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Management in Practice

Where Is the Auto Industry Headed?

Self-driving cars promise a profound change to our day-to-day experience of transportation, perhaps eliminating the scourge of congestion with clever algorithms or even turning the daily grind of the commute into a leisure hour. How this nascent technology evolves will also reshape the auto industry, pitting industrial stalwarts against tech-industry newcomers. Prof. Jeffrey Sonnenfeld spoke with former Ford CEO Mark Fields about what’s next for the car business.

The auto industry embodies both the power of heritage and the incessant push of innovation. The average tenure of a company on the S&P 500 has declined to less than 20 years, meaning that nearly half the companies on the list of the U.S.’s largest corporations are new since the turn of the century. Meanwhile, the Big Three U.S. automakers—GM, Ford, and Chrysler—trace their origins back 100 years or more and are still prominent brands (although Chrysler is now controlled by an Italian company). But pressured by newcomers like Tesla and Uber, those venerable companies are rushing to develop new technologies, including zero-emission electric engines, semi-autonomous safety features, and even fully self-driving cars.

What will come next is always hard to predict. Some say that AI-piloted vehicles are just around the corner. Indeed, Waymo CEO John Krafcik was quoted in the New York Times as saying, “Fully self-driving cars are here.” Skeptics point to the fact that the first automatically driven bus in Las Vegas was involved in an accident on its first day to argue that the technology is far from ready.

Certainly the industry is preparing for the future. One Ford-funded study rigged a human-driven car to look like it was an autonomously driven car to gauge how people in the real world would react. (There’s video.) Former Ford CEO Mark Fields says that “the next decade is going to be defined by the automation of the vehicle.” And he walks through the implications for automakers, dealers, and consumers.

Jeffrey Sonnenfeld: Mark, thanks so much for joining us today. It’s been a long time since I’ve been able to cold call you in class [at Harvard Business School]. Just about everybody else from your class has been through multiple employers and career moves. You made a commitment not just to an industry but to an employer. A lot has changed in the last 28 years; could you point to the two or three things in particular that changed most in that period of time?

Mark Fields: Well, when I joined Ford coming out of business school in ’89, we were essentially a manufacturing company and we have subsequently moved to being a manufacturing and technology company and as we go forward we are making the transition to become a manufacturing, technology, and information company. Particularly as our vehicles become connected to the internet of things and our plants and our assets become interconnected. That’s been a huge change.

Sonnenfeld: Under the umbrella of smart mobility there are so many pieces—things like ride sharing and ride hailing and autonomous driving. Of those elements, what’s going to be most disruptive for the consumer experience, say, in the next five years?

Fields: Well, I do think when you step out and you look at the major trends that will impact consumers particularly as it relates to the automobile business and transportation business, there is obviously the transition from internal combustion engines to battery electric vehicles, the dawn of the autonomous vehicles—and I strongly believe that the next decade is going to be defined by the automation of the vehicle—and then the third trend is this: It used to be just about owning a vehicle. Now, it’s about owning and having access to the vehicle whether you want to drive it or you want to be driven. Each of those is going to have a major impact on consumers.

As you look at the first one, electrified vehicles, there’s a lot of conversation these days of how quickly is that going to grow. My belief is that it’s going to vary by region. I think in Europe and China it will grow faster than the U.S.

Sonnenfeld: So the recharging stations will be mandated and much more frequent?

Fields: Yeah, I think when you look at some of the challenges for electrified vehicle, clearly the battery costs—you need to be able to get the costs down so you can get mass consumption. Then there’s the charging infrastructure. Not everybody’s living in a house with a two-car garage. So there has to be the infrastructure that’s developed around the world to allow people to be able to charge their vehicles and then there’s the challenge of the charging time. Time is luxury for people, so clearly the approach to get that charging time down something close to what it takes for people to gas up their vehicles today.

Sonnenfeld: Rather than overnight recharging it would be just a stop and go on the road.

Fields: Absolutely.

Sonnenfeld: In terms of industry structure, we have a legacy system. Just as home buyers go through local real estate agents and hospitality companies work through local franchisees that run the hotels, we have the dealerships as a franchise system. Not to create any trouble here, but do you see that changing? Because certainly one disrupter, Elon Musk, is not welcome in this particular state and some others because of the way he would undermine dealers with the direct- to-you sales technique. Do you see that spreading wildly or is that going to have a limited change in terms of the dealership future?

Fields: Well, I think the manner of how the dealer conducts their business is going to change. It’s kind of interesting—when you look at the dealers, their business has changed a lot since the early days of the auto industry. Henry Ford used to ship the Model T in pieces and one of the dealership’s jobs was to put the vehicle together.

Obviously, when you look at the service parts of it, as there’s more electrified vehicles, there’ll be less need for maintenance versus an internal combustion engine. There’s also going to be opportunities for dealers. For example, as you see the advent of autonomous vehicles and potentially those being used in ride hailing services, those vehicles’ up time is going to be very important. That’s an opportunity for the dealership network, because dealers are literally in every town, not only across America but around the world, and to be able to service those vehicles, keep them clean, things of that nature, that will offer new revenue opportunities to dealers. But I strongly believe that dealership system will be in place for quite some time and it will evolve just like it has the past hundred years.

Sonnenfeld: Looking at autonomous driving in particular, for a while we’ve had cruise control and auto park more recently, and we have some degree of lane control and collision avoidance systems. What’s the biggest technology challenge that holds up this celebrated, but elusive level five, where the car is completely autonomous?

Fields: As you look at autonomous vehicles, I’d say the four challenges are: the technological challenges, which you mentioned, the regulatory challenges, the economic challenges, in terms of the cost of the vehicles, at least initially, and then finally consumer adoption.

When you look at the technology—the sensors, the LIDARS, the radars, the cameras—that is coming along very, very quickly. When you look at the algorithms, which drive the path planning for vehicles, that is coming along very, very quickly.

There are some challenges around what I would call developing technology for the rules of the road. Then you have the unwritten rules of the road, and how does the technology deal with that over time? That’s why my view is you’ll see the initial adoption of autonomous vehicles in fairly small numbers in urban areas, because cities will want to prove that this technology will work for the citizenry. They’re going to have to figure out, how does this help the flow of traffic and their cities? Initial autonomous vehicles will be in ride hailing services because the cost, at least the initial cost of adding that kind of technology is going to be expensive, and so the way you amortize that is in a ride hailing service, which has a lot of up time.

Sonnenfeld: But the ride hailing services are in more densely concentrated communities. There’s heavier use of them, but that’s where the urban chaos is greater and harder, right? So isn’t that a paradox there, that it is harder to see the growth of autonomous driving with some of these unpredictable movements and pedestrians?

Fields: Probably the first application of autonomous driving will be in trucks on highway driving because the technology, at least where it’s at right now, lends itself for more commercialization of that first. When you look at real demand on autonomous vehicles, my view is that it will be in major urban, dense areas, because you have city governments and nations even saying that they want to reduce the number of personally owned vehicles. Every mayor around the world wants to have economic development in their cities. They want less congestion, they want less pollution, but they have to increase flow through their cities.

Sonnenfeld: Mayor Peduto in Pittsburgh is determined to make sure that they call Pittsburg the home of autonomous vehicles. Pittsburgh is one of those places that loves four-way stop signs, where everybody says, “Oh no, after you”—as opposed to Boston, where you just gun it. How do you build those cultural rules in?

Fields: Well, it’s a little bit different by city in the U.S., and it’s a little different by country, as you know. In India, for example, it’s just organized chaos, and that’s acceptable. But at the end of the day, as technology is developed, the biggest challenge is going to be for the unwritten rules of the road.

I know when I come to a four-way stop now, if I’m coming at the same time as another vehicle, I’m looking at the other driver’s eyes and I’m kind of nudging my car forward signaling that I’m going to move first. That’s why there are so many miles being racked up by the various players in the industry—to see how the vehicle reacts to those situations, what they call “corner cases” in the industry. It’s going to take time for the implementation of the technology and that’s why I think the initial application of autonomous vehicles will be in major urban areas that have been 3D mapped and where the cities say, “Here’s an area we want to test this out.”

Sonnenfeld: You’ve introduced some exciting new models. The new gorgeous Lincoln Continental that I saw in clay form in your design studios and wound up deciding I had to go off and buy one. The Mustang and others you’ve brought back. You also had to let go of a great brand like Mercury, a whole line of cars. You also had to deal with an enterprise, that if you’ll forgive me, looked like it might disappear at the time you were made president of Ford North America. That 2007-2008 period was a scary time. Any lessons from that?

Fields: I think a couple lessons. One is: it’s so important as a business these days to make sure that you are looking at reality as reality, as opposed to as you want to see it. Being able to understand the external environment. What are the societal changes? And then, what are the potential impacts that can have on your business? Because that allows you to have a point of view of what the world will look like in 10 to 15 years.

It may be the right look, it may be the wrong look, but you’ll have a point of view. Then you’ll have to rewind back to today and say “What’s the best strategy that I can employ in the world that we see that still makes my business relevant?” Which may challenge some existing parts of your business today, that you’re going to have to force yourself to say “I’m not going to do that anymore” but also at the same time, open up these new business models for you that you never thought could have existed before, that you can take advantage of.

Sonnenfeld: What was the positive vision you had to sell people in 2007 as you’re bringing them bad news? How’d you sell people on a positive vision?

Fields: Well, the first point was getting the team together and looking at the reality as we saw it. What was the current state of the business? What were our assumptions that we made, two or three years ago? What had not come to pass? What were our assumptions going forward? And just stare at that reality and say, “What do we need to do to deal with that proactively?” As opposed to sticking your head in the sand and hoping that it all goes away.

The most important thing was to communicate. Once we put that plan together, the most important thing to engage the organization was first to communicate with them. To tell them, hey, here’s the reality as we see it. Here is our strategy. Here is our plan of how we deal with that reality. But also the same time, paint a picture for them of what the future looks like. What is this business going to look like in our view in three to four years?

Sonnenfeld: Somehow you even got the union to buy in. You got some pretty good concessions, instead of the skepticism and cynicism I thought you would have gotten in such difficult times.

Fields: They key was just having open-book communications with all of our constituencies, whether it was the union or dealers—because we had to shrink our dealer network by one third—or with our suppliers. Just be transparent and be able to say here’s why we need to take these actions.

You have to find the time to continuously communicate with your organization. You can have a great plan and you can lay that out for the organization, but unless you’re telling them along the journey how it’s going, you’re going to lose people. They’re going to start second-guessing and things of that nature. The same applies to today as the industry goes through this major shift from internal combustion engines to EVs, to autonomous vehicles, to mobility services, to complement the traditional business.

Sonnenfeld: What was the toughest personally of the decisions you had to make? Was it killing off the legendary Mercury line or the Premier Automotive Group that you had so painstakingly and triumphantly brought back to life? The Jaguar brand, you made that not only reliable but gorgeous car that many of us loved, which Land Rover now runs. The Range Rover, which was largely your creation out of the Land Rover business and the Volvo business. That was such a fabulous pearl.

Fields: They were all painful. I’d say that looking back, the two most painful decisions were when we had to sell the luxury brands, because I had run that division previously. I knew all the people—fantastic people. There was the emotional piece of it, but then there was the business rationale piece, and at the time we really needed to make decisions to concentrate on Ford, to save the business. That was the first one, and then the second one was over the first couple years of the Way Forward Plan, we had programs to reduce headcount. The first three of them were voluntary; the fourth one was an involuntary. Where we had to tap people on the shoulder and literally bring them in the room and tell them that they were no longer part of the Ford family and they had to go back to their desks with a box to clean up things.

We had never done that in Ford’s history. That was a very emotional day for all of us, but what kept us going was we knew we were going to treat them fairly but it was the right thing to do for the business. Our approach was even though we had to say goodbye to them, how can we still make them a fan of Ford?

Sonnenfeld: What made you decide to ramp up, as you said goodbye to luxury, the distinctive branding on the Lincoln Motor Company? What was the thinking behind that?

Fields: Well I think it was based on a very good business rationale, which was, when we looked at the industry, more or less around 10% of the volume of the industry around the world is luxury vehicles but it represents one third to 40% of the industry profits. So for us, as we had saved and built up the Ford business, for us it would have been a real shame to be a feeder brand for other luxury brands from other automakers around the world. And so we decided to reinvigorate and reimagine Lincoln, and the team has done a great job. They’ve had 20 months in a row of sales increases and it’s launched very well in China, as well as doing well here in the U.S., gaining share. It really comes down to that that business analysis that says there’s a big profit opportunity in here and it would be a shame for us to miss out on that.

Revitalizing a Classic Brand

Mark Fields and Jeffrey Sonnenfeld discuss the revival of Ford’s luxury Lincoln division and take a look at Sonnenfeld’s 2017 Lincoln Continental.