Car Tech: Silicon Valley Takes on Detroit

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GOOG and AAPL have been investing in automotive technology hoping to disrupt nearly $2T in annual car sales, $4T in car related expenses and $1T in local transportation and delivery. According to reports, AAPL intends to follow TSLA’s lead with its own plug-in electric vehicle (EV) by decade end, targeting innovation in the user experience and leveraging its brand/design assets. While the market for EVs is growing quickly, they remain a tiny portion of the overall market and must overcome the obstacles of uncertain industry standards, high costs, limited vehicle range, and a sparse support infrastructure. Established car makers are also investing heavily in EVs, and bring substantial advantages, particularly if the transition continues at a gradual pace. In this context, TSLA’s long term play may be as a battery supplier while AAPL may be better off with an established partner rather than as a stand-alone car manufacturer. In contrast, GOOG’s self-driving car play targets transportation as an on-demand service, following the Uber model. By eliminating drivers in fleets of personal transport/delivery vehicles, service costs will drop sharply while safety and predictability improve. AMZN, with its plans for autonomous delivery drones, is following on a parallel track. The concept faces stiff regulatory and consumer education obstacles but would be extremely disruptive to the existing model of personal vehicle ownership and the associated support infrastructure. Ultimately, we believe this paradigm shift foretells opportunities that will be far bigger and more lucrative than the more evolutionary transition to EVs.

Transportation is a massive market. At nearly $2T in yearly sales, cars are one of the few consumer product markets bigger than mobile phones. That, the emphasis on design, the growing importance of electronics and the disruption of electric vehicles make it inevitable that AAPL would be interested. The emerging market for on demand transportation services initially targets the $1T world market for taxi, livery and local delivery, but ultimately should threaten personal vehicle ownership, and its $6T in annual costs, as well, once fleets of self-driving vehicles overcome regulatory bureaucracy and demonstrate their substantial cost, safety and practical advantages.

EVs inevitable but uptake slowed by cheap oil. EV’s have made obvious progress but remain just 0.3% of annual new car sales, with cost of ownership still a considerable premium to gas powered cars and range limitations still an impediment. Cost and performance improvements in battery technology have been linear, while low gas prices keep the relative operating cost bogie farther ahead. This modest pace of change favors incumbents who have made considerable investment in EV tech and can gradually transition their product lines.

Self-driving tech progressing rapidly but regulation is a major obstacle. Automakers have been introducing self-driving capabilities to augment their traditional vehicles, adding automatic parking, adaptive cruise control, and other functions as options. While many reports have focused on the batteries of sensors, the real innovation behind self-driving is a deep learning AI able to interpret sensor readings and react accordingly. Despite growing consensus that these cars are safer and more efficient than driver operated vehicles, regulators remain cautious in approving them for general use. However, there are countries, with particular congestion, pollution and/or infrastructure concerns that may be early adopters, and their experience could hasten adoption elsewhere.

Self-driving vehicles will be huge accelerant for transport-as-a-service. While an auto-pilot option for personal vehicles could prove popular, freeing commuters from drudgery and would-be drunk drivers from catastrophe, we believe that on-demand transport-as-a-service fleets will be the breakthrough application. The disruptive business model established by Uber threatens car ownership as well as traditional for-hire vehicles and local delivery when costs and reliability see step function improvement from autonomous operations. Autonomous vehicles are also a natural for the long-haul trucking market, improving efficiency and eliminating costly and dangerous driver errors.

AAPL makes high risk move to lever brand and design skills. Cars are obviously a tempting market for AAPL, which could lever its peerless brand, design prowess, hardware/software integration skills and leadership in user interface technologies to give a go at its own high-end EV. Still going it alone is a risky proposition, given economies of scale, a steep learning curve, tight industry margins and their considerable gaps in many areas crucial to car making. Just as the widely rumored AAPL made TV set never materialized, we believe an all AAPL built car is unlikely. We look for a partnership instead.

TSLA endgame is batteries not cars. TSLA is an object lesson for AAPL, having made profits in just one quarter over its 13 years and selling just 31.6K units in 2014. In contrast, the world’s largest premium auto brand, BMW sold 2 million cars in 2014, including an estimated 17.8K plug-in EVs in just their first year of wide availability. As the EV market plays out gradually, incumbents have time to play catch up, while levering their assets, limiting the competitive disruption. By contributing its IP toward open standards and investing in its Gigafactory, TSLA reveals that its plan may not be dominating EVs but rather, their batteries, which will have sizeable residential and industrial applications as well.

Uber prepping for future move to autonomous fleet. Unimaginative analysts may scoff at the $50B implied valuation for a mere “taxi and limousine” replacement, but Uber has set its sights on a global disruption of transportation writ large. As the cost of personal transportation and local delivery on demand falls, Uber competes not just with yellow cabs, but with car ownership and store visits as well, expanding the future addressable market many fold. Seeing the potential for driverless cars to both sharply reduce costs and raise customer convenience, Uber has begun to invest heavily in self-driving technology through a partnership with robotics hotbed Carnegie Mellon University.

GOOG positioning to use self-driving tech to challenge Uber. GOOG began its work on autonomous cars in 2009, proving prescient as incumbent car makers and disruptors like Uber and TSLA have jumped on the bandwagon. Self-driving systems rely on highly accurate maps, elaborate sensor arrays, and adaptive on-board systems informed by massive databases of driving experience. With 1.5 million miles logged, GOOG leverages the most data parsed by the world’s most sophisticated data analytic and learning computing platform, supported by the most accurate maps. We believe that these are substantial advantages, even relative to the other very capable organizations that have been working on the problem. We note that although AMZN’s drone delivery initiative does not involve cars, it is levering similar expertise against a fundamentally similar idea.

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