A SELF-DRIVING CAR POOL
Complicated web of partnerships is connecting autonomous tech rivals
In 2016, nobody knew what Argo AI was.
It was a scrappy artificial intelligence startup with lofty goals and industry veterans ready to jump ship from other self-driving firms, eager to try a new approach of making robot cars.
Reinventing the wheel was not exactly on CEO Bryan Salesky’s agenda.
The heart of Argo’s business model was — and is — quintessentially anti-Silicon Valley: Snuggle up with industry titans that have deep pockets and make them investor-partners. The startup has funding from only two firms, keeping the rest of the equity for employees.
“We always thought that would be a compelling business model because it’s a capital-intensive thing,” said Mr. Salesky, a Pittsburgh native.“That’s not foreign to a large manufacturing company. They need the help because those companies don’t typically build software well.”
Truth is, no company trying to crack the autonomous vehicle code is moving anywhere quickly without help. A complicated web of partnerships and acquisitions has formed.
Even companies working together to leverage one another’s expertise haven’t dropped their guard. Mr. Salesky believes that when the winning self-driving companies do emerge, he’ll be able to count them on one hand.
But it’s still worth partnering up. Companies that work together will find success more quickly than larger firms keeping to themselves, if the parties can put ego aside, he said.
Three years after its founding, Argo has wooed two of the industry’s major auto manufacturers, Ford and Volkswagen, into investing billions of dollars into the business, which hit a $7 billion valuation in mid-July.
“Automobile companies realize that if they don’t partner, they’ll be left behind,” said Timothy Derdenger, associate professor of marketing and strategy at Carnegie Mellon University’s Tepper School of Business in Oakland.
Winners and losers
Sprite. Unito. Wolfe. Angus. Empire. Not exactly household names.
These early car companies are just some of the thousands that existed more than a century ago, when the horseless carriage started thrilling the world.
Companies like Ford, General Motors and Chrysler emerged as the winners — and they’re now competing in the fledgling selfdriving market.
Many small auto manufacturers that fizzled out began in the late 1890s or early 1900s.
Most industries face a “consolidation curve,” according to a 2002 analysis in the Harvard Business Review. That contraction is happening more quickly than in the past.
“Today, we predict, an industry will take on average 25 years to progress through all four stages; in the past it took somewhat longer, and in the future we expect it to be even quicker,” the authors wrote. “But, our research suggests, every company in every industry will go through these four stages — or disappear.”
Differentiation is partly what leads some companies to success, Mr. Derdenger said.
“You see this in every industry ... competition plays out and then you start to see the cream of the crop rise to the top and everyone else goes away,” he said.
This is similar to the auto industry at the turn of the century, Mr. Derdenger pointed out.
“You saw a bunch of entry, competition and the best rose to the top. And the reason Ford rose to the top is Henry Ford and his knowledge of the assembly line to reduce costs and scale,” he said.
The autonomous melting pot
Some competitors in the autonomous vehicles race raise money to fuel development by seeking rounds of venture capital. It’s a common system across industries that allows founders to trade equity in their companies for cash.
In February, Aurora Innovation, based in Lawrenceville, took $530 million in Series B venture capital funding from Seattle-based Amazon and investment company Sequoia Partners, based in Menlo Park, Calif.
Meanwhile, Aptiv, a selfdriving firm based in O’Hara, has been working
with ride-hailing service, Lyft, since May 2018, offering riders trips in the company’s autonomous vehicles in Las Vegas as part of a bid to collect data on miles driven.
Lyft is also cozy with General Motors and Waymo, the self-driving outfit spun out of Google’s parent company, Alphabet.
Most entities have retained their own unique brand. Argo struggled with that early on.
In 2017, after Ford invested $1 billion into the Pittsburgh startup, it turned heads.
What is Argo AI? Is it a subsidiary of the Michigan automaker?
“Just because we gave them some equity in the company doesn’t mean that they control our every existence,” Mr. Salesky said.
Pete Rander, president of Argo AI, emphasizes the company is not some sort of department at Ford. Argo is an independent company that will eventually go public, he told the Pittsburgh Post-Gazette last September.
With the infusion of another $2.6 billion from Volkswagen last month, Argo’s profile became clearer. It is its own firm, with its own vision, its own employees, its own patents. It just happens to reel in big customers.
“You can’t build stuff like this just within the four walls of an [original equipment manufacturer]. It takes a different culture, a different type of company that can move fast,” Mr. Salesky said.
Foes becoming friends
It usually takes millions of dollars per year to develop and test self-driving cars, so spreading the costs among partner companies makes sense.
Uber spent $97 million on autonomous vehicles research at its Advanced Technologies Group in the Strip District during the second quarter alone, according to a filing this year with the Securities and Exchange Commission.
That’s down from $117 million during the same period in 2018.
Those figures also include expenses related to other programs that Uber defines as “next-generation technologies.”
Aurora Innovation — after having severed ties with Volkswagen just before the German automaker jumped ship for Argo — partnered with Fiat Chrysler, a U.K.-based automaker, to deploy vehicles with autonomous capabilities.
Fiat Chrysler will manufacture the autonomous-enabled cars, with Aurora building out the brains of the operation. All the more reason to partner — it allows companies to lean on others’ expertise rather than starting from scratch.
“We think that those who are going to have success … are tooling around with technology and creating a platform,” Mr. Salesky said. “Because why reinvent the wheel on something that’s so hard to begin with?”
Jim Hackett, president and CEO of Ford, said in the company’s secondquarter earnings call last month he’s pleased with Volkwagen’s decision to invest in Argo AI.
Ford’s investment in its “mobility segment” has increased from $181 million in the second quarter of 2018 to $264 million during the same period this year, according to company filings.
This is mostly cash for Argo AI operations — the $1 billion investment in 2017 is spread out over the course of five years.
Ford and Volkswagen will pool valuable data, expertise and, naturally, development costs.
“Ford and VW, of course, will remain vigorous competitors ... with each of us designing and delivering unique experiences for our customers,” Mr. Hackett said.
Four stages of consolidation
The consolidation curve consists of four stages.
First is the “opening stage,” which usually begins with a few private startups or a monopoly created by deregulation, like utilities.
Soon, competitors will begin to crop up, so early entrants — like Waymo in Mountain View, Calif. — look for ways to create barriers for entry. Technological advancements in the form of trade secrets and patents are essential.
Mr. Derdenger doesn’t think the self-driving industry is on the consolidation chart yet.
These companies may just be entering phase one. Mr. Salesky thinks some companies could be in the first phase.
The other stages are “scale”; “focus,” which is when the playing field starts to tighten and remaining firms really start to focus on profitability; and “balance and alliance,” which is where the top three or so companies dominate.
A ‘complex business’
Companies don’t leave the fourth stage of consolidation. They stay there and try to maintain their position at the top.
Mr. Derdenger said when smaller tech startups start leaving the industry, licensing their intellectual property to larger firms, it’s a signal the winning companies may be getting close to stage four.
Mr. Salesky ultimately believes that there’s room for only three firms to win. “I want the companies who are doing it right to be successful, even if they’re competitive with us.”