Hey Detroit: Wake Up and Innovate

For the first time in 30 years, the automotive market is wide open for innovation and market share gains. So wake up Detroit, and give us a 500,000 mile car that can be easily serviced, and which comes with a warranty linked to a service contract.

Once upon a time the most innovative car in the country was the 1967 GTO. Designed by famed cocaine dealer John DeLorean, the GTO was a quantum leap in driving fun delivered by putting a huge engine on a relatively light chassis. I was driving one of these beauties in the 70’s, when along came an “Oil Crisis” and a stock market crash.

The fat gasoline prices and skinny paychecks of the 70’s opened the US car market to strange little cars from Japan that were far from perfect, but cost an order of magnitude less to own than their Big 3 competition – they cost less to buy, less fill the tank and less to maintain. They even had slower deprecation rates because their value proposition was durable. Toyota, Honda and Nissan didn’t deliver a quantum leap in technology, but they did deliver a quantum leap in value proposition. This strategy enabled them to build great customer relationships and push the Big 3 onto the market share curb.

So here we are again – Oil crisis + stock market crash + skinny paychecks. The door is open for a quantum leap for market share. The Big 3 are now the Big 8 – all of them are saddled with strategies built around fun and fashion and none offer a quantum leap in value proposition. Innovation seems to have taken a uniform meaning – “hybrid.” From an engineering perspective, hybrids are cool – like fusion energy – and maybe some day they will be standard as they become less toxic to produce and maintain. I am certainly not against engine innovation any more than I am against airbag innovation. However, these innovations will be irrelevant to competitive success. The winning quantum leap strategy will focus on a radical improvement in customer value proposition and total cost of ownership.

My suggestion – the first step is to design an efficient car to last 500,000 miles. We have the materials and technology. Isn’t it funny that over the last 30 years of radical technical innovation, no company has delivered a car that lasts longer than a 1979 Volvo? Of course, longer-lasting cars would shrink the new car market – at my 500K target the new car market would shrink as much as 80%. We have seen this movie before – it is tough medicine but much better to go first. BTW When you take into account total energy footprint including production and total waste– the 500k car is the huge leap forward in green footprint.

Car service is a major component of customer cost, supplier revenue and therefore customer relationship. Trying to maintain today’s cars for 500K mile would break the bank. Today’s cars are designed to run without service for 50K, then far apart in very expensive fashion. To make a quantum leap in customer value, cars need to be designed to radically reduce the cost of service. Again, this appears to be a suicidal decision that will erode the very profitable service and parts business for the Big 8. But imagine you could deliver a 500K car that was designed to reduce service costs and could be sold with an attractively priced 8-year warranty & service contract. Sell a car and lock in an 8 year revenue stream without additional sales/marketing cost. The total market shrinks, but market share could be captured and margins should improve!

The American car companies may be in more trouble than their competition, but the entire industry is facing a new economic reality. It would be great if they could take advantage of this shift an use technical and economic innovation to get back in the game.

Chris is the founder of Bulger Capital, before which he spent three years at Needham & Co. as a senior partner and head of technology banking. He also is a Robbie Stephens vet, having run its Boston office and its global technology banking group.