Sep 21, 2018

VW and the Apple Business Model

Volkswagen Group is trying very hard to see if it can replicate the Apple business model in the auto industry

A few weeks ago, the Wolfsburg-based company unveiled its intention to plough 3.5 billion euros into its Volkwagen ecosystem. The short version of this effort is that it is a means to make the experience in the car much closer to that of a smart phone. But all car makers are trying to do that. VW's efforts go further down a path like the Cupertino, Calif.-based Apple.

A key element of the VW effort is a new, holistic operating system for its cars to debut on the I.D. family of electric vehicles, which are scheduled to debut beginning in 2020. The second is a cloud-based ID for its customers. The OS, built in-house and not licensed from one of the big software companies that feed the industry, will be designed to enable its cars to be easily updateable and upgradeable, much like an iPhone and also much like a Tesla.

Today, the architecture inside most cars is not really designed for the kinds of major over-the-air software updates that Tesla performs on a regular basis. There are 70 or more little computers spread around the car, each loaded with software. There is no central brain.

That, however, will change in the new VWs and many other car companies as well. The fragmented compute system will be consolidated onto "multi-domain" controllers and these more powerful computers will make it easier to do bigger changes to vehicles through updates.

Similarly, the ID will manage the customer's experience and give them access to services, theoretically across every different and new VW they own. It will tie VW directly to the customer, bypassing the dealer and opening up capabilities like creating an electronic wallet through the vehicle or remotely adding or removing software-based features to the vehicle.

Under this new way of doing business, VW theoretically grows much closer to its customer. It also, theoretically, creates a wall between the services that VW is delivering and what other brands could deliver.

The combination of a proprietary OS and the ID align quite closely to the Apple business model. One of the big benefits of Apple's OS is that it is designed to work specifically with the hardware the company also makes – so it just works better.

The Apple portfolio of products, managed by the ID also delivers ease of use and portability to new devices. These things together create a barrier to leaving the ecosystem once you are bought in.

It certainly has worked for Apple, which has 123,000 employees and generated $48 billion in net profit in 2017 on revenues of $230 billion. That compares to VW's 600,000 employees and 13.8 billion euros ($16.13 billion) in 2017 profit on 230 billion euros in revenue. Yes – revenues were roughly equal and Apple made more than three times as much profit.

VW is even adjusting its store model to align more closely with this new model. VW is negotiating new terms with dealers who may lose out as VW manages the relationship with the customer.

The stores, instead of being the only point of sales and service, may become more of a customer experience portal, handling repairs that can't be done electronically (sound familiar to Apple?) and providing a showroom and some retail.

Tesla already has pursued this model. In fact, the store concept for Tesla was developed by George Blankenship, the former Apple retail-store guru.

This change in business model is certain to frustrate some dealers who will feel pushed aside and U.S. dealer franchise laws may eventually give the dealers a way to stay in the game.

VW's efforts all sound quite sensible given Apple's success. Why wouldn't VW want to be like Apple?

Here are some of the potential challenges:

  1. VW Group has 12 brands and is therefore fundamentally not the same as Apple in terms of being able to create brand equity around a single marquee.
  2. Apple's OS is a big benefit to the company because it works great. VW is not a tech firm. The OS it is developing must actually work well. Building an operating systems in house might be a true differentiator in a positive way -- or it could be a differentiator in a very negative way.
  3. Consumers often have multi-brand car households. The VW ID system may frustrate people who want their digital experience to follow them between cars of different brands.
  4. The dealers could revolt as they find themselves increasingly cut out of the customer relationship.

Other car makers are pursuing similar efforts, but not with the completeness of VW's effort. Time will tell if they can pull it off, or if they will be forces to abandon or modify their ambitions.