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Chicago Shimpo
Digital Innovation, Electric Vehicle and the Auto Industry

• The Japanese Chamber of Commerce and Industry of Chicago (“JCCC”) and the Japan External Trade Organization (“JETRO”) Chicago Office co-hosted a business seminar on the future of digital innovation and electric cars.
• The seminar, held on November 15 at Harper College in Palatine, featured Yasuhiko Ushikubo, Head of Mizuho Bank’s Industry Research Department and Tomomi Saito, a member of the department, as the guest speakers.

Part I: The Impact of Digital Innovation

• During the first half of the seminar, Yasuhiko Ushikubo talked about the ongoing phenomenon of digital innovation and its implications in business, including major issues and business strategies.
• Digital innovation (“DI”) is happening around us at a mesmerizing speed today, pushing for a wide range of technological advancement, such as electronic commerce, commercialization of drones, and the use of artificial intelligence (“AI”). How will it affect the future of our society, in connection with the issues such as global warming, aging population and globalized economy in a mid- and long-run?
• According to Ushikubo, changes are already happening in many areas. For example, the use of digital technology in agriculture – AgriTech - is now increasingly popular. “Plant factory,” an indoor growing system for year-around production of vegetables, is a case in point. Using more advanced technology, it is now viewed as a solution to issues like labor shortage and risk of climate unpredictability.
• Electronic commerce (“EC”) is expanding so fast that the delivery of purchased goods is having difficulty in keeping up with orders. The city of Chiba has begun experimentation of home delivery using a drone. In the United States, a San-Francisco start-up called Dispatch has launched an autonomous delivery system for local deliveries.

Fourth Industrial Revolution: Destructive Innovation

• As DI continues to develop, it may function as a “destructive innovation” to the existing business model, Ushikubo said. We have seen the land-line phones taken over by mobile phones, and the compact disc replaced by the music distribution system over the Internet.
• In China today, the mobile payment using the QR barcode (2-dimentional quick response barcode) is spreading so fast that even street vendors are using it. This means bypassing banks, which have been the sole provider of a financial infrastructure for payment and settlement. Banks have invested an enormous amount of money and resources to create and provide the all-encompassing financial service system. Now, thanks to DI, they have a powerful competitor.
• In the automobile industry, recent innovations such as electric car and self-driving car have offered a possible solution to the existing problems such as air pollution, traffic accidents and traffic jams. Traditionally handled legislatively, these problems can now be controlled with the use of DI and we can focus on the primary purpose of automobile – to provide an efficient method of transport for people and goods, said Ushikubo.
• To pursue higher mobility is part of the technology revolution called Smart Mobility. It includes creation of a “smart city” that is equipped with an optimal public transportation system, which, in turn, provides the residents with a greater mobility that’s not dependent on automobile alone. It can also collect Big Data regarding the mobility of every individual via the individual’s smartphone.
• The concept has been tested in the United States. In 2016, the U.S. Department of Transportation hosted a contest called “Smart City Challenge,” in which the city of Columbus, Ohio won.
• Smart Mobility, combined with measures such as carpooling, could reduce the number of automobiles down to the bare minimum.

• Ushikubo also explained the arrival of the Sharing Economy, a new business model that uses Internet of Things (“IoT”). IoT is a network of devices with Internet connectivity, and is being used for creating a system to build and share trust with strangers.
• This new business model is represented by such service providers as Uber and Airbnb. Airbnb is an online marketplace for vacation homes, apartments and hotel rooms, and it depends on the IoT network to build a system of reputation and trust among the lenders, tenants and agents.

Advent of Global Business War

• Today, we are witnessing a worldwide surge for strengthening the national competitive edge by tackling social issues using DI, Ushikubo explained.
• In Japan, experts claim that the nation is moving from what we call the “Information Society” to the “Society 5.0” (Super-Smart Society), and they call the transition “the Fourth Industrial Revolution” (prior to the Information Society were the Industrial Society, Agrarian Society and Hunting/Gathering Society, going backwards). In the Super-Smart Society, people work to solve social problems through technology and create a community where everybody can live comfortably.
• This transfer will also bring a change in business – the use of Artificial Intelligence (“AI”), Big Data, etc. will create new added values, which will eliminate boundaries between the existing industrial categories, and a new form of industry called “Connected Industry” will appear.
• For example, China has launched a project called Made in China 2025, a Chinese version of Industrie 4.0 (a movement for automation and data exchange in manufacturing technologies). This is an “Internet-plus” policy which concurrently promotes investment in 10 major manufacturing industries plus the Internet-plus (=AI) areas, such as self-driving cars and smart homes. This is based on the idea of reducing waste by connecting individual industries.

World Trends in DI

• DI has enabled the collection of Big Data. Big Data, in turn, facilitate the retail industry to grasp the individual customer needs, offer more convenience, and conduct efficient inventory control and replenishment.
• Retailers like Family Mart and Amazon Go are now working to introduce stores without a cash register, while providing customers with products that match their needs and handling payment through smartphone apps. While offering more convenience to customers, the retailer can collect a large amount of customer information this way, contributing to Big Data. Based on the ever-growing Big Data, retailers may even produce goods on their own that better fit customers’ needs.
• Such data can be analyzed by AI, which may lead to an individualized medical service that is tailored to, and optimized for, the individual patient. In the U.S., for-profit business exists that provides small- and medium-sized hospitals with a patient’s electronic medical records for free, while earning income from pharmaceutical ads and sale of data.
• DI has also created a revolutionary business model that uses the blockchain technology. It is a new transaction system called Smart Contract, a type of transaction based on an automated program. Combined with the blockchain, Smart Contract enables automated transaction, eliminating the centralized intermediary. For example, a seller of excess electricity wants to sell it to the highest bidder; a buyer wants to buy electricity from whoever offers it at the lowest rate. Both parties can do it, on the blockchain basis, through Smart Contract, which will execute the transactions for them automatically. This could alter the existing form of the power industry.
• Ushikubo added that we are also witnessing the birth of the IoT Platform using the Internet. The technology called Cloud Computing gathers data from machines under operation, which are stored in Cloud for AI analysis. It then sends useful information to the user for troubleshooting.
• When the collected data are not stored in Cloud but processed in the platform before being sent to the user, the service is called Edge Computing.
• The IoT Platform is a highly competitive area, with Google and other net businesses competing, and there is no clear winner yet, added Ushikubo.

Servitization of Goods

• In a long run, the development of IoT is projected to bring a change - from traditional, one-time sale of manufactured goods to the pay-as-you-go model where the manufacturer offers service to supplement the use of the product.
• Kaeser Kompressoren, a German compressor maker, has already switched to this new model. The company now sells its service, as well as its products, covering from installation to maintenance, and charges the user based on the basic rate of compressed air usage.
• While it appears to give the user more benefit, the company can accumulate data of the user’s compressor use.
• The “servitization” of goods is a concept born as a part of “circular economy.” It’s based on the idea of sharing; liability that has been owed by the user shifts to the maker, who will manage the risk, product performance, and quality. In this model, risks shift to the maker, but the introduction of this new business model will change the way the companies do their business across the board, Ushikubo said.
• The advancement of DI will inevitably affect the existing industries, both negatively and positively. Some may move toward forming a consortium, while others may go for business alliance and M&A. The next 10-20 years will see industry reorganization at an increasing rate, Ushikubo added.

Will AI Take away Our Jobs?

• It’s already here – robots are working at hotels and hospitals in Japan. Will AI eventually replace human labor? In the past, coachmen lost their jobs when the automobile was invented, but a lot of jobs were created by the automobile industry. It’s the urgent role of the government to formulate a policy to create new jobs for those will have lost their jobs due to DI. Ushikubo said this is the key for the country to be successful in the future global society.
• The realization of science fiction may be imminent, but we humans have the capability of self-recognition, unlike the AI. That’s the critical difference that we have in controlling the AI, Ushikubo concluded.

II. New Age of Automobile Electrification

• Tomomi Saito talked about the future of the electric vehicle (“EV”), including the course of the EV development and its expected impacts on the industry.

Development of EV: Irreversible Trend

• EV caused a boom in 2010 as part of the countermeasures to eco-friendly regulations, and then the boom has calmed down. Today, the environmental reality in many countries is forcing the auto manufacturers to move to electric vehicles, including full-electric vehicles (“EVs”) and plug-in highbred electric vehicles (“PHEVs”). Many industrialized countries have revealed plans to reduce fossil-fueled, engined vehicles and introduce more EVs. Unlike the boom we saw previously, it’s an irreversible, worldwide trend that’s here to stay, Saito said, which is supported by the lowering costs and economies of scale thanks to the technological advancement.
• With this in mind, major automakers are making bold moves to shift toward electrification. Volkswagen, for instance, plans to introduce 80 electric models (including 50 full-electric models and 30 PHEV models) by 2025, aiming to produce 3 million electric vehicles, one quarter of the company’s total annual sales. Meanwhile, GM announced that it will introduce more than 20 EV models by 2023.
• Most of the major automakers have begun reducing their resources for traditional engines, while the EV battery price is coming down steadily. It was $800/kWh (kilowatt hour) in 2010, which was down to $150/kWh in 2015. Now it’s expected to drop to $100/kWh in 2020 and onward. When it drops to the $80/kWh level, EV’s whole life cost will be the same level of the traditional engine vehicle.

Issues of EV Popularization

• Some of the issues in popularizing EVs include how to secure a stable supply of rare metal materials for the battery, how to establish the mass-supply system for battery cells, and how to expand the network of battery charging stations.
• By 2030, the rate of EV popularization is expected to be highly uneven across the world.
• Saito predicted that EV would be most popularized in China, with the estimated sales of 13.8 million out of the total automobiles sold at 32.5 million. In the U.S., out of the estimated total sales of automobiles of 18.8 million, approximately 4.1 million, or a little over 20%, will be EVs (less than 1 million of them will be full-electric vehicles).
• For five European countries (Germany, France, the U.K., Italy and Spain), 1.39 million automobiles are expected to be sold in 2030, 4.3 million of which being electric. In these countries, sales of the PHEVs and EVs (full-electric) are expected to grow, but those of the hybrid vehicles are expected to be sluggish.
• Automobile sales in Japan are projected to be 4.4 million in 2030, about 1.7 million of which will be EVs, and most of them will be hybrid, according to Saito.

Impact of Electrification

• Saito stated that it is expected that sales of traditional engined vehicles will hit their peak in 2024 or 2025, and the market for the engined vehicles starts to shrink. In contrast, the EV market is seen to grow, but its market share will still be at the 30% level in 2030. Therefore, the industry must plan a strategy for both engined and electric vehicles.
• The automakers will be required to create models that meet the various local needs, taking into consideration each model’s body type, location and powertrain for each market.
• As the automakers introduce an increasing number of EV models into markets for varying local needs, the industry will box itself into the corner where it is more and more difficult to earn profit due to the increasing costs of R&D, purchasing, and production. What should they do to arm themselves against such a prospect?
• The engined vehicle area will remain as the cash cow, but it’s not easy to take advantage since the market is expected to get smaller. Strategies such as focusing on sales of highly profitable models at specific target markets, as well as reducing the model types, could be on their list of strategies.
• Further suggestions for the automakers include: (1) selection and omission regarding the target locations, powertrains, and model types; (2) fundamental change in automobile architecture; (3) promotion of horizontal division of labor such as outsourcing, R&D consignment, and centralized purchasing system; and (4) consolidation into camps, such as forming a camp among the OEM members to pursue economies of scale.

Strategies for Automakers

• Toyota, Mazda and Denso recently joined together and signed a joint technological development agreement pertaining to the basic structure of EV, starting up a joint venture company.
• Renault, Nissan and Mitsubishi Motors recently announced a joint plan, “Alliance 2022,” a six-year plan for EV development.
• While GM has unveiled an ambitious portfolio strategy to strengthen the profitability of its engined vehicle segment based on selection and omission, Volkswagen has launched the “Strategy 2025” project, aiming to sell 2-3 million electric cars annually while introducing 80 EV models by 2025.

Strategies for Parts Suppliers

• Generally, powertrains are manufactured specifically for each automaker. But the expansion of EV production is seen to change that practice. According to Saito, powertrains for EVs will require a supply of many different types of products in a smaller volume, pushing for standardization beyond the boundary of individual automakers. It’s also expected to push for horizontal division of labor such as a system-based supply system and specialization of product development, as well as the increase in the demand for global-based supply.
• As for engined vehicles, the segment will get smaller and more consolidated, which may result in more demands for cost reduction from unexpected areas. Engine parts makers may also face new competition, demand for sharing the work of product development, etc.
• In the end, parts suppliers for EVs as well as engined vehicles will be required to have new, unconventional strategies for survival, as the automakers will look harder for dependable suppliers of more standardized products, Saito added.

Yasuhiko Ushikubo, Head of Mizuho Bank’s Industry Research Department

Tomomi Saito, a member of Mizuho Bank’s Industry Research Department