The Importance of New Technology for Transportation

During his almost 6 years of consulting, Nathan Zielke greatly enjoyed the variety of assignments and tasks, but the structure and flow of projects got repetitive. What he really wanted was to be in an environment where, instead of just planning change, he could take part in the actual implementation of it.

Legacy challenges hinder transportation

With a solid background in transportation, Zielke is naturally well-acquainted with the sector’s problems. He sees the biggest challenges currently to the air and rail industries as being the sector’s so-called “legacy” issues, by which he means the hundred-plus years of tradition that the sector carries. This legacy includes unions, contractual obligations, aging infrastructure, and assets that make the traditional players in the sector too slow when it comes to change.

Disruptive innovation stokes industry transformation

Zielke explains that the sector’s legacy players – like the major airlines, for example – were able to survive previous shocks, such as the blow from low-cost airlines like Ryanair. However, it took them years to adapt their strategy to those new players, but he estimates that new challenges will be even more radical. These challenges will be due to the digital revolution, and they will be harder to survive. “New entrants 10 years ago required strong financial backing as significant investment in assets was almost always required. Today, new entrants address corporate’s core markets through digital product offerings which are much cheaper, faster, and easier to implement,” Zielke underlines.

“There are two things about digitalization and using new technology for transportation: it helps you to cut costs, but it also enables others to address your market and, most importantly, your customers”, Zielke says. Most legacy players have good experience in cost-cutting, but the aspect of losing customer contact to new digital entrants has been underestimated by many companies. Zielke gives an example of the railway sector, “they know how to slowly reduce costs, but they forget about offering what customers really want – and that is usability, ease of access, and a smart interface.”

Striking a balance: startups and corporations converge

Take, for example, buying a trip from Paris to Amsterdam. Because of national borders and the different legacy railway systems, a simple thing like purchasing one ticket from Paris to Amsterdam can be a daunting experience for the customer. Using a website instead can unravel all this complexity and provide a one-stop-shop for one itinerary for one price – and customers can even choose the fastest and cheapest routes. New players thus provide a billable service to the customer, while at the same time squeezing margins for legacy players. The most crucial element here is that corporations risk “losing the customer,” Zielke stresses. Once platform and broker companies take away your end-customer contact, you will be degraded to a simple product delivery company – and these typically don’t generate attractive margins. “Cost-cutting will not help you to survive; it will just help you slightly extend your remaining life. You need to keep and win the market, and the only way to do so is to listen to the customer and to offer him what he demands”, Zielke points out.

Challenges, however, are not restricted to legacy players. New entrants, Zielke points out, do wonders when they first start out in the transportation sector, as they provide simplicity, but as they grow, they will inevitably add more and more features to distinguish themselves from other brands as well as provide services that keep customers coming — which ultimately results in more complexity. This is where old legacy firms, which have experience managing complexity, might have an advantage. “I have seen many start-ups and SMEs which grew quickly for years and then ended up seeking help to manage their complexity,” Zielke says. New entrants often underestimate the nature-given complexity of some environments; in the rail sector, for example, a new train operator would also rely on state-owned infrastructure companies with their decades-old processes and complexities.

Navigating the crossroads of technology and sustainability

If you look at these two streams – start-ups learning to deal with complexity versus corporations learning to handle digitalization and quick change – it becomes obvious that the smartest way forward is to collaborate. Corporations and start-ups working together can be beneficial for both parties,” Zielke says. However, the cultural difference is still huge, and it all comes down to how top management handles the issue. Change, he says, comes from developing a new culture for the company. He compares it to telling a new story for the company. But, in order for the change to actually take place, the story has to be believable. An example of an unbelievable story is when the head of an old legacy firm starts preaching the gospel of digital cool to his company, but everyone in the company knows that this same boss still prints out his emails.

It is harder than ever to bring sustainable change into corporations these days because new technologies for transportation are ten times faster than 20 years ago. “If you want to stay at the top of the development game, you need to think and act fast,” says Zielke. CEOs like Microsoft’s Satya Nadella have pointed out that app development might not be the best way forward. Most top managers still believe that deciding to build an app for something is a modern and digital move. “But it might be just the opposite; apps might be sunk cost,” Zielke says. “Just look at China. People steer large parts of their lives within one simple messenger app, WeChat. They don’t use 20 separate apps any longer, and with innovations like Amazon’s Echo, this trend will become more and more the new normal.”

Zielke does not discourage change, but the emphasis here is that it is not quick. Change – strategic transformation – must be prepared for, and this takes time. Quick change, however, can be bought! Instead of attempting to transform an old culture overnight, it would be better for a legacy company to simply buy a start-up.

This was one of Zielke’s reasons for starting DreamCheaper, a company that monitors hotel price developments after the stay has been booked – and once a cheaper rate appears on the global market, the algorithm switches the booking to the lower rate to save customers money. “We act like insurance against missed price drops,” says Zielke, and protect customers from overpaying. As DreamCheaper only takes a 20 percent cut of the savings, it really acts on behalf of the customer, a positioning which will be of utmost importance to customers once they delegate purchasing decisions to bots. “We believe people appreciate a neutral ‘policy’ which makes sure that all these bots act on their behalf instead of increasing someone else’s margin,” explains Zielke.

One last challenge Zielke mentions is the effects of technological innovation on the overall economy itself. In particular, he mentions the negative effects of some changes. He used the phenomenon of Uber as an example. Through digitalized services, Uber was able to revolutionize taxi services. In doing so, Uber eliminated a key function – that of radio callers, the paid employees that would dispatch drivers to their next customer. For the customer, Uber is cheaper, faster, and easier. But for radio callers, Uber is not an improvement but rather a source of unemployment.

This is a key example of how all innovations have the potential to create economic losers in their wake. In fact, without naming names, he said that a lot of market disrupters are huge moneymakers, producing profits that are not justified, as these profits for the few do not produce equivalent macroeconomic benefits. This is a concern he likes to address in ventures. “Is it fair to automate a process by laying off people just to cut costs by 25 percent? Certainly not if this automated service then takes a 25 percent provision and literally ‘prints’ money as its scalable business model only generates very incremental marginal cost”. He also stresses that there might be macro-economic downsides to the much-hyped “digitalization” and we would be well advised to manage them in a meaningful way.