Transportation: Rapidly Shifting Landscape

How Transportation Companies Work

Transportation companies move people around the world. They include companies that provide transportation as a service, such as airlines, bus companies, taxis, urban mobility, and consumer rail. Automobile manufacturers are typically viewed as a separate category, but for the purpose of this discussion they are included in the overall transportation industry category, as these sectors are converging to some extent.

Transportation companies make money by moving people from place to place. This can range in cost and complexity from a short taxi ride to a chartered private flight to the other side of the world, but the fundamental transaction mechanics are the same. Transportation companies compete for customers on price, timeliness, availability/convenience, brand, safety, and amenities. The transportation category includes both low-margin businesses that require volume for success and high-margin businesses that service select customer segments.

Automobile manufacturers design, build, market, and sell cars and trucks. They generally sell vehicles through a multi-step distribution chain, which includes third party financing. All of the links in this chain are subject to the same disrupting forces as manufacturers. Manufacturers compete for customers on brand, price, and features, and often offer different products in international markets to suit price and feature priorities.

Source: Fortune, company data

Transportation-as-a-Service

Traditionally, local transportation has relied on mass transit (trains, subways) with fixed routes to service dense urban populations. Suburban living, or urban living in areas with less-developed public transportation, creates the need for some form of customized transportation, such as taxis or privately owned vehicles. Taxis have a scale problem. If a fleet of taxis were large enough to service all people at all times, it would suffer from excess capacity in nonpeak hours. Taxis therefore tend to be scarce, or at least not completely reliable, and expensive, both of which necessitate car ownership outside of the largest and most developed urban areas.

Technology has begun to change this dynamic. Uber, Lyft, and a host of other technology companies are expanding the availability and geographic reach of non-ownership transportation options, while reducing the cost. The current dynamic of private car ownership creates an inherent oversupply of automobiles, which is not realized because cars in their garages do not add capacity to the system. Technology is beginning to exploit this inefficiency.

It is likely that we are in the first phase of a structural shift in transportation and ownership models. The first phase is manifest through companies that add capacity by allowing some car owners to drive other people for pay when there is demand for transportation. If autonomous vehicles realize their full potential and driverless cars become a reality, later phases of this shift will result in all car owners being able to use their vehicles to add transportation capacity for pay. With more productive time per vehicle, fewer vehicles will be required to service demand.

This is not to say that car manufacturers no longer have an important role in the transportation environment. They will remain important, and iconic brands will continue to service their loyal customers. However, decreasing requirements for direct ownership and increasing availability of other transportation options will result in a shrinking addressable market for car manufacturers. That inevitability will force some automobile manufacturers to broaden their aperture to become vertically integrated transportation service companies.

Constraints

Transportation companies are constrained by a variety of external and market factors.

Travel and Living Patterns

Transportation companies need people to transport as customers in order to generate revenue. Reduced local, regional, or global travel will result in fewer opportunities for transportation companies. This creates a dependency on globalization for the aggregate travel market. If global travel were to decrease, the decrease would likely be marginal, and there will still be plenty of opportunity for transportation companies to succeed. However, directionality and aggregate market size are important factors to consider, as contracting markets compel companies to act in different ways than growing markets.

Travel is an enabling activity, not an object in its own right. This is an obvious, but important consideration. Transportation companies can facilitate travel volume by decreasing prices or increasing access to transportation, which enables more people to travel. However, they cannot create demand when there is none, or when other factors limit or prohibit travel.

Local and regional transportation companies are also affected by emerging catalysts, as how and where people live impacts their transportation requirements. Simply put, people who live in megacities have different transportation requirements from those who live in rural communities, suburban neighborhoods, or small- or medium-sized cities. Structural changes to urbanization and habitation patterns have an impact on all transportation markets.

Transportation companies generally rely on volume for profitability, and as such are sensitive to structural shifts in general living, buying, and traveling patterns of societies. As these are highly competitive businesses that operate at relatively low margins, it is important for transportation and logistics executives to stay with or ahead of market shifts.

Pressure Towards Commoditization

Broadly available transportation-as-a-service creates commoditization pressure on both manufacturers and transportation service providers. We have seen this in American, European, and Asian air transportation markets over the past several decades, as price and route availability have become more important than brand, comfort, or features. As long as a minimum standard of features and safety are present, customers are increasingly intent on paying the lowest price possible, commoditizing a large part of the air transportation sector.

A similar trend is likely to follow in ground transportation markets. Car ownership is broadly seen as an outward projection of status and/or lifestyle, which provides companies many differentiation strategies outside of price. As ownership diminishes, and it is no longer assumed that the car you are driving in is actually yours, the external artifacts of vehicle selection seem likely to become less important. There will still be luxury and status-oriented vehicles and transportation services, but commoditization pressure constitutes a growing threat.

Source: Forbes, company data

Developed-Market Saturation

Although there are still markets that are not yet saturated with cars and transportation services, the low-hanging fruit has to a large extent been picked. Companies have already entered most of the countries with per capita incomes that support the purchase of low-end cars and transportation services. Other countries will likely develop to the point that they too will become attractive markets for transportation companies. As of now, however, few wide-open markets have reached that state of development.

Economic development is needed to increase the size of the global transportation market, which is a long-term and difficult undertaking. Unless cost dynamics drastically change, these markets cannot be opened solely by the efforts of transportation companies, which constrains growth opportunities.

Energy Technology

Operating costs are an important part of the price of transportation services and the total costs of vehicle ownership. These operating costs depend in large part, on fuel costs. Our current fleet is primarily powered by hydrocarbons, which are generally more expensive than other types of fuel. This creates a ceiling on transportation and ownership that would not exist if energy sources were less costly. In other words, fuel costs shrink the addressable market for both transportation and car ownership.

Developing alternative power sources for transportation platforms that use less costly fuels will enable more people to travel and buy vehicles, changing the dynamics of the market.

Regulatory Constraints

Many transportation companies are viewed as national assets, similar to aerospace and defense companies. In some countries this results in incentives (or protections) to ensure the success of local companies or prohibit the commercial viability of foreign companies. This presents a limiting factor for transportation executives and constrains strategy options in some markets. It also adds an element of unpredictability to international markets, as protectionist trade policies can vary rapidly due to electoral politics.

Source: KPMG

Strategic Imperatives

All companies are different, but there are common imperatives that compel companies who operate in the transportation industry. Similar pressures upon different types of companies can result in wildly different strategies and tactics, but understanding constraints and compulsions helps frame how the industry operates.

1)  Correctly assess and understand the long-term implications of transportation as a service and of autonomous vehicles. This matters to everyone in the transportation business, from car manufacturers to airlines and other types of transportation service companies.

2)  Position your business to avoid being disrupted. This means different things to different types of companies, but the general imperative is to participate in transportation-as-a-service and autonomous vehicle technology. If business transformation is not possible, make investments to capture some of the value of these new industries and offset potential losses in your core business.

3)  Invest in and protect the brand. It will be increasingly difficult to differentiate as transportation markets continue the trend towards commoditization. Brands that have generations-long cachet and trust may be the only companies capable of maintaining market position.

4)  Expand your addressable market. In many cases this will entail growing internationally or introducing new products to reach larger markets.