Detroit Has Val­ley Envy

▶ The rise of robot cars is forc­ing al­liances with tech in­ter­lop­ers ▶ “We can wait to be dis­rupted, or…take an ac­tive role to dis­rupt”

Bloomberg Businessweek (North America) - - Com­pa­nies/In­dus­tries - �Keith Naughton and David Welch

A traf­fic jam of Sil­i­con Val­ley com­pa­nies has a mis­sion: to de­stroy Detroit’s busi­ness model and take over trans­porta­tion with driver­less cars and shared mo­bil­ity ser­vices. Yet last sum­mer, Gen­eral Mo­tors’ top brass ven­tured be­hind en­emy lines to meet with the very forces try­ing to up­end the in­dus­try. When the 15 ex­ec­u­tives re­turned to Detroit, they re­al­ized they needed to de­fend their turf not only by ac­cel­er­at­ing their own mo­bil­ity pro­grams—from rideshar­ing out­fits to driver­less-car soft­ware—but also by form­ing al­liances with the chal­lengers in the Val­ley.

By Thanks­giv­ing, GM, which since 2000 had in­vested heav­ily in self-driv­ing cars and rolling 4G hotspots, was in a hurry to find a part­ner to com­bine its in-house tech­nol­ogy with a ride­hail­ing ser­vice. But Uber Tech­nolo­gies wasn’t in­ter­ested in align­ing with old­line man­u­fac­tur­ers. So GM struck an agree­ment to in­vest $500 mil­lion in Lyft for a 9 per­cent stake in the No. 2 ride-hail­ing busi­ness. GM Pres­i­dent Dan Am­mann now sits on Lyft’s board. A few months later, GM dropped al­most $1 bil­lion for self- driv­ing soft­ware maker Cruise Au­to­ma­tion, one of the rich­est deals ever in the Val­ley. “It’s more than get­ting a win­dow view,” Am­mann says of the in­vest­ment he con­tends is crit­i­cal to GM’S fu­ture. “We want to make it clear that this is a sig­nif­i­cant strate­gic in­vest­ment.”

The rise of self-driv­ing cars and the shar­ing econ­omy has Detroit on the de­fen­sive. The Amer­i­can auto in­dus­try, which long prided it­self on fol­low­ing its own path, now re­al­izes it must part­ner with play­ers in Sil­i­con Val­ley to re­main rel­e­vant in a fu­ture where cars drive us and we don’t own them. Fiat Chrysler Au­to­mo­biles Chief Ex­ec­u­tive Of­fi­cer Ser­gio Mar­chionne says he wants to help Ap­ple build a car. Ford has en­gaged in ne­go­ti­a­tions with Google that have yet to yield a deal. Ford CEO Mark Fields says the search gi­ant and Ap­ple could be his key ri­vals in the fu­ture. Be­yond Lyft, GM has ex­pressed in­ter­est in hook­ing up with Google. The au­tomak­ers of­fer their cen­tury- old ex­per­tise in mass pro­duc­tion, but they also want a role in de­vel­op­ing driver­less tech­nol­ogy.

“We can wait to be dis­rupted, or we can take an ac­tive role to dis­rupt,” Mark Reuss, GM’S prod­uct de­vel­op­ment chief, told Bloomberg Busi­ness­week last fall. “Col­lab­o­ra­tion be­tween Gen­eral Mo­tors and Google is some­thing that I am very in­ter­ested in.”

Detroit’s bosses re­al­ize they face an ex­is­ten­tial threat. U.S. auto sales may drop 40 per­cent over the next 25 years be­cause of shared driver­less cars, forc­ing GM, Ford, and other mass pro­duc­ers to slash out­put to sur­vive, says Bar­clays an­a­lyst Brian John­son. If Detroit doesn’t get into bed with the dis­rupters, well-fi­nanced star­tups such as Chi­nese elec­tric-ve­hi­cle mak­ers Fara­day Fu­ture, Nex­tev, and Atieva may be happy to do deals in the Val­ley.

Au­tomak­ers are try­ing to el­bow their way into the bur­geon­ing busi­ness of mo­bil­ity, spend­ing bil­lions cre­at­ing their own robot rides and car-shar­ing out­fits. GM just started a rideshar­ing ser­vice, Maven, and ac­quired a pi­o­neer in that busi­ness, Side­car Tech­nolo­gies in San Fran­cisco. Ford cre­ated a sep­a­rate unit, Ford Smart Mo­bil­ity, to ex­pand its pres­ence and part­ner­ships in the Val­ley, while also ex­per­i­ment­ing with rideshar­ing in Lon­don and the U.S.

BMW and Daim­ler each tried and failed to ce­ment a part­ner­ship with Ap­ple, with talks col­laps­ing over who would con­trol the ven­tures, ac­cord­ing to Ger­many’s Han­dels­blatt. BMW has started its own lux­ury-car-shar­ing ser­vice, Reach­now, in Seat­tle and is ex­pand­ing it to 10 North Amer­i­can cities. Af­ter ac­quir­ing a trio of trans­porta­tion star­tups, Daim­ler, par­ent of Mercedes-benz, has cre­ated a mo­bil­ity soft­ware and ser­vices unit named Moovel Group. Daim­ler also has a car­shar­ing ser­vice, Car2go.

Mar­chionne, who’s tried un­suc­cess­fully to merge Fiat Chrysler with a larger au­tomaker, con­tends he could con­vince Ap­ple of the mer­its of uti­liz­ing his com­pany’s au­to­mo­tive ex­per­tise. “Ap­ple has a lan­guage, and you have to be able to speak that lan­guage,” he said in

March. “Usu­ally the in­dus­try comes into that di­a­logue with a high de­gree of ar­ro­gance, as we know how to make cars. That’s not very help­ful, as their syn­tax is worth more than our abil­ity to build cars.”

Detroit rec­og­nizes it can’t keep up with the pace of change on its own. “This is a defin­ing mo­ment for the au­to­mo­tive in­dus­try,” says Thilo Koslowski, a for­mer vice pres­i­dent for the au­to­mo­tive prac­tice at Gart­ner who’s now at Porsche. “Me­chan­i­cal engi­neer­ing ex­cel­lence is not suf­fi­cient any­more to suc­ceed in the fu­ture. They have to think about how a car be­comes a node in con­sumers’ dig­i­tal life­styles.”

For now, the quick­est way into that dig­i­tal fu­ture is through al­liances with Val­ley in­ter­lop­ers. Google’s self­driv­ing cars have racked up 1.4 mil­lion miles of test­ing on pub­lic roads, more than any­one else. Uber and Lyft are al­ready eclips­ing taxis in some mar­kets. Ap­ple isn’t re­veal­ing its in­ten­tions but has been on a hir­ing spree to snap up au­to­mo­tive ex­perts— fu­el­ing spec­u­la­tion that it wants to re­de­fine hu­man mo­bil­ity just as it changed the game in mu­sic and mo­bile phones. Pair­ing with these tech giants would mean shar­ing se­crets with the forces try­ing to blow up the tra­di­tional trans­porta­tion busi­ness model.

But no sin­gle com­pany can cover the cost of rein­vent­ing the au­to­mo­bile and mass-pro­duc­ing it. It will be a multi­bil­lion-dol­lar propo­si­tion as the mar­ket for au­ton­o­mous tech­nol­ogy grows to an es­ti­mated $42 bil­lion an­nu­ally by 2025 and self-driv­ing cars ac­count for a quar­ter of global auto sales by 2035, ac­cord­ing to Bos­ton Con­sult­ing Group. Google has ad­mit­ted it can’t build cars on a mass scale on its own and is putting a pri­or­ity on find­ing an au­to­mo­tive part­ner this year, an­a­lysts say. It also has lessons to learn from Detroit’s dis­tri­bu­tion sys­tem and mar­ket­ing meth­ods. “We’re go­ing to need a lot of help,” John Kraf­cik, the for­mer Hyundai Mo­tor and Ford ex­ec­u­tive now run­ning Google’s self-driv­ing car pro­gram, told auto in­dus­try lead­ers in Jan­uary. “In the next stages of our project, we’re go­ing to be part­ner­ing more and more for sure.”

Any mar­riage of con­ve­nience be­tween Detroit and cash-rich Sil­i­con Val­ley com­pa­nies is likely to come with plenty of con­di­tions. The great­est risk to car builders is that they sim­ply be­come the man­u­fac­tur­ing brawn to the Val­ley’s soft­ware brain. That would rel­e­gate au­tomak­ers to ju­nior part­ners build­ing the equiv­a­lent of the cell phone hand­set while the tech guys im­bue au­ton­o­mous cars of the fu­ture with all that makes them spe­cial— and col­lect the lu­cra­tive data they’ll gen­er­ate. It would be as if mighty GM or Ford were re­duced to an au­to­mo­tive ver­sion of Fox­conn Tech­nol­ogy, the Tai­wanese con­tract man­u­fac­turer that as­sem­bles the iphone ac­cord­ing to Ap­ple’s very pre­cise spec­i­fi­ca­tions.

“If au­tomak­ers play their cards right, they can be­come more in­te­grated with Google in build­ing and har­ness­ing the brains of the op­er­a­tion,” says Mark Boy­ad­jis, an an­a­lyst at con­sul­tant IHS Au­to­mo­tive. “But if his­tory serves us cor­rectly, Google is go­ing to want to con­trol al­most ev­ery as­pect.”

The bot­tom line Bar­clays says U.S. auto sales could fall 40 per­cent within 25 years. Detroit is look­ing to tech part­ner­ships to stay rel­e­vant.

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