Disruptive innovation: How profit pools will shift between now and 2035

In automobiles, profits will shift dramatically and come from electrification & software, from mobility services and value propositions built around data & connectivity.

And if they are unable to find competitive solutions, thousands of jobs will be at stake in the coming decades. But more important are the implications for our industrial policy which is being debated within the government, and, more broadly, the economic growth strategy of the country. I have drawn three specific implications which I pose as questions for our policymakers.

Recently, I was part of a discussion with a senior leader of a global automotive company on how the industry will evolve as four great forces—growing role of geopolitics and economic nationalism, digital technologies, China’s rise as the second economic pole shaping global rules, and the globally connected customer transcending national boundaries—collide to transform, perhaps, the most visible and global industry. The discussion was intense and eye-opening with important implications for countries like India which are at the cusp of the big push from low- to medium-income and are struggling for sustainable strategies to drive growth and jobs.

A significant part of the discussion centred around one slide in our presentation that showed how the profit pools will shift between now and 2035. Today, pretty much the entire profit in the industry comes from what we call the classic profit pools, consisting of components, sales of cars, after-sales activities, financing and insurance. By 2035, the share of classic pools could go down from 99% to about 60% as new profit pools emerge, driven by three major shifts in the industry. The first is electrification of cars. New components’ software and fully built electric vehicles (EVs) can grow to contribute 10-12% of the total industry profits. The second is the growth of mobility services, the fastest-growing profit pool which could grow from a near zero to close to 20%. The third pool of profit will come from offering services leveraging data and connectivity to the owners and drivers which again could grow from nothing to 7-8%. A caveat around these numbers: They are projections done by my colleagues in BCG based on specific assumptions around both economics and penetration of new technologies and their customer acceptance, but also on the government policies that can accelerate or slow down such shifts. So the exact figures could change but they are directionally correct for the conclusions I have drawn below.
This kind of radical shift in the profit pools over the next few decades is not restricted to the automotive sector—it is happening in industry after industry. The financial sector is ripe for this transformation. For example, digital payments services by companies with no presence in the sector is growing very rapidly globally and, depending on how fast the regulators move, profit pools in financial services will perhaps undergo an even more dramatic change than the automotive industry.

As I came out of the meeting with the automotive industry leader, I started reflecting on what such an industry transformation will mean for India where the industry is one of the more successful industries and where the country is globally competitive. It is important to do this ‘thought experiment’ given the intense debate around India’s GDP growth and number of jobs created in recent years as these wholesale shifts in industry structure have huge implications for our future industrial growth and jobs strategy. It also left me wondering if we are missing the wood for the tree—the fast evolving future while we bicker about the past.

The challenge facing the automotive company we were meeting is that many of the potential winners in the new profit pools are non-traditional players of the sector. The war for the EV profit pool seems to be going China’s way, like it did in solar. China saw the industry shift early, as the country made the critical strategic bet in their industrial policy to build a dominant global position and orchestrated policy measures cutting across ministries and states to support this goal. Global OEMs, even very large ones, recognise the challenges they face, and intense competitors like BMW and Daimler recently announced a collaboration to join hands and share resources and skills to be able to develop a competitive offer in this evolving market. In the mobility business, the big players (and investors) are all non-Indian, and even India players like Ola have large overseas investors. The picture in the global digital services from data and connectivity value pools is even more stark with ‘digital hegemonists’ from US and China (the top 20 digital companies in the world are from these two countries) being in the best position to win.
So, what does it mean for India? Clearly, the homegrown automotive companies face the same challenges that global companies, BMW and Daimler, face which made them enter into the path-breaking partnership. And if they are unable to find competitive solutions, thousands of jobs will be at stake in the coming decades. But more important are the implications for our industrial policy which is being debated within the government, and, more broadly, the economic growth strategy of the country. I have drawn three specific implications which I pose as questions for our
policymakers.

India’s industrial policy has generally been developed along industrial ‘verticals’ but the new ‘horizontal’ technologies that will determine the winners (both countries and companies), like electrification, digital technologies, nanotechnology or smart materials, are shaping the new profit pools and transforming all industries. India cannot be leaders in all of them. So the first question is whether we are ready to make strategic choices in placing bets in building a globally competitive position in one or more of these new horizontal technologies? And if yes, what are the comprehensive set of policy interventions from partnership with countries, negotiations at WTO, setting standards which will support domestic development, research funding, investment support, and inclusion on college curriculum to tax breaks that are required to make it happen?

The second implication I have drawn is the importance of data (and skills to process it, interoperability across sectors, etc) and digital infrastructure in driving the industrial growth and jobs in the 21st century in the same way hard infrastructure, like roads and ports and rules for the physical flow of goods, did in the 20th. We seem to take pride in building new infrastructure only after the demand has overtaken the existing capacities. My second question is—can we afford to follow the same approach to data and digital infrastructure (both hard and soft, including the critically important regulatory regimes) in a piecemeal and reactive manner or do we do it strategically and proactively, even ahead of the curve, for our industry to become a leader and not a late follower?

My third implication is for our governance and policymaking model. If we look at the automotive example, the future value pools cut across many industries and topics—manufacturing, financial services, electrification, digital services, consumers, data and IT infra. The players are from different sectors as per today’s definition. So, which ministry should be responsible for policymaking in the automotive industry of the future? And this applies to every sector and topic today. Here is my third and last question: are we ready to reform the way we have structured our governance and policymaking to align with this reality? We lost the opportunity to build a world-leading solar industry despite having the home advantage of one of the highest intensities of ‘sun power’ in the world. The next-generation technologies offer us the same game-changing opportunities. Whether we grab them and learn from our past experience, or we let the solar story play out again, only time will tell.

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