Is Detroit Moving to Silicon Valley?

 

f 015 luxury motion mercedes concept self driving car

As the value of an automobile moves to its electronics and cars become networked, self-driving computers, will the car industry move to the west coast? Consider:

  • Google now logs more than 10,000 miles weekly with self-driving cars — more than a million miles to date. Most of this is Mountain View (also Austin). Nobody else knows as much about navigating self-driving cars and building the underlying mapping technology as Google.
  • San Francisco-based Uber is widely expected to begin testing driverless car services. California’s recent move to classify drivers as employees is likely to accelerate this effort. Few can match Uber’s expertise at quickly matching drivers with riders in hundreds of markets worldwide.
  • Electric car pioneer Tesla, based in the former NUMMI plant in Fremont, is widely expected to offer driving services that compete with Uber.
  • Apple is unlikely to sit this one out — although the extent to which they aspire to build self-driving cars is unclear. The Wall St. Journal announced this week that Apple plans to ship a car in 2019 and has been hiring industry veterans for the secret project (code name Titan, which sounds slightly Titanic).

Ben Evans at Andreessen Horowitz has given some thought to how cars are evolving. He makes several useful points:

  1. The current focus is on building an autonomous car that can drive down the street and not hit anything. This is the Google skill — and maps are critically important. Maps, he points out, have moved from discretionary accessory to vital necessity.
  2. As autonomous cars grow, they are likely to be deployed as a service by companies that can optimize a fleet of autonomous on-demand cars in a city on a real-time basis. This takes NetJet type optimization skills and seems well-suited to Uber or Google. It also radically reduces the number of cars (and parking spaces) the world will need. The industry will shrink.
  3. The buyer and thus the car is likely to change — and this will change the cars. Cars will become simpler, partly because they are increasingly electronic. At first they will still have a steering wheel. Eventually however, they may not have brake pedals or windshield wipers. And if you are summoning a fleet car, they will be purchased based not on Tesla-elegant styling, but by corporate fleet managers, much like PCs are today.

Even high tech cars will remain a large business. Indeed, that’s what attracts Apple and Google. There are simply not many industries left to revolutionize that can move the dial on companies with revenue measured in the hundreds of billions of dollars. Evans’ chart showing the place of the $1.2 trillion global car industry in the minds of technology CEOs is instructive.

Evans on car market 1
As Evans notes however, this is today’s market — the one that looks to get smaller.

“Some analysts are talking about unit sales halving over time (with growing demand from China and other newer markets offsetting new technology). Meanwhile, moving to electric can reduce the price of a car, or of course (Apple’s preferred option) expand margins.”

He notes that even if Apple goes after the premium car segment, as seems likely,

“the bubble on the chart above shows Mercedes-Benz, BMW, Audi and Lexus, which combined sell 5-6m cars a year for $220bn in revenues (and so averaging $40,000 per car). That’s where Tesla is aiming now, and where one might expect autonomous cars to arrive first. For comparison, iPhone revenue in the last 12 months was $146.5bn….To look at that another way, if Apple created a car business as big as BMW and Mercedes combined, that business would generate less profit than the iPhone.” (my emphasis)

In short, yes — Silicon Valley will be the next Detroit. Seat belts advised — this will be a wild ride.