This article is the second in a series of articles discussing long-term disruptive trends and their impact on restructuring activity. Read Bankruptcy Venue Reform, the first installment of this series.
The English Oxford dictionary defines “disruption” as a disturbance or problems which interrupt an event, activity, or process. Disruption is ubiquitous in business. A few examples include customers filing for bankruptcy (Toys “R” Us Inc.), new laws (Tax Cuts and Jobs Act), labor strikes (work stoppage at the ports in Los Angeles and Long Beach), natural disasters (Hurricanes Harvey and Katrina), new technological innovations (the Internet and mobile phones), and changes in social, cultural or economic trends (America’s shrinking middle class). Management teams routinely make tactical and strategic decisions to prepare for or respond to disruptive change. Fortunately (for restructuring practitioners), not every decision will be the correct decision. As a result, disruption can be a precursor to restructuring activity.
The transportation industry is on the cusp of a major transformation that will impact many industries including automotive, financial services (banking and insurance), oil and gas, and real estate. There are numerous disruptive trends impacting the transportation industry including, but not limited to, the following: (1) transportation-as-a-service (“TaaS”) and (2) electric versus internal combustion engine cars.
While the term “Transportation-as-a-Service” might not be mainstream, most have e-hailed an Uber or Lyft (the top two ride-sharing services). Ride-sharing is a TaaS. TaaS can be defined as the shift away from personally owned modes of transportation and towards mobility solutions that are consumed as a service. The growth in TaaS is being driven by many factors including convenience, the prevalence of mobile devices, ubiquitous wireless connectivity, the economics of car ownership relative to ride-sharing fees, and consumers beginning to appreciate how underutilized a car truly is as an asset.
Ride-sharing services have already disrupted the taxi industry in hundreds of cities across the globe. According to the New York Post, “taxi medallion prices reached an average of $1 million in 2013, just before Uber and other ride-hailing services started to take away business.”[ii] Those same medallions today have list prices in the low-to-mid $200,000s.[iii] Akin to the housing crisis, medallion lenders are now severely undercollateralized and borrowers have defaulted by missing debt service payments.
The ride-sharing segment is forecast to reach $15.7 billion in revenue in 2018.[iv] Revenue is projected to reach $28.4 billion by 2022 for a compound annual growth rate (“CAGR”) of 15.9%.[v] As the ride-sharing market continues to grow, drivers will utilize their vehicles less. According to U.S. Census Bureau data, the average travel time to work in the U.S. is 25.4 minutes (or approximately 51 minutes round trip).[vi] This implies that car owners do not use their vehicles 90% of the time (after factoring in personal usage). As vehicles are utilized less (fewer miles driven per vehicle), vehicles will last longer (be replaced less frequently) and vehicle ownership rates (vehicles per driver and per household) will continue to decline.
The trends highlighted above will have a material impact on auto manufacturers with a ripple effect through their dealer networks and supply bases. Auto repair and parts shops might experience traffic declines. If the absolute number of total miles driven per annum continues to decrease, what will happen to the price per barrel or price per gallon of crude oil and gas, respectively? How will oil and gas exploration and production companies respond? How will insurance underwriters evaluate risk (when car owners are driving less than 12,000 miles per annum or if they own a shared vehicle)? How will states respond to this declining revenue stream? Will real estate (for example, parking garages) be repurposed?
While the above are long-term trends that won’t be felt overnight, TaaS will disrupt a wide range of industries.
Do batteries come to mind when thinking about a Tesla? If the engine is the cornerstone to the internal combustion engine than the battery is the cornerstone to the electric car.
According to FleetCarma, in the first half of 2017, electric vehicles grew U.S. market share to 1.07% (based on vehicles sold) from 0.75% in the first half of 2016.[vii] The global electric vehicle market was $129.3 billion in 2016 and is estimated to reach $393.4 billion by 2022 at a CAGR of 20.4% for the forecasted period.[viii] There are many factors driving the growth in electric vehicles. Factors include, but are not limited to, reduced CO2 and greenhouse gas emissions (environmental friendly), decreasing battery costs, and government incentives. In addition, electric vehicles have fewer moving parts (one moving part, the motor, whereas the gasoline-powered vehicle has hundreds of moving parts[ix]) resulting in a more reliable vehicle that requires less periodic maintenance (driving down the total cost of ownership).
During 2017, the following organizations have all increased their electric vehicle sales assumptions: OPEC, the International Energy Agency, Exxon, BP and Statoil.[x] Electric vehicle growth estimates are being revised upward due to declining battery costs.
The trend toward electric vehicles taking market share away from internal combustion engine cars will have a major impact on auto manufacturers and their dealer network and supply bases. Less maintenance will impact auto repair and parts shops. Less demand for oil and gas will have major implications. Will chains of charging stations emerge? How will gas stations respond? Will the increasing demand for electricity stain the power grid? Will the growth in electric vehicles make the power grid more efficient? How will utilities respond?
This long-term trend will have major implications over the coming decades.
Disruption is a fact of life in business. Management teams are paid to make strategic decisions to be the disruptor or, if caught flat-footed, respond to disruption. The disruptive trends highlighted above will require management teams in many industries to respond to trends that likely will have a negative impact on their existing businesses. Not all will respond in time nor will all make the right decisions. Select companies will become distressed. Restructuring advisors stand ready to help. Hopefully, sooner than later.
[i] The views expressed herein are those of the author and are not necessarily the views of MorrisAnderson & Associates, Ltd., its management, subsidiaries, affiliates or other professionals.
[ii] Investors see opportunity as taxi medallion prices ‘bottom out’, New York Post, October 14, 2017 (https://nypost.com/2017/10/14/investors-see-opportunity-as-taxi-medallion-prices-bottom-out/)
[viii] Global Electric Vehicle Market (2016-2022), Oristep Consulting, September 2017.
[ix] How Do Gasoline & Electric Vehicles Compare?, Idaho National Laboratory, Advanced Vehicle Testing Activity (https://avt.inl.gov/sites/default/files/pdf/fsev/compare.pdf)
[x] Everyone Is Revising Their Electric Vehicle Forecasts Upward – Except Automakers, Greentech Media, July 17, 2017 (https://www.greentechmedia.com/articles/read/everyone-is-revising-electric-vehicle-forecasts-upward#gs.iZLo9aQ)
Todd A. Zoha, CTP, CIRA, is at AlixPartners. He has 16 years of experience as a C-level executive (CRO, CEO and CFO), seasoned restructuring professional and trusted business advisor. He specializes in crisis and interim management, corporate restructurings and transformations, financial and/or operational turnarounds, cash enhancement, and performance improvement initiatives.
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