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5by5 | The Critical Path #39: The Locus of Power

Dan and Horace take a nostalgic trip through the automotive industry. Horace asks why should a 20 year old car (which he happens to own) be replaced? Why are cars built to be disposed of and why aren’t they meaningfully improved based on new jobs to be done? In this episode we look at the auto industry as a proxy for other “network-based” industries which reach plateaus of innovation and can go no further. Plus, Horace challenges readers to guess what car he drives.

via 5by5 | The Critical Path #39: The Locus of Power.

Show notes:

(Answer to the quiz question here).

  • kankerot

    This nonmenclature of “new jobs to be done” is simply satisfying a need which currently may be unmet or not fully met.
    Anyway I assume you own an old car for its classic nature than it being your daily drive.

    • http://www.asymco.com Horace Dediu

      What leads you to make that assumption?

      • kankerot

        I take it you value efficiency, driving a 20 year old car as a daily driver is not efficient petrol wise, or parts wise if it breaks down. Not sure of the requirements for annual legal checks either in Finland. What about insurance costs etc. I personally would not drive a car over 5 years old.
        So I assume you have an old car because you like its design and you use it very infrequently.

      • sribe

        ??? True, old cars are less fuel efficient. Beyond that point, you run straight off the rails. Old cars are often less expensive to repair, because parts are simple, mechanical and discrete where on a newer car you often have to replace some integrated module. Insurance costs are of course much less. In the US, old cars have to meet old standards for emissions and safety, and I seriously doubt any country has inspections that amount to forcing an upgrade schedule.

        My main car is now over 10 years old. It has never “broken down”–the only repairs I’ve made in the last several years were brakes.

        Never driving a car over 5 years old will, over your lifetime, cost you a TREMENDOUS amount of money. If you want to spend that for your pleasure, that’s your choice. If you think you’re saving yourself money though, that’s foolish.

        Now, for an infrequently used vehicle, I have something that is over 50 years old–a real collector’s item. But that’s a different story.

      • kankerot

        Parts might be simple but are they available? What is the downtime in finding a part?
        Well I think before you jump to cost conclusions if I bought and used an electric car in London on a daily basis I would be saving alot compared to a 10 year old car with the congestion charge alone!
        Don’t forget the legal and tax implications / benefits of new cars.

      • sribe

        Yes, parts are available–readily. Jumping to electric right now might make financial sense. Upgrading at least every 5 years most certainly does not.

      • http://www.asymco.com Horace Dediu

        That was the point of the podcast. The decision on availability of parts and the taxation model of vehicles are indicators of an industry in crisis.

      • kankerot

        Not heard your podcast. What exact taxation model did you refer to is determining the industry as being in crisis?
        Also crisis? Is there a metric you used to define crisis or is it just subjective?

      • http://www.asymco.com Horace Dediu

        Car taxes in many countries are designed to promote consumption, especially if there is local car production. Case in point is taxation on personal CO2 emissions but not taxation on industrial CO2 emissions. The idea behind car taxes is to scrap less fuel efficient cars while encouraging manufacturing of new cars. But manufacturing is extremely costly in energy and carbon emissions. Perhaps much more costly than the marginal output from a maintained and inspected older car. This encouragement of consumption is contrary to most other policies which try to deter it in the name of the environment. I should also point out that commercial vehicles are exempt from this treatment. Trucks and buses and ships and planes and even taxis have lives an order of magnitude longer than consumer-marketed vehicles (if not in years then in utilization) and yet use the same technologies.
        An industry in crisis is one which is not being disrupted.

      • kankerot

        So how would you define an industry being disrupted? Is the oil industry in crisis? The pharmaceuticals industry? Etc

        The argument re commercial vs consumer vehicle taxation also has has an element about governments raising taxes via consumers than behing business unfriendly.

        I was referring to it being tax efficient to lease a new car rather than buy it outright.

      • http://www.asymco.com Horace Dediu

        Disruption is well defined by Christensen et. al. The easiest indicator to observe is turnover in the roster of market leaders. Industries in which majority market share is held by the same set of companies for decades, even centuries are bereft of disruptive innovation.

      • kankerot

        This assumes disruption is in itself a good thing. But why is that? The problem I have with the theory of disruption its not a panacea.

      • http://www.asymco.com Horace Dediu

        It’s not a good thing for everybody and is very disturbing and traumatic to many. It is, in fact, often made illegal through regulation and legislation. And yet, it’s the only source of unforeseen value creation.

      • http://www.asymco.com Horace Dediu

        I drive my car every day and in winters that are very harsh and long. I’m intrigued by the assumptions you are making. I’m trying to understand how these misconceptions begin. Insurance is cheaper, parts are cheaper, the car is lighter and has adequate efficiency, inspections are the same and I’m happy to spend a fraction of the cost of a new car’s financing on the service of a mechanic who explains to me how the car works.

      • Kizedek

        I live in the Netherlands, and when I am not cycling about I also drive an old diesel car… and I find none of your assumptions to be true. It is the best car I have ever had (bought it three years ago).

        My car is a thirty-year old Merceds 240D, about 60hp. The thing purrs like a kitten; sounds great, too, since I just had the valves tuned (for free because I do my mechanic’s website).

        Keeping up with repairs couldn’t be easier — I am no mechanic, but have enjoyed getting into the engine on this car (it’s very simple, straight four, no computers). I can find anything I need at salvage/junk yards and replacement parts are cheap and easy to find (Bosch makes new equivalent parts for most items if I want something new).

        This car will run forever: they are on record as lasting 1Million Km. Due, apparently, to the lower horse-power / compression putting very little wear and tear on a superably engineered engine. And the mileage is good, maybe 30 miles to the gallon. I don’t drive every day, but only because I work at home.

        As far as taxes and running expenses — I couldn’t be happier, that’s why I got it. As an “Oldtimer” (over 25 years), it is road-tax free. This saves me about 150 USD per month! And insurance? An old, solid, slow car is cheaper to insure, not more expensive (don’t know where you got that idea). My car is insured at about 10 bucks a month.

        It passed the yearly road worthiness test with flying colors, including emissions; and as a bonus, once the car is 30 yrs old, the test certificate is good for two years in the Netherlands. I would be very surprised if the road tests in NL, UK and DE (where there are roads without speed limits) are in any way less stringent than those in the USA.

  • Chris

    Horace–After listening to the podcast I want to characterize markets with embedded distribution networks as brownfields and markets of nonconsumers as greenfields. If this is the case, then:

    Would it be correct to say then that Facebook’s targeted advertising model could be more successful in emerging markets where there is not the same incumbent advertising distribution to compete with, where people are happy to receive any new information about products rather than the alternative–nothing at all.

    • http://www.asymco.com Horace Dediu

      That’s a very keen observation. Facebook and Google both attacked the advertising industry by capturing new money rather than trying to shift the ad budgets of brand managers. I don’t have statistics on budgeting but the old ad agencies and their value network have not embraced the web and Google/Facebook with enthusiasm. The disruption was in finding underserved advertising needs. Discovering a way to address advertising non-consumption should be foremost in the strategy of both FB and Google. Analyzing their respective architectures and business models should help in understanding the trajectories they’re likely to follow in this regard.

  • Jony

    Horace seldom drives but when he does it’s a Mercedes Benz cars from the early 1990s.

    • http://www.asymco.com Horace Dediu

      Touché.

  • http://twitter.com/toraharris Tora Harris

    Nice discussion on the Critical Path.

    I am 33. In the past I really liked cars, but now not so much.

    Here is my observation.

    The whole “car thing” has peaked in the US.

    What defines the design of a car is the shape of the roads, fuel price, speed limits, safety from crashing into other cars, emissions, sizes of parking spots, insurance etc…

    The demands of the highway network ultimately sets the standard and limits innovations. If your want to get on the highway, your car must attain a high speed and be safe in a crash. With those 2 constraints, the car’s design is locked and also so is the minimal entry price for a car which can achieve those standards.

    Turns out, an affordable solution to this problem has been solved 25 years ago.

    Further advancements in technology are just used to keep up with changing regulations and adding “fluff” to motivate people to buy new cars.

    Not considering which power plant, a car really needs to take you from one point to another safely, reliably. That’s it! In the past this was a challenge, but now the technology is much more settled. Almost every car can do this job well, the “transport feature” of cars have been solved.

    Once that happens, the product differentiation starts becoming about trends and fashion. So cars have this double duty – to get you from one place to another and proclaim your status when you arrive. Cars are very visible things unlike other appliances.

    The problem is cars have scaling issues. They gobble up all the resources like energy, land, the natural environment. To make them move as efficiently and cheaply as they technically can, you must kick out all other means of transportation… public transportation, cycling and pedestrian. The cost of keeping this network alive keeps going up and eventually gets passed on to the motorist.

    At some point, the cost to get on this highway becomes too high. Even switching to a more fuel efficient or electric vehicle will not work, because of other fixed cost just to operate any vehicle. That is when people will just change their location so they don’t often need to get on the highway. Then *puff* the need to own a car goes way.

    New innovations will accelerate this effect. For example car sharing like Zipcar which is in a way acting as our non-existing public transportation. People normally entering the car market will just choose to live in more densely populated areas and use other means like public transport, bikes or walking. Cities will be forced to build up the non-car infrastructure… which will attract more people into urban areas. So there is a cycle of contraction squeezing out the automobile.

    When people who normally should enter the car market decide not to get a car, no connection is established at that early stage. They are lost forever to the car industry. It is like young tablet users who may never interact with PCs or mobile phone users who skip past feature phone and go directly to more advanced smart phones.

    A lifestyle without everyone driving cars everywhere is actually the more advanced future. Everyone takes different times to get there. Places like Netherlands, due to resources and geographical reasons quickly jumped to this more advanced civilization.

    There is a basic need for transportation. Cars come to service, they do their damage, they peak, then they are driven away by the economics. New cars in the USA are just sold to replace old ones which normally work fine with a little maintenance. Manufactures will slowly have to look elsewhere to sell the romance of the automobile. At the moment, it looks like China.

    • http://www.asymco.com Horace Dediu

      Well said and well thought through.

      • kankerot

        These points all seem valid until you actually look at the economic implications. If people gravitate towards cities prices for accomodation shoot up so its a tradeoff of not owning a car.
        If you look at the problems withing the car industry they are – political- governments and the green lobby are against cars. Yet neither have provided a suitable alternative.
        Economic – it still cheaper for me to own and run a car than use public transport.
        Legal – car makers are being pulled in two directions at the same time. one the one hand they need to make cars safer which adds to their weight. On the other hand they need to make cars more efficient they do this either by using diffrent materials or investing heavily in engine technology and breaking systems.
        You could argue the same with smartphones – there is all this fluff to keep people buying the phones.
        “A lifestyle without everyone driving cars everywhere is actually the more advanced future.”
        I disagree there will never be a public transport utopia as peoples demands are and requirements cannot be filled by the one size fits all of public transport. What defeines travel is lowering the costs. passing the costs from the car to where you live doesnt lower travel costs.

      • http://twitter.com/toraharris Tora Harris

        It is true. The cost of housing in urban areas will increase, but everything you mentioned about the automaker’s regulatory burden only serve to increase the cost of driving as well.

        Your argument assumes that the cost of operating a car will remain the same. The precedent has been set in Europe for increased parking fees, congestion tolls and other methods to deter people away from using cars.

        As Horace spoke about in the podcast, increasingly we will have to look at the whole picture and the net effect of personal car ownership, not only the cost per mile to get around.

      • kankerot

        Compare the cost of changes in housing vs the cost of using a car – which has risen faster? Which has become cheaper?
        Travelling by car has become cheaper in real terms than moving into urban areas to live.
        I do not assume the cost of motoring will fall but the cost of housing in urban areas will rise faster then the increases in motoring.

  • http://twitter.com/andreionut andreionut

    I think buying a new car often (in Ireland and UK during the boom years it was every year) has more to do with personal image and status than practical reasons.

    I’ve heard people rationalizing renewing their car every year via leasing by saying that they will end up having a new car at the end of 5 years and maintenance is basically none (no oil, tires change), but if you do the math you realize that they would’ve paid for 2 cars in the process.

    If you start calculating the cost of having a perpetual leasing or loan cost and more money on maintenance it will always be cheaper not to pay leasing. Your car maintenance cost should not cost more than a a leasing or car loan.

  • Anthony Daniele

    I think this article brings together a few of the ideas you discussed on the show:
    http://www.energyboom.com/electric-vehicles-grid-energy-storage

    In short, the introduction of electric vehicles will add storage to the electricity grid, which will make small-scale renewables more attractive, bringing energy generation to the “edge” of the network as the internet did with communications.

    Coupled with the plummeting cost of Solar PV, this has the ability to affect the energy & transport industries quite considerably.

    P.S. There are also promising centralised renewable technologies that can deliver energy on demand:
    http://beyondzeroemissions.org/blog/spain-now-producing-24-hour-solar-power-110708

  • Mike Wren

    Horace, I do think there’s real innovation in the auto market, just not at the smartphone level. You mentioned Tesla and car sharing. There are also natural gas vehicles which are becoming more common because of the low price of natural gas, especially where there is a fleet with a central fueling facility such as with buses and UPS trucks. There is pricing innovation in the emerging market. The Tata Nano from India costs $3000. Three wheel auto rickshaws, often used as cabs, cost about $1500.

    A truly disruptive innovation would be flying cars. There are cars that convert into airplanes. There’s also a prototype flying car that uses four ducted fans called the Moller Skycar. This would require a highway in the sky with an autopilot so it would be safe.

    • Mike Wren

      I think soon it will be long haul trucks using natural gas (The Pickens Plan), medium term it will be natural gas cars, longer term it will be self driving cars and very long term it will be flying cars.

      • http://www.asymco.com Horace Dediu

        Flying cars and self-driving will require “network upgrades” and natural gas is sustaining as a powerplant technology upgrade. Network upgrades are usually intolerable in sufficiently advanced societies.

  • Oak

    Disruptors to traditional auto industry:
    Zipcar.com
    Car2Go.com
    Uber.com

    • http://www.asymco.com Horace Dediu

      These have the best chance at disruption but it’s still a slim chance. They are useful in small niches like urban areas.

  • http://aaplmodel.blogspot.com/ deagol

    “The saturation in the expansion of a particular development paradigm leads to a phase of structural discontinuity and serves here as a model to explain slowdown phases in long-term economic growth. During this period of structural discontinuities and economic volatility, the decline of traditional, and the emergence of new systems is initiated. This “process of creative destruction” may serve as a theoretical model for the transitions and changes within the transport sector in the future, acting as an essential and inherent part of the long-term evolution of our economies and societies. It is the crisis of the old that provides the fertile ground for the emergence of the new.”

    “Our transport infrastructure both records the past and shapes our present and future. It results from a long evolutionary sequence of growth and structural transition processes.”
    […]
    “Will our future urban centers lie around airports, how will they be linked, and how will highway bridges be utilized, once they are no longer needed for automobiles? There remain far more questions than possible answers, but as Francis Bacon said: He that will not apply new remedies must expect new evils; for time is the greatest innovator.”

    Grübler, A. (1990). The Rise and Fall of Infrastructures, p. 288. Retrieved from http://www.iiasa.ac.at/Admin/PUB/Documents/XB-90-704.pdf

    • http://www.asymco.com Horace Dediu

      I used this book to prepare some charts for Asymconf.