Automotive Ecosystem – Dyson C5 pt. II.

At least Dyson didn’t try and make his C5.

• As I suspected (see here), high margin vacuum cleaners, fans and air purifiers are much easier to make than electric vehicles which has resulted in Dyson pulling the plug on its ambitious plans to invest $3.1bn in the development of an electric vehicle.
• Dyson is a manufacturer of highly-priced consumer goods upon which it earned £4.4bn in revenues and £1.1bn in operating profit in 2018.
• This does not come as a surprise as it has developed a strong brand on its revolutionary vacuum cleaners which are still far better than anyone else’s.
• It has taken this brand and leveraged into other air products such as air purifiers, fans and hand dryers with great effect.
• I rate Dyson’s other products as second rate as I think there are much better products available from traditional Korea and Japan-based brands.
• However, this has not stopped Dyson from making a handsome profit from these devices as it reported margins of 25% in 2018.
• This is far better than most white goods makers who earn mid-single digit margins when things are going well and lose money when they are not.
• It is in its success that one finds Dyson’s problems with an EV:
  • First, profitability: James Dyson’s message to employees states that the electric vehicle in development is “not commercially viable”.
  • Given the margins that Dyson enjoys and the margins that the automotive industry makes on vehicles (4% – 6% for midrange and 7% – 9% luxury), an electric vehicle business was always going to shred Dyson’s profitability.
  • This is exactly the problem that Apple discovered with Project Titan (see here) which it too has effectively abandoned.
  • Second, barriers to entry: Electric cars are much easier to make than petrol vehicles given their relative simplicity, but it is still extremely difficult to do it at scale.
  • As ever the skill is in the small details such as the ability to design a door hinge such that the door will close in exactly the same position many times a day for 15 to 20 years.
  • Tesla has struggled with the durability of some of these details over the last few years but is showing signs of improvement.
  • It is clear that making safe, durable vehicles takes years and years of experience to get right.
  • Tesla has struggled to make money or generate any cash and the more cars it sells, the more money it seems to lose.
  • This is not a winning business model and someone as astute as James Dyson knows that the time is right to throw in the towel.
  • Third, digital data: RFM research (see here) has concluded that understanding the importance of data generation in the vehicle is likely to be critical for the success of the OEMs in the long-run.
  • Players such as Google, Apple, HERE and TomTom are pushing hard in this space with OEMs such as Tesla and BMW already working hard to improve their differentiation using sensor data.
  • Dyson’s current product line up does not have any data collection nor does the company have any real experience with regard to using data to make its customer experience better.
  • I see Dyson as firmly in the ship and forget category rather than the ship and remember that I think is essential going forward.
• Hence, I am not at all surprised to see Dyson end its automotive ambition which was a nice idea while it lasted.
• Fortunately, Dyson is a private company controlled by its founder, and so the economic fall out from losing the money invested will fall squarely on the decision-maker rather than minority investors.
• This is good news for the OEMs as it means that the number of new entrants into its industry will be fewer resulting in a somewhat less brutal environment.
• However, the outlook is still pretty bleak as RFM forecasts that automobile shipments could fall by up to 65% as electric and then autonomous vehicles become mainstream.
• There is no OEM that will survive this in its current form which is why they must seek to earn revenues from other sources.
• Value-added services within the vehicle and the monetisation of the sensor data are where I would be looking if I was an OEM.