher than the aircraft industry. Aircraft industry was producing, in some terms of JDP or in terms of output, less than 1% of the value of the car industry. So if this was true in the 20s–30s, it was an amazing industry back then. So anyway long story, but one of the things that I’m curious about is how cars have… where do they go from here because we’ve gotten to a lot of interesting junctions in the road if you want. One is…

 

Jim: Alright. I think you’re getting to a great point which is other work; which is other industries you’ve looked at. The value proposition is changing. I mean, I’ve looked at some data this weekend. At least 20% of Americans from 14 to 34 don’t have a driver’s license now. And in Japan it’s significantly higher than that.

 

Horace: [crosstalk] In Europe too.

 

Jim: Yeah, this growing urbanization and then, of course, car insurance services and all the other things. So you’re right that the value proposition is certainly beginning to change and one wonders where that will lead us in the next five years.

 

Horace: Yeah, so what’s happening—usually disruptions come from places you don’t expect them, right? It happens when the product isn’t really… like I said, the obsession on the product side becomes—suddenly you’re looking at something you didn’t realize it was a product because the job is what’s being sold by the new thing and it isn’t necessarily something on four wheels.

 

Jim: VN engine or the Diesel engine, yeah, exactly.

 

Horace: Yeah, exactly. So one thing I have issues with is the Tesla thing. I think the Tesla product is—and I am not the only one—I mean, Tesla has been around for a while and when Tesla launched, they launched with a roadster that was hundred thousand dollars or something.

 

Jim: The Lotus, yes, exactly.

 

Horace: It was based on the Lotus chassis. I think their prototype was even based on the Ariel Atom, so predating that even. So there was an English chassis as well and then they went to Lotus and then, of course, the problem was that it was very expensive and so when Elon Musk was asked about this, he said all technologies begin with early adopters who are usually wealthy and willing to pay for the innovation at the beginning. So his point of view is very much the opposite of a disruptor’s point of view. The idea behind… even though people talk about this—you know, Tesla disrupting—it isn’t disrupting in the classic sense. Now, let me put some [inaudible 10:53] one, it may be that it is disruptive in terms of distribution; it may be that the idea of getting rid of dealers is a disruptive idea which allows them to evolve the product. Maybe the service aspect will be disruptive because then if you hire the cars transportation—but you don’t have to deal with sale, service issues and all the other thing because they take away and they make the car service. Then there might be opportunity there to redefine the value proposition. But fundamentally, the idea of changing everybody drives and the way transportation is handled isn’t going to come from a powertrain change. You know, there are in fact issues with this particular powertrain running headlong into obstacles. Not only do we have problems with filling stations, problems with range anxiety, problems with weather and applicability and all types of driving everywhere. They build these cars to solve too many problems. I think the more interesting approach—and this is what I would call the disruptive approach and, by the way, I would love to make this as a check list, so number one—capital deployed, Tesla; column one is Tesla; column two is the alternative. So column one—Tesla; capital deployed, line one—billions of dollars, alternative millions of dollars, okay? Let’s go down the list.

 

Jim:  He has Wall Street on his side these days too, certainly.

 

Horace: Yeah, target market—rich people, Tesla. Poor people—column B, okay? Third point—size of vehicle. Huge or—I would say even before—it was small, but essentially it was a toy. It was not meant to be utility-driven.

 

Jim: There was a marketing exercise, sure.

 

Horace: Its utility and prestige. We can even call that as the next object, you know, the next thing. A job-to-be-done of Tesla from day one has been to make rich people feel good about the fact that they destroy the world. And so you go down that list and also, you know, foothold market—the US. And you go down the list and you think, what is the exact opposite of what Tesla did? And you put that in column B. And by going down that list you will actually create a disruptive idea.

 

Jim: So let me pop the balloon. So why didn’t Tata’s Nano or the Renault Logan—why have those things not taken off? I mean is there a lack of infrastructure, is there…

 

Horace: I actually think that they haven’t been thought through in a system-wide fashion. And here is what I mean. [inaudible 14:05] actually has relation with Tata Group. At one point he was in the board of Tata Consulting. So I don’t know, I haven’t asked him, but I assume he has given some input on the Nano. But the problem is that, again, it’s product-oriented. It’s not the entire process—or I even say beyond the process—to rethink automobiles, you have to rethink all these things on my long list. Where does it take a foothold? Now one thing is, it is in India, but the company building them is an incumbent in India that has already one of the largest market shares of automobile manufacturing in India. So if you look at the percent of cars produced in India, the Tata Group—if it’s not number one—it’s certainly in the top three. The next problem is that they repurposed not just their business model; they repurposed their plants, their designers, their engineers, their production people. They built a new plant for the Nano. But it was on a blueprint of all the other plants anywhere in the world. You have to rethink at the very-very bottom the idea of what manufacturing actually is. There is one example I’ve seen of rethinking of the manufacturing process and that’s BMW’s—is it iDrive? Or not iDrive, I…

 

Jim: I City or something…

 

Horace: I Something… iProcess, I don’t know what they’re calling it.

 

Jim: Of course, their price points are not exactly emerging markets either.

 

Horace: Right, but that’s because you’ve got to go down this check list. They’re launching by building factories in Germany to make cars for Germans. Now, if you are going to do this right—again my idea would be, yes, the India part was the right thing to do, but the wrong thing was doing it using a large integrated plant. The better thing to do was build a cottage industry where people make parts for cars and then they get assembled in an almost do-it-yourself fashion. That is as low as possible. Not even the BMW vision changes dramatically the whole idea. So here is my dream of a new car metaphor because, again, we’ve seen this in computing—computing went personal. And computing went from something that only IBM in the most complicated and expensive way could make computers, down to a hobbyist who could do it themselves and that happened very early on. In the 70s and 80s hobbyists could make computers because of microprocessors and so the thing modularized once the microprocessor became available and so we haven’t seen anything like that in the auto industry. Of course, you have people putting cars together on their own, but first they’re discouraged from selling those cars because regulations say you cannot be a car manufacturer without getting the car certified and all these other things. But also the safety requirements and all these other things preclude someone from being a do-it-yourself car maker. And so this is where emerging economy is exciting because the components have been modularized to the point where you can buy them off-the-shelf. The body panel… here’s the other thing—when you look at the way a hobbyist would build a car, as a kit car, they would start with the frame. Usually it’s either body on frame or it’s a tubular exoskeleton-type thing; I don’t know the exact term for it. But the way cars are made in mass production, they are done as a unit body stamped sheet of metal welded by robots, painted and so on and so on. So the process of building cars is done the same way everywhere in the world when you’re dealing with mass production. And then the hobbyist model—which is like putting it together from a kit—you might welder a few things together, but it’s not going to be done; you do it in one off. What I’m struggling with… and I think the exciting thing is, what if you could create a hybrid between this two? Well, you could manufacture do-it-yourself cars on the large scale where the components don’t need a steel stamping press; which is, stamping machines are sometimes the size of buildings. They are probably the most expensive part of the factory. One data point just to give you an idea: I was reading an article about a new plant that was being built in Japan for Toyota—a new Toyota plant. There haven’t been very many in Japan, by the way, for quite a long time. There was a big deal that Toyota built a plant in Japan. And they did it as cheaply as possible and they said they were trying to move it also to the US and built a US plant along the same lines and an [inaudible 19:17] Toyota said that 60—was it 60 or 40? Gosh, I don’t remember exactly, but a significant amount of the cost of a car is paying back for the manufacturing plant.

 

Jim: Sure, massive capital.

 

Horace: So a multibillion dollar plant requires you to, sort of, mortgage your production to it for a long-long time. So a car for example that costs 15–20… I don’t know—cars don’t cost 15,000 anymore, do they?

 

Jim: 25.

 

Horace: 25,000. You know, like maybe 10,000 of that is actually paying back the mortgage on the plant.

 

Jim: It’s like an Intel fab, billions for the fab.

 

Horace: Exactly, exactly. So when you get into these car structures, you have to ask, could there be a better way? Could you squeeze that down so that it doesn’t cost billions, it costs millions? Tesla said… probably they didn’t even ask the question. They didn’t ask. He said, “Oh, we wanna make cars. So let’s call… does anybody know anybody who knows how to make cars?” So you pick up the phone, you find—because you’ve got money; you’ve got all the resources in the world—you go and get the best guys and the best guys are gonna tell you, “Yes, you need two billion dollars to make a plant” and then they bought the one in Freemont and [inaudible 20:32] car manufacturers and all the pomp and ceremony that goes with that. Instead of sort of saying, “Well, you know what? We don’t have the money; we don’t have any smart people that know how to make cars; let’s figure it out how to do it without that” and, by the way, the Chinese and Koreans and everybody—even the Indians who got into this business—they all do the same thing because the government said, “Yes, I think we should have a car industry” and so they brought on board the smartest brightest people and said, “Ok, you, you have the franchise, go forth and make a car industry for us” and they pick up the phone, find out the best manufacturing experts and, you know, let’s start building car plants and they’ll use the same blueprints as they did everywhere else—Canada; doesn’t matter; Iran.

 

Jim: It’s about jobs; it’s not about the cars at that point for the governments. They want the jobs and the taxes.

 

Horace: Exactly. No one stopped to say, “Wait a minute, is there another way to build cars?” No, there’s one way to build cars and that’s what all of us are using and you can prove it because it’s so commonly done and there’s no one; there’s no dissenting voices to this subject. And that to me is the frustration that it is very definitely possible. We have existing proofs all over the place—especially in the technology industry—and you can make stuff differently. And why should cars be exempt from this rule? Now one thing that may happen that could be exciting is this—if we have manufacturing technologies, you know, like the do-it-yourself… these…

 

Jim: 3D printing and all.

 

Horace: Yeah, they call it 3D printing. 3D printing of certain parts might change dramatically, you know, we need to get into larger stuff that needs to be made. But if you could use steel tubing for your frame; if you could use a composite material for your body panel; if you could use off-the-shelf—either electric or gas or Diesel, doesn’t matter—the powertrain is like picking a CPU for your…

 

Jim: That could be purchased, no doubt.

 

Horace: Yeah, exactly, so there are plenty of companies that make them as modules. So the only problem is how do you do the final set assembly, how do you deal with issues of painting, how do you deal with issues of regulatory approvals and so on and so on. By the way, so I mentioned also this Gordon Murray guy who has put forth some ideas. There’s not much to read, so I don’t know how far he’s on this trajectory, but he also has the right idea that says—I think he calls it iStream. The whole idea is to think from the very beginning. And it makes sense because he came from car racing and in car racing they have essentially a custom building process where—although you can make a run of cars—each one is hand built and it’s built from a design that is really light; that is very modular and it is optimized not for throughput production, but for performance. And if you borrow the best ideas from racing and then apply a little bit of mass production magic to it, I think that process could be a very exciting idea. The problem is he’s gonna run into a problem trying to sell this idea to existing manufacturers who have committed to workflows; who have committed to car structures and who have committed to markets that steer them away from it. That’s the whole problem. To break this knot, this impossible barrier, you need to take the idea outside of the context, which I think is into developing markets; to try to create indigenous production; to do something along these lines. And it will take a long time. It won’t seem like there’s much progress but, anyway, to me that’s the full stop.

 

Jim: So why have some of these niche assemblers not expanded? You have one of them, I think, in Finland [crosstalk].

 

Horace: Well, it’s only a contract manufacturer. That’s another thing. Very, very rare to have contract manufacturing in cars. Why? Contract manufacturing meaning that ok, you pick up the phone, you have a design—maybe you made the design yourself or you hired someone to make your design as happens in computers. In computers, HP doesn’t do anything. HP picks up the phone and says, “I need a computer for next year or the year after that” and somebody then [inaudible 25:16] presents them with the design and then they say, “Ok, I’ll take that design, now please arrange manufacturing” and somebody goes and picks up the phone again and calls the contract manufacturers. So you have contract designers, contract manufacturers and then somebody else does… you probably contract support and sales. So the company in the centre, HP or Acer or any of the brands we see on the computer, don’t ever touch the product.

 

Jim: Right.

 

Horace: They are not involved. I think one of them was famous about actually being proud of the fact they don’t touch the product at any stage of its value, of its existence. All they do is hire essentially a project manager, so they manage the project and the brand. The same is now happening in TVs. Visio, for example I think it’s called or something like that—one of the biggest brands in TV today—has nothing to do with TVs. They don’t make them, they don’t design them, they don’t ship them, they don’t service them, they don’t sell them. They’re a couple of hundred people in an office in San Diego. That is the brand.

 

Jim: So the Boxter and the Cayman, for example, are assembled, some of them, in Finland.

 

Horace: So what happens is you have a few of these plants. So they’re like the Foxconn. The number of units that get produced this way globally for the car industry must be like in the tens of thousands. It may be more common for the trucks and busses, but I don’t know that industry well. If you focus on passenger vehicles—cars on particular—it’s unheard of. You’ve got these tiny, sometimes, you know… like if you have a product, in the case of the Cayman or the Porche Boxter, these were not fitting into Porche’s existing plants. The existing plants were set up for the 911 or the Cayenne or something like that. Those were running at full speed, so for them to slot in a limited production or a limited run of a product extension, it made sense for them to actually outsource it. But this outsourced company or contract manufacturer is really batch-oriented; they’re not continuous flow type-of-business, so they’re not going to generate large volumes. In many ways so is actually Foxconn. That’s how they operate; more in the batch market.

 

Jim: Right. Massive demand and then it goes away. But you would think that these guys that make the niche cars would have some experience in the contract or the supplier relationships to think differently about this. I am just surprised it hasn’t happened actually.

 

Horace: You’re right. So that’s possibly where the disruption could take root. Some contract manufacturer says, “You know, I’ve been doing this for other people; I’m at their mercy.” In fact this plant in Finland—they had Porche for a while; they had even Saab. A couple of years ago they did a couple of Saabs, then they got a deal with Fiscar and then that whole thing imploded and they had to lay off their workforce. Basically their pay plan run dry and they couldn’t keep the plant open even. And they should have been scratching their heads and saying, “Why don’t we create our own company; I mean, our own brand” and then probably someone smart would tell them, “You know how much you’ll have to get through? You’ll have to get through regulatory issues; you’ll have to find a way to the market; you don’t have the competency to do any of these things.” And they would just say, “Yeah, looks like mission impossible.” But if you are naïve enough and you were in an emerging country in which you would do this contract work and then you realize that there might be a local demand for something that you built yourself—maybe it’s a tractor; maybe it’s not even a car, you know; it’s a motorcycle; it’s a moped or something like that. A lot of that is going on in China now. But these guys who used to do it for somebody else decide that, you know, we can actually build a brand, we can actually build engineering, we can actually build find people to buy it. So this happens so many times in so many different industries. It’s a little bit boring to even go back into it. But that’s what’s not happening in the car industry and you are pointing out exactly why it’s one of these things where you have to go and do more analysis. My instinct says that there hasn’t been indigenous production because people are fearful. They think it’s too expensive. They think they need an integrated approach. Even if you ask someone in an emerging country, “Why don’t you build a car company?”, they will say, “Yeah, but even the people in this country they respect BMW; they respect Western brands, so if I introduce a local brand, they are not going to buy from me, even though it’s made here and cheaper and so on because they’ve been brainwashed to think that only foreign cars are good.” You know what I mean?

 

Jim: Of course.

 

Horace: There’s also counterexamples to that. Take the VW Beetle. The VW Beetle was the anti GM in a sense because when you look at their advertising, they celebrated the fact that they were quirky. They celebrated the fact that they were weird and they were an outsider and it didn’t conform to any of the notions of the time of being competitive. And they were great as a counterculture symbol; as a disruptive idea in the 1960s that, you know, a small car made sense in a big car country. You know, to every list of impossible goals and impossible things to overcome you have these examples in history where it did happen. And so you have to have faith at the end of the day. All the great bets are based on faith. The data will tell you not to do this. So, anyway, I don’t know…

 

Jim: One of the things we talked about a few months ago was the automakers missing the shift, you know, the position for the iPhone or apps and thinking that the car is the center point of the apps versus the smartphone or a tablet, let’s say. Is it possible that the value will change; the perception people have will change and car sharing or the apps… you know, somebody will—almost like iTunes on Windows—somebody will create a value model on top of the current industry and therefore make the entries more generic? Maybe that can occur.

 

Horace: That is, indeed, probably the most exciting way because an outsider will come in, look at the problem as an information problem not a transportation problem. They’ll look at it and say… This would be my dream. Someone would say, “You know, I see the job to be done here. The job is people don’t want [to own] cars. Ownership of cars is not just expensive but it’s actually adding a lot of waiting into your life. Waiting in traffic, waiting to park. Waiting at line in the DMV, whatever. You’ve got all these hassles associated with cars… So we’re going to solve your problem of transportation by providing you with less waiting.” And then they say, “That’s an information problem because knowing where the cars are and so on and allocating the car.” The car at that moment is ‘off-the-shelf’ and you say, “OK, but we’ll just pick whatever cars are available. Oh, if it’s electric it’s even better because our economics are going to be better with electric cars. It won’t break as much and so on.” The innovator in this case looks at it as an information problem, attacks a job to be done that’s on that, uses off the shelf technology which is just a city car with electric drive, and then goes back to the manufacturer and tells them, ‘You know what would make them better is if we had this, that, or the other thing.’” And then the manufacturer would say, “Thanks, we’ll get back to you in five years.” You don’t have that time. So you say, “No, I want to have it done in the next six months.” Then you start to think, “You know what? Maybe I can make the car myself.” That is really the spark of a potential story… And that’s the cool thing is it’s the same thing that happened with smartphones where Apple said, “In order for us to get a better phone we need to solve these problems and that may involve getting into new businesses.” You get into apps. You get into services. You get into Siri. You get into… Suddenly you’re solving a whole set of different problems.

 

Jim: Owning and leasing capital equipment.

 

Horace: Yeah. But the fuel was the huge profit you got because you solved a job. The fuel to get you into the new industries is supplied in ample quantities, beyond what you can absorb. And so suddenly, this guy was making a business selling information, really, to consumers about where to get a car at a time when they need it and not to get a car when they don’t need it. That simple shift makes them, hopefully, wealthy beyond their wildest dreams. They say, “You know what? I have so much capital now I can buy a car company.” And they’re actually quite cheap to buy because, as you know, they don’t make much money. And so, they’re usually wasting assets.

 

Jim: Right.

 

Horace: You go in and they could go and grab Saab, for example. Boom, just pick up Saab for peanuts or pick up a brand out of the UK or something as the Indians did. They bought Jaguar. They bought Land Rover. BMW bought Mini, which was essentially a defunct brand in the UK, as well. You can get that and you get the brand and you get some tooling, some facilities, some distribution network, whatever. Throw most of it away and rebuild the business along the lines that serve this need. And so, they would then create a niche for themselves in sort of electric vehicles optimized around the job to be done of not being owned. And then they have great connectivity that they have built-in mesh networking that they are build around the information problem. So they have perfect metering; they have better metering than taxies do, right? They’re getting down, getting the resolution…

 

Jim: That’s what’s already happening. I mean Anstar and others are selling their data to insurance companies. There’s deals back and over risk management, so for this revolution to happen—for this disruption to happen—do self-driving cars have to become available first given the regulatory issues or is there enough…

 

Horace: Self-driving is one of these things that I think is a little bit cramming, as they say. It’s a technology that has been crammed into too early a stage on the evolution of what can be absorbed. The problem, obviously, is because not only does it have social impact; not only does it have all kind of liability issues, all kinds of incredible problems in terms of fitting in to the existing networks; but fundamentally I think it may be simply too early. Technology itself is not the problem. The best example might be where… here you have great computing power and great technology and so it’s sitting on a shelf and you say, “Let’s apply it to the problems of cars by making cars drive themselves.” Now I am going to take you back and this is one of the great stories from Christensen, which is the story of the transistor. And the story of the transistor is that when it was developed, it was the idea of solid-state amplifying and solid-state gates that were driving the main application of that… The problem that the transistor solved was amplification and that was really radio and later the TV. And so when the transistor was invented, the guys who were making radios and TVs looked at it and said, “We can’t really make use of it because the quality of amplification is far worse than the tubes that we are using.” But they said, “But we are not ignoring it.” so they took it under R&D development and they began to develop better quality transistors and they spent billions on semiconductor research and solid-state but not bringing anything to market. In the meantime, the transistor was taken by hearing aid companies, by these Japanese transistor radios—which are very poor quality radios, which didn’t have a lot of amplification because you had a single earpiece to listen through. There wasn’t a need for filling a room with sound, which is what the radio market at that time was all about—the console radios and the console TVs which sat in the living room. And so what happened is that the disruptive approach came via a completely different track, not through the existing industry. So my point is that replace transistors with computing technology, with algorithms, all the clouded, all the stuff that Google works on and you say alright, so Google is taking that transistor and trying to apply it to the car today and there is going to be development for decades trying to make it work. In the meantime, somebody takes the information technology and says, “We’re going to make the equivalent of hearing aid or transistor radio, not to make cars drive themselves, but rather we’re gonna solve <<Hey, how about that cars are going to be available when I need them, right? I’ll drive them, but please tell me when and where I can go get a car and I am willing to pay for not owning it.>>”  That’s the solving of the problem and then those people who took that trajectory outside of the existing value network and the existing definition of what a car is and then they might actually solve the self-driving problem, but because they will take it in incremental steps. So one of the things obviously a smart car would have is self awareness in terms of where it is and so on. Maybe it sends you messages, maybe it begins to communicate with you in ways and help you get the job done. And maybe in some cases it will simply be inside of a parking facility and they will just drive themselves from its parking spot to sort of become a valet car. I mean, imagine instead of having self-driving cars, how about self-valet cars? There is an interesting problem, right? So you drop off the car in front of the building and it drives itself into a parking spot. It’s not building a railroad across the continent; it’s simply getting a small job done and it’s likely to learn from that to become better and better at doing it. And by the time it evolves into being a self-driving vehicle, they would have solved all the right problems and they would have ignored all the impossible ones. I’m thinking that’s how it should go.

 

Jim: There is an analogy to that. Maybe 10 years ago there were several startups trying to create tiny point-to-point air routes. One of my friends was involved in one. You know, where they had this whole idea of small jets, small planes…

 

Horace: Yeah, air taxis.

 

Jim: The whole thing, right. And I think it was a guy, I think from Citrix, can’t remember. He put a lot of money into it and, of course, he saw it as a big math problem, which it is in some ways, but just the economics never worked [crosstalk].

 

Horace: The downdraft in the market… in the whole economy, because a lot of customers would be somewhat more wealthy. I remember because Clay was talking about this also a few years ago— the air taxi business—and suggesting that that might be the disruption to the airline industry because it was about making planes, taking the whole job to be done to a new level. The problem still is that it relies on too many dependencies, one of which was actually… there have to be new types of airplanes, there have to be wealthy enough customers that it does work in the United States first and maybe not so easy to move to Europe, you know, and it’s got a lot of constrains on it. And there is one or two little things that might have killed it, you know, that it was too fragile as an idea although it had a lot of promise and I am not saying that this idea of an information-based car is gonna work out. I am just suggesting that a lot of the experiments I am seeing today have less of a chance even than these rather fragile ideas that we are putting forward here because these new fragile ideas at least have a disruptive potential; going against an entrenched system with cramming and brute forcing a solution into that. You know, it’s the Segway, it’s the Google Glass, it’s all these things which are “ambitious but rubbish at the same time”—to reuse a phrase from Jeremy Clarkson. They’re rubbish because they don’t work as well as the average person or even beyond a certain very tiny niche, they’re not gonna be useful. So, anyway, that’s my rent. We take it in so many directions. I think the job to be done… there are opportunities… I think we did a bit of e-mail exchange on this, on what would you look for in a new car and my answer to you—you remember—was that I liked the idea of making cars more to appeal to women, in particular if cars are…

 

Jim: Which was a factor in my purchase, by the way.

 

Horace: Yeah.

 

Jim: Absolutely.

 

Horace: You know, and the phrase I picked up was “a happy wife—a happy life.” It is one of these things that shocks me to this end because somehow women aren’t part of the discussion. They are more and more, but the car makers haven’t really nailed that question of…

 

Jim: Oh, definitely not.

 

Horace: What is it that… I know that there are many women who are working in car design—actually I met one once. I think maybe what they’ve been working on in sort of feminizing the industry a bit is exactly this—that we are seeing a little bit of that. I think the Mini brand—I mentioned it before, we have Mini now—the Mini brand is absolutely the brightest idea following this model. Mainly because when you look at—and I don’t know, there’s a lot of Mini fans out there and I’m not saying that there’s anything feminine about it, but it does break through to women and you can see it in the colors, you can see it in the way it is accessorizable…

 

Jim: Right, that was their key strategy; this almost limitless accessorization of the car, colors, you know, all these things.

 

Horace: If you looked through a brochure, like half of it is taken up by changing this or that little thing about it. Mostly it’s all aesthetics and, you know, having little labels. It has one on the car seat instead of having some kind of writing on it or something like that, but it has like a little clothing tag—you know, those things that come off—and says airbag on it. It’s got that tactile feeling; feels like an item of clothing. I won’t get into it. I’m not trying to sell Minis here, but the thing is that what I appreciated was that they understood that the job to be done is that you want to have a distinctive looking car that you can accessorize; that it also shows off your sense of style. It shows off your sense of taste and that is indeed the job that many women hire clothes for. They hire the clothes and their wardrobe and their shoes to show that they are competent in choosing clothes, you know; that they can put an outfit together and that it’s not just looking good and feeling good, but it’s a signaling method that “Look, I am…”

 

Jim: [crosstalk] And put together, of course.

 

Horace: Yeah, “I’m competent in this regard and you should respect me for it” and that’s… you know, men will do the same with all kinds of things, obviously. It’s not just a female-only job, but I’m saying that along the dimension of putting something together like that—and if you watch girls when they play, they also like to put things together and make an ensemble. That is one of the jobs and, as far as I know, only Mini solves it at this point and so obviously they become extremely attracted to it and—I don’t know what the numbers are, but I would be willing to bet and if you would drive a Mini, you start to notice a lot of other Minis just like in the Volkswagen you start to notice Volkswagens; but if you drive a Mini and you do see a lot of Minis and you look at the driver, I would say it’s 80% female. I just… that’s my impression, I could be wrong. And they’ll make a model that will be masculine if you wanted. Obviously the color changes and all these other things and you could make it a powerful version and all the other stuff. But that’s probably a small group relative to the ones we are really focused on just having a wonderful looking car. So anyway that’s one aspect of how you can take the car industry as it is but simply evolve the job to be done in a slightly new direction. And, you know, you’re dealing with 50% of the market in enabling that. And by the way, I’m sure Minis are often also second cars in the family so they wouldn’t be a compromise for the man because he would have also maybe his car. So anyway that’s just one thought I had about how you can solve the job to be done and I think what you see more and more with cars is positioning on jobs; or at least the clever ones are figuring out the jobs and not saying our car is a crossover for this or that demographic. They’ve created over time car categories, so if you ask any car worldwide, “What’s your portfolio?”, they’ll talk about… they all speak the same language, “Well it’s a compact segment car” as if that was somehow a universal language that everybody understands; that everybody consumer thinks…

 

Jim: Manufacture talk.

 

Horace: Yeah, I’m gonna go buy myself a compact segment. Or, or…

 

Jim: Crossover SUV, right?

 

Horace: Crossover SUV. So you see the copycats going on, you know, so you have somebody build, “Oh, we don’t have a minivan; oh, we’re going to have a minivan now because somebody else had” and then somebody builds an SUV, so “Oh, we gonna have an SUV”. So the establisher category is that there might be a proxy for a job, but eventually they all begin to say you have to have that category in your portfolio otherwise you’re… so what used to be in these categories are out of control. I mean, look at BMW, ok? BMW suddenly…

 

Jim: Car for the niche.

 

Horace: They’re all over the place and they have to have an SUV; not only one, but several; they have to have a crossover; they have to have a…

 

Jim: Station wagon.

 

Horace: Porche has to have one too. They have to have a tiny little city car, they have to have the mini for some things, but they also have the one series. Then they have to have a two-door, they have to have a four-door; on and on it goes. And then Mercedes did the same and so the Germans are like in lockstep following the same formulas and—whether you are French or German—I am sure you don’t know much about French cars, but you pretty much see the same thing. And so they’ve all lost any Frenchness of them, you know, or German because it used to be that German meant something and it meant performance, it meant luxury, but it meant mostly engineering. And now, you know…

 

Jim: It’s a brand now, mostly.

 

Horace: It’s brand and they all have the same bunch of cars—same sizes, the same cookie cutter as everyone else. And they are all built using the same process and, what’s more, if you start to look—and I don’t have proof of this—but if you start to look at the factories, you see the same tools are in use by every single car factory in the world and because the same tools are in use, it’s the same process; it’s the same car structure; it’s the same quality, so you can’t differentiate it anymore. So you want robots, you got robots. The same robot company will sell you robots for any car plant in the world; same sheet stamping; same painting process. It’s all certified so it doesn’t pollute, so you have to have the latest design that’s… all the governments got together and they all agreed it has to be water-based process. So you have this multiple hundreds-of-feet-long process for painting cars. And the same supplier supplies—probably there’s two suppliers in the world that can deliver that type of paint shop. So the paint shop is put in every factory in the world and that’s why they all look the same, they all feel the same.

 

Jim: So let’s sort of wrap up by just taking the inverse view. Again with the growing urbanization, the growing use of public transit by young people, in the States you know we have this thing—maybe you’ve seen it—Megabus. They, you know, $25 I think you go from Chicago to Minneapolis; you can ride it, you know. In New England there’s a lot of them, but they’re big double-decker buses that have WiFi.

 

Horace: Yeah, they took off first I think actually in the New York–Boston route.

 

Jim: Yeah, so they’ve grown. If you think about the job to be done, “Hey, you know I have my smartphone; I have my tablet; I am going to consume; I am going to create things; whatever I am going to do; so that is more important to me than sitting behind the wheel and dealing with traffic in these urban connections” let’s say.

 

Horace: Yeah, public transportation could be another thing. This has also kind of run into a wall. Public transportation in most of the world is quite good. We have a lot of options in Europe for example. In the US it’s stagnated and atrophied and in fact often regressed much to a lot of political debate around that. Unfortunately it’s missing the point. A lot of it about the economics of ridership, but in the end of the day you have to have the job done and, because of the way the infrastructure is laid out, the job cannot be done by public transport. But again there is an opportunity for someone to figure something out where you go to a hybrid model, where you figure out a new thing like communication infrastructure. If you make that available, people will commute more, because they’ll say “I can be productive during that hour on the train, bus.”

 

Jim: Exactly.

 

Horace: And I too… I have the thing that I could take my son to school driving or I could take my son to school in a bus. And the bus, though, takes about twice as long, maybe even a bit longer. So I would lose an hour a day probably if I took the bus. But it’s more comfortable in some ways because I don’t stress over the driving; I don’t stress especially when the weather is bad. But I feel like I’m wasting my time there, so in balance I still would take the driving option. But if a couple of things were tipped against driving, for example a congestion charge in the city…

 

Jim: Right.

 

Horace: Right, that would drive my costs to the roof. Second would be if they added WiFi on to the buses sufficiently and provide it—although there is 3G, there are some issues with using a computer in the bus. But if they architected it in such a way; give you a little bit more room; give you a little bit more or maybe a power socket or something like that; suddenly people will rethink public transportation and they’ll think of it as productive time and that’s where one wonders why aren’t they doing this. So yeah, focus on the job, do the proper research, serve the people, don’t ask them how much that would cost. Money is never usually the only thing that people care about and maybe the only thing that you can measure because it’s something easily surveyed and you can easily capture data on that. But the real problem is usually deeper and the calculus that takes place in a person’s mind is complicated—the decision process “Do I do it or do I not do it?” You have to sit down with somebody work through that in a long interview process, with an inquisitive type of mind that gets you to the answers and do it a few hundred times to get a good sample; then you paint the right picture and not much gets done that way so anyways…

 

Jim: I think we’ve covered a lot here, Horace, and probably we need to talk about bikes as well. I have a few things on that maybe…

 

Horace: Bikes, cars, buses, trucks—all these things, they all depend on roads and what few people talk about is how are roads built, how are roads funded, how are roads designed and that all these things—the design of infrastructure—cannot happen independent of the vehicle or the vehicle cannot be rebuild and redesigned without understanding the infrastructure. And this is why the world would think of it as already modular and we think cars are plug-compatible with roads, but they’re so plug-compatible that no other car fits in, right? And then we realize that, hang on, that means we can’t put bikes on the road because we don’t have places for them. We haven’t built roads to accommodate bikes and when we try, we get into all kinds of problems, and then the bike lane issues and all that stuff; yeah, so you’re right, we should talk about this next time.

 

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Episode 1, new version

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