Driving Sustainability Advances in the Automotive Industry

The automotive industry has embarked on a journey towards fuelling lasting change by helping achieve better fuel economy and sustainability in the industry. The goal is to build cars, trucks and industrial machinery that are more fuel-efficient, using new materials and developing innovative approaches that help reduce dependence on fossil fuels and cut down on greenhouse gas emissions from cars, trucks and machinery or overall, including manufacture of the materials being used.

The relevant UN Sustainable Development Goals to the automotive industry can be described as:

Goal 9. Industries, Innovation and Infrastructure: Technological progress is the foundation of efforts to achieve environmental objectives, such as increased resource and energy-efficiency. Without technology and innovation, industrialization will not happen, and without industrialization, development will not happen. Goals by 2030 include upgrading infrastructure and retrofitting industries to make them sustainable, with increased resource-use efficiency and greater adoption of clean and environmentally sound technologies and industrial processes. This is a key goal for the automotive industry, which is currently focused on initiatives towards reducing friction and energy loss via better design and more advanced materials, therefore yielding much more energy-efficient vehicles.

Goal 12. Responsible Production and Consumption: At the current time, material consumption of natural resources is increasing. Countries are also continuing to address challenges regarding air, water and soil pollution. Since sustainable consumption and production aims at “doing more and better with less,” net welfare gains from economic activities can increase by reducing resource use, degradation and pollution along the whole life cycle. Amongst the relevant goals for the automotive industry are to substantially reduce waste generation through prevention, reduction, recycling and reuse or encouraging companies, especially large and transnational companies, to adopt sustainable practices and to integrate sustainability information into their reporting cycle. As an example, tire industry stakeholders are pushing to improve sustainable rubber yields, protecting human rights and natural resources while improving transparency and traceability in a complex supply chain.

Goal 13. Climate Action: Climate change is now affecting every country on every continent, disrupting national economies and affecting lives. Affordable, scalable solutions should enable countries to leapfrog to cleaner, more resilient economies. The pace of change is quickening as more people are turning to renewable energy and a range of other measures that will reduce emissions and increase adaptation efforts. As an example, many automotive manufacturers have made the reduction of CO2 emissions a corporate priority.

Using sustainability as a way to achieve competitive advantage, the current numerous initiatives in the automotive industry are contributing towards achieving the above described SDGs. Without doubt, the sustainability issue has become the major influence on the motor and, as a result, motor vehicles have become much more efficient, cleaner, safer and more recyclable.

These benefits however have been watered-down as the numbers of motor vehicles on the roads increase, and society requires higher environmental and safety standards. A further sustainable transport policy should tackle rising volumes of traffic and levels of congestion, noise and pollution and encourage the use of environment-friendly modes of transport as well as the full internalisation of social and environmental costs.

The traditional industry approach on environmental or social sustainability has been to respond with philanthropy, public relations or influencing regulation. However, by turning sustainability into a creative constraint and taking an entire business model perspective, there is an opportunity to generate superior value for the organization, for the customer, and for the planet. Business model innovation is therefore a powerful way to unlock new value from sustainability strategy while also tackling competition and achieving higher profitability. Sustainable business models also capture economic, social, and environmental value for a wide range of stakeholders.

How Michelin used business model innovation to create profitable sustainability outcomes

Facing strong competition from low cost competitors in their business with haulage companies, and despite the belief of having a superior technology, Michelin, a worldwide leader in the tire industry, had not been able to capture all the value from their products. After witnessing several years of losses and with climate change regulation increasingly impacting them and their customers, Michelin took the bold decision of moving the strongly product-driven firm into the new world of services. Michelin’s tires were traditionally priced at a premium and the idea was to create a value-added service for large vehicles fleet operators.

As a result, Michelin decided to redesign their business model and come up with a new product: Michelin Fleet Solutions (MFS), a comprehensive tire-management solution service for large European transportation companies. With this new business model, the company ventured into selling kilometers – instead of selling tires. Michelin gives its tires away for free but charges customers per kilometer.

Customers do not buy tires from Michelin: they sign long-term service contracts (typically three to six years) and pay a fee for use and maintenance of the tires and are billed according to distance traveled. Once the contract is signed, Michelin takes care of everything: selection and provision of tires, inventory management, maintenance, replacement, and management of the tires till the end of their useful life. Instead of a traditional model, where the customer bore the upfront cost of the tire as well as the entire risk associated with its replacement in case of damage, MFS shared this risk with the consumer for a nominal monthly fee.

Michelin’s traditional business model:

Michelin’s innovative business model:

By installing computer chips in the tires to measure performance such as distance and maintenance requirements, this range of bundled professional services is targeted at helping its customers reduce fuel consumption and optimize vehicle performance. The new business model allowed Michelin and its customers to maximize value from their products. Michelin’s superior technology, as compared to other low-cost competitors, meant that they could get more kilometers per tire and therefore maximize revenue per tire. At the same time, they now have the incentive to produce fewer tires, with the subsequent less material usage, lower supply chain risks, and reduced carbon emissions. Furthermore, due to the fuel efficiency improvements, lower carbon emissions for their customers are also achieved.

Aligning incentives, Michelin created new long-term customer relationship pathways, creating a direct relationship, stronger intimacy and deeper roots within their customer’s business, a key component of Business Model Innovation.

Michelin also took a product stewardship role, recovering the used tires for recycling and re-entry into their manufacturing process, effectively solving a double conflict of interest by giving tires out for free and taking responsibility for their disposal. First with customers by being incentivized to sell as few tires as possible. Then with the planet by ultimately manufacturing less and recycling better.

Through initiatives like this one, Michelin helps supporting the aforementioned UN Sustainable Development Goals, with the wider community benefiting from this business model through less waste to landfills and reduced air pollution.

How does this business model outperform existing business models both financially and environmentally/socially?

The shift is intuitively appealing and provides Michelin with an opportunity to differentiate itself in the tire business. In comparison with the former business model, this program offers several financial and environmental / social advantages.

From a financial standpoint:

  • Maximization of revenues per tire through the new per-kilometer billing model. The program enables Michelin to take over the responsibility for tire maintenance from the customer, hence allowing the company to extract the maximum value from its product.
  • Lower supply chain risk (e.g., rubber price fluctuation) from reduced tire production. Based on this new business model, all parties have aligned interest towards increasing the life of the product.
  • Safer cashflows with the long-term contracts locking in recurring monthly payments. The value for the customer now lies in the company’s expertise and service rather than in a disposable commodity.
  • New and longer customer relationship channels created through direct relationship, stronger intimacy and deeper roots within their customer’s business. In addition, performance objectives that are contractually guaranteed, with gains shared with the customer.

From an environmental / social standpoint:

  • Lower consumption of natural resources (i.e., rubber) by enabling easy recollection and recovery of used tires for recycling and re-entry into their manufacturing process
  • Contribution to lower deforestation (especially in Indonesia and Thailand) and risk of child labor by reducing use of rubber
  • Realization of energy economies and reduced air pollution from lower production levels due to increased product life
  • Realization of fuel consumption economies for customers (hence reduced carbon emissions) through optimization of vehicle performance
  • Reduced waste (controlled (landfill) and uncontrolled (oceans)) from both lower production and enhanced recycling opportunity
  • Reduced risk of accidents, hence lower casualties and increased road safety, due to well-maintained tires. This also entails relaxation in vehicles depreciation.

Do financial growth and social/environmental impact form a feedback loop (i.e. the faster the growth, the larger the impact and vice-versa)?

This new business model helps Michelin grow while increasing its social / environmental impact. In fact, lower tire lifecycle translates into more efficient revenue extraction from products. Longer product useful life translates into reduction in cost of raw material and generated waste. Furthermore, having a product stewardship enables a higher capture of salvaged value, leading to higher and more efficient recycling, which in turns leads to reduction of production costs and raw material consumption and CO2 emissions.

In addition to the economies achievable to the bottom-line above and the environmental benefits associated with the new model, servitizing the tire and overseeing the maintenance secure a steady cashflow for the firm, hence contributing to its financial sustainability.

Why could this innovation be game-changing (demand and/or supply point of view)?

With this innovative business model, the interests of all parties converge. Michelin realizes savings to its bottom-line through adopting a sort of circular economy loop. It also enables the company to lock a stable long term cashflow, reduces customers churn through a service-based solution as a powerful way to maximize customer loyalty over time.

From the demand point of view, customers enjoy peace of mind with Michelin taking care of all tire-related issues. In addition, the model eliminates upfront costs (one-off costs associated with purchasing the tires) borne by the customers and replaces it with smaller, easier to absorb, monthly installments. The value proposition of the model extends as well to more efficient fuel consumption, vehicle health and a lower carbon footprint by ensuring clients have well-maintained tires which might lead to lower insurance premiums. Finally, Michelin helps its customers understand their costs better by offering monthly reporting from data collected from tire monitoring.

What are the potential costs and risks associated with this business model? What are the barriers to scaling this business model?

The new business model in place at Michelin does entail new costs as well as creates new risks for the firm.

First of all, by switching to a completely new operating model, Michelin might lose customers that are comfortable enough with the current way. Indeed, it is a bold strategy and Michelin is hoping that the new customers will realize the benefits of tires-as-a-service (better maintained tires last longer), coupled with the reduction in environmental impact. There is thus the risk that the company fails to properly communicate the value proposition of the added service.

Moreover, tightening the relationship between the two parties will lead to customers having higher expectations from the tire manufacturer, which will lead either to higher costs of customer retention or a higher churn rate. For example, customers and Michelin will oftentimes disagree on the need to replace tires, with customers pushing to get brand new ones more often. This situation can be a cause for friction and ultimately damage the relationship. Furthermore, since Michelin is incentivized to replace tires as rarely as possible, it enters in an important conflict of interest. The firm will look to cut costs, but it comes at the expense of road and passenger safety.

Another potential risk of misaligned incentives that Michelin needs to consider is that, by charging per kilometer, the model is incentivizing customers to drive less, which in turn leads to lower revenue for the firm. From the internal side, there is the risk that this new service goes in conflict with current KPIs, for example if the sales team feels that by selling MFS, they would be undermining their primary KPI of new tire sales.

In countries with climate seasonality, where it is required by law to have both sets of summer and winter tires and specific deadline to switch, Michelin is faced with the problem of replacement itself. Indeed, as the owner, Michelin is liable for respecting the deadlines, which will make for extreme queuing issues in shops. Some customers will probably not get the switch done before the deadline, a case in which Michelin finds itself at risk. Moreover, as the owner of the tire, Michelin will be responsible for storage of out-of-season tires, which is very costly. This situation also incentivizes the firm to equip its customers with “all-weather” tires that are wearable all year long and pass the test of regulation. However, these tires are only better on average on both surfaces but do not outperform specific winter or summer tires. There is therefore another safety risk associated with the implementation of the new business model. Finally, the “all weather” tire technology may also not be compatible with the higher yield tires needed to make the business model work. We believe that this issue of seasonality will be a barrier for scaling in this type of country, while deployment in tropical zones should be easier.

On a more direct financial perspective, the change of business model required a lot of investment in Research and Development, in order to allow tire longevity to match a set turnover rate of customer tires. These additional costs can lead the pricing department to a sunk cost fallacy and to overcharge customers for the product. As a consequence, customers will have less incentives to stay with Michelin.

Finally, a huge new cost comes from the implementation of the chip tracking system. This new system will require investments in both the hardware (chip) and the software (data analytics).

What are the possible next steps to mitigate the risks associated with this business model and to allow it to scale?

There are multiple steps that Michelin can take to mitigate the risks associated with the new business model.

The marketing department of the company will be the first barrier to possible departures of customers. Selling the new product to Michelin’s customers in a way that will not only get them on board, but also increase the loyalty. It is of the utmost importance that the message of positive social and environmental impacts is delivered and received.

The company also needs to set clear the expectations of its customers through contracts, be it with regards to the type of relationship they will create and sustain, but also regarding the seasonality of tires. A good way to mitigate queuing would be to either set a rigorous schedule with customers and shops, or to simply protect itself against potential liability, by setting clear limits in the legal contracts. This comes at the cost of acquiring counsel.

As a final recommendation, Michelin will need to pass the cost of chips (hardware) to the customers. They can do that by adding some useful functionalities that pertain to road safety or driving comfort, in which case this new ‘smart chip’ becomes an asset to the vehicle owner.

What are the potentially negative social/environmental impacts of this business model?

This new business model from Michelin might have a negative social perception. Even though there are many benefits, not only for the customer but also for the environment, the fact that the new tires will have a chip to track the usage and the distance, customers can feel that they are being tracked. In a sensitive moment, where data privacy is a concern for many citizens and governments are taking more legal actions towards companies, this can be a reason for customers to reject or be concerned with this business model.  

On the environmental aspect, even though the usage of the tires will be extended, Michelin should invest in two main areas in other to further reduce its environmental impact. On one side, research to find alternatives materials to rubber to minimize the environmental impact of the raw materials to produce a tire. On the other side, Michelin could also reduce its environmental impact ensuring the usage of renewable energy throughout all the manufacturing process and its facilities.  

 

Mireia García Casas, Olaf Boullé, Pablo López Bouzas, Charbel El Helou (MBA 19D)

 

List of sources:

https://www.michelin.com/en/michelin-group/our-ambitions/our-ambitions-introduction

https://www.un.org/sustainabledevelopment/sustainable-development-goals/

http://www.dupont.com/products-and-services/plastics-polymers-resins/articles/supporting-sustainable-mobility.html

https://www.smmt.co.uk/industry-topics/sustainability

https://bluetribe.co/business-model-innovation-the-secret-weapon-of-your-sustainability-strategy

https://rctom.hbs.org/submission/michelin-tires-as-a-service

 

 

 

 

 

 

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