Who would have thought? Automotive start-ups everywhere, after half a century without.

Many clients seeking strategic advice ask me about the reasons for the sudden rise of automotive start-ups, how some even create class leading products, and what incumbent OEMs can learn from them.

Let’s dissect these questions in two articles. My focus in part 1 is: Why do we see more and more automotive start-ups, despite the high barriers to entry?

Since the 1960s until the 2010s hardly any new car company was established. Besides in China, initially by China for China, and some small niche specialists.

A few brands, yes. Offspring from existing OEMs - the three Japanese luxury arms Lexus/ Acura / INFINITI Motor Company, Hummer, Smart, Saturn came and went, BUGATTI and Maybach were resuscitated - all created to enter into new market segments.

The barriers to entry simply seemed too high: a high invest/ high fixed cost/ low margin business. $-billions and 10s of thousands staff needed just to develop and produce one single product, billions to keep it competitive over its lifecycle, billions more to build a brand and loyal following, then +/- 30% of your hard-earned revenue disappearing in distribution cost.

Who in her or his right mind would want to build such a business?

Yet, recently more and more new car company’s opened shop. For three key reasons:

1. Investors

With interest rates around zero % for more than the last decade, investors took higher risks investing in start-ups, hoping for higher, well, any return.

Major cash was and still is readily available.

A lot was made in tech industry windfalls, being re-invested in auto start-ups. Think

• Musk -> PayPal -> Tesla,

• Chuanfu -> Yadi Electronics (consumer electronics batteries) -> BYD,

• Bezos -> Amazon -> Rivian (if only as biggest investor).

Also growing national economies bet on the GDP-growth- and employment-potential inherent in an auto industry hub. With positive ripple effects, creating suppliers, research, infrastructure. Think

• China -> SAIC/ Dongfeng/ FAW as well as subsidies to many other Chinese car companies, or

• Saudi Arabia -> Lucid Motors/ Ceer .

Finally, climate change and the high-yield promise of a green economy attracted investors to EV start-ups.

Will the quickest growth in interest rates ever (U.S. Fed e.g. +5%p in the last 16 months) choke this generous flow of cash?

Certainly, it does already. E.g. EV truck start-up Volta Trucks with its promising market demand, strong product, and credible delivery concept was pushed into insolvency last month by a lack of additional funds after a supplier problem.

Five years ago, quickly finding the needed cash or a buyer would have been no issue whatsoever.

2. Consumer Change

Electrified and connected cars is what car buyers want.

Well, this is not completely true. Yet. Demand for EVs is still dependent on incentives. But the trajectory towards EVs is clear. Natural demand or not,

• legislation,

• attractive EV-products, and the

• push of the auto industry will eventually turn their investments in EVs into sales.

Also, because for Gen Y and Z

• sustainability is a key purchase criterion,

• full integration with their digital life a must.

Within the next one to three years, depending on forecasts, these two generations will be the majority of car buyers globally.

Other industries have shown us, whenever consumer behaviour is changing, start-ups have the best chance to establish themselves, look for example at PCs, internet, retail, social media, personal TV. While the existing players try to protect their business and products, which are based on ‚old’ customer preferences, start-ups can respond exactly to the changing demand. Especially when there are opportunities for disruption.

3. Disruption

Start-ups need to define all aspects of their business from scratch.

Strategy, financing, structure, staffing, processes, culture as well as products, manufacturing, marketing, services - everything starts from a blank sheet. They are well advised to define enough aspects disruptively, to create true USPs and competitive advantages against the incumbents. This is their only chance for success.

Rarely since Bertha Benz has there been so much opportunity for disruption in the auto industry:

• EV drivetrains at scale are new also to traditional OEMs. So start-ups focusing on these components have a realistic chance to come up with smarter solutions.

• EVs are also inherently less complex to engineer. Key components like batteries or e-motors are less character defining. Hence, can be sourced from a wide global network of suppliers, as an alternative strategy.

• Industry 4.0 allows for cheaper manufacturing or outsourcing to flexible contract manufacturers.

• Managing the product lifecycle is more efficient through software-over-the-air updates.

• Social media and viral marketing help build brands more quickly.

• Online, direct, or agency sales reduce distribution cost significantly.

• To manage and implement this leaner and meaner business model you need innovative talent. Who is more attracted to the agile, open, risk-taking innovation culture of a start-up, than the behemoths that at least they think are traditional OEMs.   

So, the past decade was a rare window of opportunity for new auto start-ups. A window that is closing, with money moving elsewhere and classic OEMs catching up to changing demand.

Next week I will analyse the amazing speed at which auto start-ups become competitive, even class leading, by having a closer look at Lucid Motors.

Then I will make suggestions, what the established OEMs can learn from them.

In preparation, why don’t you let me know in the comments what you learned from automotive start-ups.