The data ecosystem of AVs are offering new paths to profit for carmakers

Carmakers have regained some of the upper hand in self-driving: Businesses once thought to be on the path to extinction are calling the shots when it comes to self-driving partnerships.

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In 2014, Uber and Lyft were the future. Automakers like Ford and GM were under pressure as these fledgling startups threatened to cause a fall in sales, as they aimed to curb the need for personal car ownership.

Initially, carmakers concluded they needed to partner with Uber or Lyft and help create autonomous vehicles or risk extinction. But in the short lifespan of the self-driving industry, a series of significant changes has shifted the power to the traditional automakers.

Ford, GM, Volvo and others have regained some of their leverage as Silicon Valley has come around to the idea that, well, building a car is hard, and no matter how readily they can create the technology, self-driving cars won’t hit the road unless they work closely with automakers.

The shift first became clear in 2016 when Google finally came to an agreement to outfit a limited number of Fiat Chrysler cars with autonomous technology — now about 500 cars — and Uber bought 100 Volvos to do the same.

Google and Uber started to realize how hard-pressed they were to find automakers wiling to become metal benders for them. The tech companies wanted automakers to manufacture a Google or an Uber car. Automakers resisted, refusing to strip their cars of their own branding.

Now they have the leverage to plug their own autonomous vehicles into ride-hail networks. Daimler is doing that with Uber; Jaguar Land Rover is doing that with Lyft.

The self-driving ecosystem

The autonomous ecosystem consists of three primary components: The automakers, the self-driving software providers (often referred to as the brains) and the path to market represented by the customer network developed by Uber and Lyft.

Early on, automakers struck relationships with ride-hailing companies to make sure they weren’t shut out of this budding market.

General Motors invested $500 million in Lyft, establishing a plan to plug their future self-driving cars into the network once they were ready to hit public roads.

Then, for a large part of 2016, it was the software companies building autonomous technology that held the power. The narrative was that building the brain that drives these cars was the hardest problem, Silicon Valley was the answer, and these laggard, century-old companies would be lost without tech’s self-driving engineers.

The tech industry was convinced that the software was the hardest problem to solve.

Automakers like Ford wanted to work with Alphabet’s self-driving arm, now called Waymo, or companies that could compete with Waymo. Even Uber was trying to work with Waymo before former CEO Travis Kalanick decided to venture out on his own.

In March, GM acquired Cruise, a self-driving software startup, for $1 billion; in a talent grab, Uber acquired self-driving trucking startup Otto for $680 million. That acquisition is now at the center of a trade secret misappropriation lawsuit between Alphabet and Uber.

Waymo

Late to the game, Ford also took a majority ownership stake for $1 billion in newcomer Argo.ai, another self-driving software startup. That’s just to name a few.

But in that time, dozens of self-driving software companies have sprung up. That created some competition among these new entrants, but as there are only so many major car manufacturers on which to deploy these technologies, Detroit got the upper hand.

That shift prompted some VCs to turn their attention away from investing in the brains of the ecosystem, and focusing more on what some are calling “ingredient” technologies. These ingredient suppliers are creating hardware that will need to be fitted into a car manufacturers’ build of a self-driving vehicle.

That includes companies working on developing smaller parts of the supply chain — like the laser-based radar, or lidar. For instance, newcomer Luminar recently raised a $36 million seed round from 1517 Fund, Canvas Ventures and GVA Capital.

That has also left the software developers to compete on relationships and talent rather than a different technology offering. In the case of startups like Aurora and nuTonomy — both of which create systems that help a car process what its sensors pick up — investors are betting on which company will deploy their cars first based on the caliber of the engineers developing the technology.

Some expect an impending period of consolidation where some of these smaller startups join forces and bring together their capital, infrastructure and talent, and others fall by the wayside.

“One of my core hypotheses about this space is the technology is complex, difficult and new enough that there will be few groups that will get to a working solution in the near term,” nuTonomy co-founder Karl Iagnemma told Recode. “If you believe that only a handful will get access to the technology, then my feeling is the people who hold that technology will have this rare and valuable commodity.”

In large part, these 30 or more self-driving startups aren’t trying to build a car from the ground up. They also know how important it is to make sure the hardware and software are closely developed and are integrated into the production line. This all requires a carmaker partner.

nuTonomy

“I’ve learned over the years in doing self-driving cars, you need support from the automakers,” Argo.ai CEO Brian Salesky previously told Recode. “The virtual driving system is an extremely complex set of hardware and software; you need the support of an [automaker] to integrate that safely and cost-effectively.”

Now carmakers have a myriad of companies to choose from — allowing them to be picky about which players to work with in addition to striking non-exclusive relationships.

Automakers like Ford can hedge their bets and work with multiple self-driving tech companies.

By that same token, there’s no reason an automaker couldn’t simply work with both Uber and Lyft — or even decide to create its own ride-hail apps.

Add to that, these century-old companies have a clear and likely unchanging value in the self-driving supply chain.

There are, of course, exceptions, and the dynamic may in fact shift again. As Iagnemma said, if only a few self-driving software companies are able to reach level 5, considered full autonomy, then these companies will become more valuable.

The prime exception that comes to mind is Lyft’s new autonomous strategy, wherein the company is serving as an agnostic platform for automakers and tech companies to click into, but also building its own self-driving software. But even that was done in a bid to gain leverage in the supply chain, making it a more appealing partner to automakers.

Each of these components — the car, the brains and the path to market — are necessary and crucial parts of the ecosystem. But it’s clear, at least for now, automakers hold a great deal of the leverage in this dynamic.

FRANKFURT/DETROIT (Reuters) – BMW and Daimler, the world’s top luxury carmakers, have announced alliances with suppliers, talking up the virtues of having a bigger pool of engineers to develop a self-driving car.

But another motive behind these deals, executives and industry experts told Reuters, is a concern that robocars may not live up to the profit expectations that drove an initial investment rush.

Carmakers are increasingly looking to forego outright ownership of future autonomous driving systems in favor of spreading the investment burden and risk.

The trend represents a clear shift in strategy from little more than a year ago when most automakers were pursuing standalone strategies focused on tackling the engineering challenge of developing a self-driving car, rather than on the business case.

“Although it is a substantial market, it may not be worth the scale of investments currently being sunk into it,” said a board member at one of the German carmakers, who declined to be identified because the matter is confidential.

Dozens of companies – including carmakers and tech firms like Google and Uber – are vying for a market which, according to consulting firm Frost & Sullivan, will only make up about 10 to 15 percent of vehicles in Europe by 2030. There are sure to be losers.

“It’s impossible for me to believe there will be 50 successful autonomous vehicle software producers,” said John Hoffecker, global vice chairman of Michigan-based consulting firm AlixPartners.

In July last year, BMW became the first major carmaker to abandon its solo development of self-driving cars in favor of teaming up with chipmaker Intel and camera and software manufacturer Mobileye to build a platform for autonomous cars technology by 2021.

The decision followed a trip by senior executives to visit startups and suppliers to gauge BMW’s competitive position.

“Sitting at other companies, one rattles off the technological challenges and safety aspects, and you come to realize that many of us are swimming in the same sludge,” Klaus Buettner, BMW’s vice president autonomous driving projects, told Reuters.

“Everybody is investing billions. Our view was that it makes sense to club together to develop some core systems as a platform.”

Daimler’s Mercedes-Benz has since combined efforts with supplier Bosch, three months ago, while Japanese carmaker Honda has said it is open to alliances in the area of autonomous cars.

Even deep-pocketed tech companies are teaming up. San Francisco-based transport app operator Lyft and Alphabet Inc’s self-driving car unit Waymo pooled their resources in May.

 

SHARE THE BURDEN

Partial autonomy is already a reality in higher-end cars that keep in lane and adjust their speed in motorway driving. Each of the next stages – “eyes off”, “mind off” and ultimately driverless autonomy – will likely take years to become reality.

FILE PHOTO: A couple gets into the Mercedes-Benz F015 Luxury in Motion autonomous concept car during the 2015 International Consumer Electronics Show (CES) in Las Vegas, Nevada January 5, 2015. REUTERS/Steve Marcus/File Photo

Klaus Froehlich, BMW’s board member responsible for development, said the company was likely to lose money with its first fully autonomous vehicles, just like it did with its first-generation electric cars. But developing the technology remains a necessity in order to stay relevant as a carmaker.

“It is an enabling technology, not a business case,” he said about BMW’s decision to develop autonomous vehicles. “But if the burden can be shared on a platform, I have nothing against that.”

One of the most financially promising markets that autonomous technology will open up is driverless on-demand taxis, which may one day come to replace regular cabs and parts of public transport in large cities.

“Robotaxis” are expected to drive the wider market for car sharing and ride-hailing, which was worth $53 billion last year and could be worth $2 trillion by 2030, according to a McKinsey study published earlier this year.

Ford and General Motors are investing at least $2 billion each to develop self-driving vehicles for urban ride-sharing fleets beginning in 2021, competing with incumbents and start-ups.

The emergence of alliances involving the likes of BMW and Mercedes-Benz comes at a time when regulators are pushing for a creation of standards for the new technology, which has the potential to improve vehicle reflexes and cut accidents by up to 90 percent, according to Boston Consulting Group.

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Industry experts say such standardization could make it much harder to develop a product which stands out, calling into question the wisdom of high-stakes, go-it-alone strategies.

ALLIANCES, MERGERS

In September 2016, the U.S. Department of Transport and the National Highway Transportation Safety Administration released guidance for heavily automated vehicles.

The regulator urged carmakers to disclose how vehicle reflexes are programed, particularly when cars are faced with a dilemma, such as choosing between hitting a cyclist or accelerating beyond legal speeds to avoid an accident.

“It is important to consider whether highly automated vehicles are required to apply particular decision rules in instances of conflicts between safety, mobility, and legality objectives,” the guidance said.

“Algorithms for resolving these conflict situations should be developed transparently using input from federal and state regulators, drivers and passengers.”

European regulators too are debating whether to standardize speeds and distances which autonomous cars need to adhere to while weaving in and out of traffic or joining lanes.

Pressure not to waste development costs is laying the groundwork for alliances and even mergers between the various companies supplying technology for autonomous cars, including makers of vehicles, software, computer chips, radar, camera and laser sensors and high-definition maps.

BMW, Mercedes and Audi put aside their rivalry and teamed up to buy mapping firm HERE, for example, in order to cut their dependence on Google.

What starts out as arms-length agreements designed to capture market share, much like code-sharing deals between airlines, may evolve further into takeovers once the next investment round is due, executives and advisers said.

“Will we see what is happening in aviation be adopted in automotive – where first we see alliances, collaborations and consortiums, and then we see full out market combinations?” asked Bill Curtin, head of mergers and acquisitions at global law firm Hogan Lovells.