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Future readiness

Magazine

Drive hard into the future and don’t look back 

Published 6 July 2022 in Magazine • 7 min read • Audio availableAudio available

The urge to return to business-as-usual must be resisted. Commitment to change and innovation is more important than ever, explain Howard Yu and his colleagues at IMD’s Center for Future Readiness 

 

“It’s clear that the market is experiencing a seismic shift and we need to react accordingly,” wrote Uber CEO Dara Khosrowshahi recently. The shift is in the collapse of tech stocks which have plunged since the beginning of this year. Nasdaq has lost more than a quarter of its value. From Netflix to Spotify, from Coinbase to Robinhood, all have lost 60% from their peak. It’s in this environment that Khosrowshahi said he’ll slash Uber’s marketing spend and freeze hiring.

Much of the acceleration by tech companies during the pandemic seems to have halted. Not only are people starting to return to the office, but also the cheap money and government stimulus packages are drying up. The war in Ukraine and the rise of commodity prices have triggered a deep fear of inflation. People are waking up to the fact that without the energy of today it is impossible to dream about the renewables of tomorrow. Saudi Aramco briefly overtook Apple as the world’s most valuable company. An oil major outran a tech giant in 2022. That’s the shift.  
 

But then again, we live in a noisy world. There will always be conflicting signals. The biggest danger of an upheaval is that it causes leaders to waver in their commitment. The deep secular trends are ignored; the company falls back to its prior inertia. We are again in the “new world”, people may say. The allure of business-as-usual is all too tempting.

But business-as-usual is exactly what carmakers can’t afford. At IMD’s Center for Future Readiness, we track which companies are the most future-ready. We do this through objective measures calculated as a composite score. Our latest ranking of the automotive industry highlights which companies are in a position to win tomorrow. Winners succeed by having a solid base today. You can’t rely on storytelling in 2022. People are judging the long-term vision by looking at whether it can be powered by the financial earnings of today. No more free money.

Naturally, our ranking also highlights companies that have been surging in their positions over more recent years. The rising stars are those that have been riding on their steady momentum. They are breaking into the big leagues precisely because of the seismic shift that the industry is experiencing. Still, the learning from the industry is universal. Whether you are carmakers or not, becoming future-ready demands commitment. It requires building new capabilities and weaning off one’s reliance on easy growth. And all of these hinge on the entrepreneurial outlook of managers and their speed in decision making.

The power issue

From CXOs to Gen Z activists, our experts examine where the real sway lies. In Issue VII of I by IMD, we explore the shifting centers of command and how leaders can inspire, empower and wield influence for good.

Make sure the unit economics work before going big  

If top-line growth is no longer sufficient, earning quality is what the financial market is paying attention to. Of course, the financial market has a long list of measurements to gauge earning quality and cash flow consistency. The key is consistency. Erratic behavior is a sign of cutting corners or losing control.

That’s why Tesla is interesting. The Tesla of 2022 is very different from the one of 2018. Back then it was still figuring out how to ramp up production of Model 3. These days, Tesla is pulling ahead further, from revenue growth to free cash flow. Other top-ranking companies like Toyota and VW are doing well too. Their financial performance is solid. The difference is that these traditional carmakers are being hurt by the semiconductor shortage, and there is no way out. They have been shutting down their production lines because of the lack of chipsets. The better ones, like Toyota, have been stockpiling. 

Then you have Tesla, which is so flexible in sourcing the component parts. Anything that is still available in the marketplace, Tesla uses it. Tesla is nimbler but not because of its culture. The soft side of things might help but they won’t save the company. It’s the hard skills and deep capabilities that make a difference. “We design circuit boards by ourselves, which allow us to modify their design quickly to accommodate alternative chips like power chips,” explains one Tesla employee. In other words, Tesla’s pursuit of vertical integration has moved the company into areas that traditional carmakers had shunned. And now it’s paying off. 

And when there are no more chipsets anywhere, Tesla selectively downgrades features to reduce chipset requirements.

Elon Musk, as gruff as he has always been, said that other carmakers “will largely go to the traditional supply base and, like I call it, catalog engineering.” Meanwhile, he got work done directly with semiconductor manufacturers like Qualcomm. He didn’t let parts suppliers handle sourcing. He said carmakers aren’t “very adventurous”. And it’s Tesla’s early adventure that has resulted in today’s envy-worthy topline growth and production resilience.

The rising stars are surging fast  

Tesla is not the only one surging. Looking at the results from previous years we saw the rise of China’s BYD and South Korea’s Hyundai. Aside from Tesla, practically everyone else is making hybrids. And everyone agrees that hybrids are the transition to all-electric. Some are plug-in hybrids, like the BMW 3 Series. Others are non-plug-in, like Toyota’s Prius. As in any transition solution, it’s a hedging strategy that’s useful when a company should wait for a stronger signal. But a transition solution can become a burden. Maintaining a transition strategy can prevent the management team from furthering the commitment to an eventuality.

After all, when you make a pure electric vehicle (EV), the battery technologies must be world class. You must insource many things and master the battery technology inside-out. There is no other way to extend the maximum range on a single charge, but when you keep producing hybrids you can always use gasoline to power an engine when the battery runs out. There are all kinds of alternatives you can explore. By avoiding the hard work, engineers may easily miss true mastery of electrification. Worse, they may get stuck with a transition solution and never move past it.

A look at the percentage sales of pure EVs is, therefore, quite telling. It’s the story of corporate commitment to that eventuality of an industry. Here is the final question: Tesla is always an outlier, but what about the others? What makes BYD and Hyundai special? How do they behave differently from other carmakers?

A study of company outlooks speaks volumes. We compiled the graph (see above) by running a large-scale text analysis. We downloaded more than 60 news sources of records over the past 10 years. We wrote an algorithm to unpack companies’ behaviors based on these records. We entered the text data and asked the computer to score companies along various constructs. Is the company fast in decision making or does it tend to make a choice only when it has complete information? How likely is it to progress from one place to another? That’s the X axis you see in the chart. On the Y axis, we gauged the level of entrepreneurship of each company. To what extent is a company likely to undertake new activities that incur financial risks in the hopes of profit?

More specifically, we want to see a difference between the big auto giants like VW and Toyota against the smaller rising stars. The general conservatism of the big autos stood out. Toyota and VW face challenges not just in mastering new skills. They also need to convert their sprawling factories from building petrol-guzzling cars to those powered by lithium-ion batteries. The challenge lies in all the difficult tradeoffs that need to be made. And that demands even more difficult conversations within the company.

What fast-moving Hyundai has done is slash the number of combustion engine models in its lineup. That frees up resources to invest in EVs. The idea is to stop developing new powertrains for internal combustion engine cars, as doing so will release R&D resources to focus on the rest: electric motors, batteries, and fuel cells. And BYD is busy expanding its own semi-conductor manufacturing. Already self-sufficient on chipset supplies, it’ll soon become a supplier for others, too. That’s how BYD surpassed even the absolute production volume of EVs against VW in Q1 2022.

The next frontier  

The battle over EVs will continue and the race to secure chipsets will be a top priority in 2022. But the next frontier is already opening up. The heated geopolitical tension will trigger further local sourcing. The global supply chain is in almost constant flux. It’s this environment that demands leaders to learn new things. It demands managers to master new situations and at a heightened speed. Those who are most future-ready are those who learn the quickest. You are as agile as what you know.

Authors

Howard Yu - IMD Professor

Howard H. Yu

LEGO® Chair Professor of Management and Innovation at IMD

Howard H Yu is the LEGO® Chair Professor of Management and Innovation at IMD and the Director of IMD’s Center for Future Readiness. He is the author of the award-winning book LEAP: How to Thrive in a World Where Everything Can Be Copied. Howard Yu directs our Future Readiness Strategy and Business Growth Strategies programs.

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