Canaries in the coal mine: how do newcomers participate to the growth of new niches in the automotive industry?

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With the emergence of electric and autonomous vehicle, as well as new mobility services, the automotive industry appears to be about to change drastically. Public and private actors are locked in a communication race to predict the end of personal vehicles, and the rise of all electric fully autonomous vehicles in the near future… Nevertheless, no matter how engaging these storyline might sound, we have so far failed to see it actually happening: Market prospects are limited at best, regulation is far from established, and technological development might be slowing down.
However, while tangible evidence of disruption is limited, one observation can be made: a large number of outside firms are making a move towards the automotive industry. These new entrants are looking to exploit these opportunities to settle on new niches. While unlikely to succeed individually in disrupting existing firms, we should not underestimate the impact their presence can have on the industry. Indeed, new market niches tend to have a high uncertainty of technologies and customer needs, and limited economies of scale, as well as low entry costs. Newer firms are thus more prone to explore these new opportunities than incumbents are. Understanding how these firms explore new opportunities and how they interact with existing players provides key insight on industrial innovation dynamics.
An extensive literature exists on how to measure firm performance and value, but it is hardly applicable to uncertain environment such as the early stages of niches. Indeed, new entrants show a lack of correlation between market valuation and sales revenues. Similarly, indicators that describe firm exit probability struggle to explain the extreme resiliency demonstrated by unprofitable firms in these conditions. This point to the fact that firm external characteristics do not reflect accurately their trajectory. In this paper, we opt to look at the characteristics of niches new entrants are trying to settle, rather than looking at their own characteristics. In other worlds, we ask the question: What niches are new entrants trying to settle?
Klepper’s (2002) work on the early automobile industry describes industry birth as a process. The industry first goes through a phase of mass entry of new players, followed by a period of high mortality of said firms, or shakeout, and a concertation of the industry in a reduced number of firms. While his work focuses on the early stages of the industry, it has been widely shown that entry and exit are continuous phenomenon. Most empirical studies converge in their findings: entry is easy; survival is hard (Geroski 1995). Helfat (2002) proposes that any shift in business practices, regulation or technology opens a new space for firms to enter an industry. The prospects of entering new spaces with limited competition pushes these firms to explore these risky opportunities, when incumbents cannot afford to do so. We can thus conceptualize industry evolution as a series of smaller niche lifecycles, each roughly following Klepper’s phases.
As such, while new entrant’s mortality rates are high, they can have a lasting impact of the industry nonetheless. Firstly, by being quicker to explore niches, they incur most of the unexpected risks and create a precedent for later entrants. Secondly, by being the first to develop market-ready solutions, they participate in shaping business practices, standard choices, and early regulation. Lastly, incumbents rely on new entrants to enter niches at a later stage. Indeed, entrants provide a fertile ground by developing niche specific assets that incumbents might not need to redevelop. While all of these elements are unlikely to provide new entrants any kind of lasting competitive advantage over incumbents in the long run, they have a lasting effect on the industry (Covin 1990).
We distinguish between two types of market opportunities that can be exploited for market entry. On one hand, new firms can decide to leverage new technological developments to propose new solutions to existing uses. This is the case with car manufacturers proposing all electric vehicles, or advance driving features. They exploit what we call new product niches. On the other hand, new firms can decide to explore alternative uses, such as other mobility solutions, to avoid frontal confrontation with incumbents. We call these opportunities new market niches.
The objectives of this paper are the following. Firstly, based on a literature review of papers in applied economics we summarize the common knowledge on industry life cycles, and we propose a framework that posits the key issues of entry/exit in the current era. Secondly, we propose an examination of new product niches and new market niches in terms of their market prospects, regulatory settings, and active firms. Lastly, we explain the specific role of parts suppliers in the exploration of new niches.