The development of driverless cars has accelerated since I argued last year that Google’s driverless car is worth trillions. Not surprisingly, it was Google GOOGL +1.55% that floored the gas pedal. Google announced this spring that it was starting to “master” autonomous driving on city streets (whereas most competing efforts are focused on highway driving). Just a few weeks later, it unveiled a prototype specifically designed for autonomous operation—complete with the dramatic symbolism of not having a steering wheel.
While automakers such as Nissan, Ford, Volvo and Daimler have also made high-profile statements about their autonomous vehicle efforts, none have embraced the audacious, fully autonomous approach being pursued by Google.
Traditional automakers are, instead, pursuing incremental, sometimes-autonomous vehicle strategies. This makes eminent sense in the short term, both from a technical and business standpoint. The downside is that it creates openings for long-term scenarios that automakers should greatly fear.
From a business standpoint, automakers’ incremental approach enables rich pipelines of premium technology and safety oriented car features that do not depend on breakthroughs in technology, regulation or liability. It allows automakers to stay firmly focused on their current competitors—each other. And, it allows them to incorporate new features into their vehicles without any disruption to business as usual.
Technically, this approach is less complex and allows automakers to deploy sometimes-autonomous features now—before Google is able to commercialize its own innovations—and evolve those features over time as technology improves.
Automakers’ incremental strategies generally assume three simplifying technical constraints: (1) Autonomous driving only works in limited scenarios such as highway driving and parking; (2) it requires human-in-the-middle designs where a qualified human driver is available to take control whenever needed; and (3) it depends on widespread infrastructure improvements, such as vehicle to vehicle (v2v) and vehicle to infrastructure (v2i) communications.
Unfortunately, disruptive innovation can upend even the most well-conceived incremental strategies. Just look at Blackberry, Blockbuster, Borders, DEC, IBM, Kodak, Microsoft, Motorola, Nokia, Sears, Yahoo and most of the TV, newspaper and publishing industries—to name just a few bankrupt or struggling former industry leaders. They all bet that non-incremental approaches would not pan out, and struggled with the consequences when those bets went sour.
Will automakers’ incremental strategies on driverless cars also go sour? Here are five reasons that today’s market leading automakers should fear such an outcome.
1. Google establishes an intellectual property (IP) moat. Industry insiders tell me that automakers’ internal conference rooms are abuzz with debates about the strength of the intellectual property that Google is developing. By long assuming that Google’s approach was not technically or strategically viable, automakers gave Google an open field to build its brand and claim intellectual property rights. Now that Google have moved beyond the constraints that automakers place on their own development efforts, the long-term consequences of continuing to allow Google’s relatively unchecked expansion could be dire.
2. Google becomes the dominant supplier. Automakers are used to negotiating with their Tier 1 suppliers from a position of extreme strength. They’ve long used their negotiating power to drive price concessions that, in the view of some industry observers, caused a race to the bottom that almost destroyed suppliers. Imagine how the balance of power in the industry might flip to the sole supplier of fully autonomous vehicle technology. This might be comparable to the tremendous bargaining power that Apple enjoyed with mobile phone operators in the early days of the iPhone. How would automakers fare if they found themselves negotiating with a dominant Google? The extreme case of this scenario is that automakers become makers of commodity hardware and are beholden to Google’s autonomous driving software.
3. Driverless cars create opening for a leapfrog competitor. In other words, maybe Google will choose not to be a supplier at all. The International Energy Agency estimates that a combination of population growth and rising living standards could drive a 250% increase in the number of passenger light-duty vehicles worldwide, to more than 2 billion vehicles, over the next 35 years. There’s no guarantee, however, that those cars will look like today’s cars. How might Google deploy its assets to complete directly with traditional automakers, rather than as just a supplier to the industry? There are a number of plausible scenarios where Google might build, acquire or partner in order to go directly into the car business—much in the same way that Google has the audacity to bet more than $12B for Motorola Mobility to create an option to enter into the smartphone business.
4. Driverless cars create new markets that automakers are unable to serve. It is not a coincidence that the videos showing Google’s self-driving cars always focus on the young, elderly and handicapped users.
A US Bureau of Transportation Statistics survey found that almost 15 million people, six million of whom are disabled, have difficulties getting the transportation they need. This number will rise. The Los Angeles Times reports that by 2030, up to a quarter of the licensed drivers in the US will be older than 85. Fully autonomous cars extend mobility to traditionally unserved and underserved market segments. Expanding into these adjacent markets for mobility is great—but only for those with the fully autonomous cars needed to serve them. It not possible to assume that there will be a driver-in-the-middle to whom to yield control if none of the passengers can “drive” in the traditional sense. The incremental strategy that automakers are pursuing might be the best way to serve existing markets. It precludes them, however, from serving these new adjacent markets.
5. Driverless cars enable massive business model disruption. The doomsday scenario for automakers is that fully autonomous cars lessens overall car sales or enables a large-scale shift to car sharing rather than private car ownership.
Personally owned cars are parked, on average, almost 95 percent of the time, so there is plenty of room to better utilize them through person-to-person car sharing or taxi-like car services. This would create enormous disruption to current automaker business models, as I’ve previously discussed. It would reduce overall car sales. It would shift demand towards small efficient electric vehicles, which would further reduce automaker revenue and profitability. And it would diminish other competitive advantages that large automakers enjoy, such the high capital cost barriers for new entrants, the necessity of complex logistics and supply chains, and the value of dealer-based distribution networks.
Some argue, as Bill Gurley recently did, that Uber is already creating a viable alternative to car ownership. That’s because the convenience of ordering an Uber car of the right type (UberX, UberXL, Uber SUV, Uber Black, etc.) when you need it is making it plausible for more and more people to use Uber than to buy their own cars. And that’s just human-driven car services. Now consider that some studies estimate that driverless cars could dramatically reduce the total number of cars. The same studies found that the cost of taxi service could be reduced by 50 to 80 percent by reducing labor cost and increasing operating efficiency through network coordination. Uber + Google’s driverless car is a recipe for long term disruption that automakers’ driverless car strategies, in their current incarnation, do not adequately address.
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The drawback of automakers’ incremental approaches is that they are unlikely to scale up to fully autonomous capabilities. There are three limiting factors. First, designs built on existing car designs might be too limiting to evolve into completely autonomous cars. Google, at least, recently made this argument. Second, designs dependent on a driver-in-the-middle might never make the leap beyond that assumption. Third, v2v and v2i communication standards and infrastructures—which depend on favorable public policy, enormous infrastructure investment, and widespread adoption before delivering any benefit—might never become pervasive.
At the same time, Google certainly has a long way to go to reach its driverless car vision. As the saying in Silicon Valley goes—never confuse a clear view for a short distance. But, given the talent, resources and progress that Google has demonstrated, automakers should start worrying that Google might actually succeed in developing fully autonomous cars. At the least, automakers need to hedge against such a disruptive outcome.
Yes, it makes eminent sense for automakers to be pursuing incremental strategies—each has no choice if for no other reason than to remain competitive with the others. However, both as a hedge against a major threat and to establish a credible shot at significant opportunities, each automaker must also launch an aggressive fully autonomous program like Google. It will be challenging—in the same way that large companies have historically found it challenging to successfully manage breakthrough innovation. The fact that it is challenging is no excuse for not doing it
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