The New Transportation Ecosystem and The Role of Silicon Valley


This second posting provides additional insights into what the large OEMs are doing, and what Evangelos feels they need to do, to stay competitive. Here are a few excerpts from his posting and some of the conclusions that he reaches based on his own observations and analysis:

If you have been reading the last three of my blog posts—all focused on Silicon Valley Innovation Outposts (SVIOs)—you know that many of these SVIOs are focused on the automotive industry, and there is no doubt that Silicon Valley already is playing a major role in helping shape the future of the automotive industry. In this post I want to build on but extend my previous analysis, both by making references to some excellent analysis of others (especially Evangelos Simoudis of Trident Capital), and by commenting on some other interesting, recent developments. Finally, I want to suggest that we look beyond automobiles to transportation more generally, as drones and other technologies will likely have growing impact on many different parts of the future transportation industry.

Simoudis: The Innovation-Driven Disruption of the Automotive Value China (Part 1)

I highly recommend that you take the time to read both of Evangelos Simoudis’s two posts, but here are just a few of what I think are some of the most interesting parts of his first posting:

  • Evangelos notes “Over the years OEMs have transitioned from being vertically integrated companies to become highly efficient integrators of components in car platforms they define and own. Their supply chains are global and are optimized through constant incremental improvements giving them cost advances a new entrant cannot achieve but also making radical changes to this chain difficult, if not impossible.”
  • “While initially these were hardware-only platforms, today’s cars can be thought of as consisting of a software platform, of mostly embedded and proprietary software that controls major functions of the car, and a hardware platform.” The growing importance of software (A major area of strength of Silicon Valley) and very advanced software-based technologies—such as machine learning and other Artificial Intelligence-related areas—together with so-called big data, cloud computing, and others will continue to make Silicon Valley an important place in the increasingly dynamic and changing transportation innovation ecosystem.
  • Evangelos credits his friend Lou Kerner for emphasizing the importance of recognizing that we need to think beyond the traditional OEMs, their suppliers and dealers, when we talk about the automotive value chain as it“…should actually be organized into two broad parts: the car manufacturing and sales part, and the car use part.” And he includes a figure that shows elements of financial services, driving services, vehicle services and mobility services where large numbers of companies are now providing important and innovative services to customers.
  • By expanding the value chain to include the car use part, it enables a much richer scope for analysis and understanding how the automotive and transportation industries are changing, and most of us have personal experience with how some innovators, like Uber, Zip car and others are changing how we use and even think about our cars. And by looking at the two parts of the value chain, we can better understand why, and how, many of the traditional players (including the large OEMs) are now making M&A deals across the integrated value chain.
  • Another interesting section of Evangelos’s posting focuses on “Problems that are Starting to Shape Our Automotive Thinking”—including Productivity Loss (from traffic congestion, in particular), Pollution, and Climate Change, and how we can start to think about and affect these problems—problems which I think extend beyond automotive to the whole transportation sector.
  •  Emerging Mobility Ecosystem. His figure of this ecosystem depicts a very interesting, and rapidly changing landscape, and one that will likely generate lots of opportunities for large and small companies, including many Silicon Valley startups.

Questions and Issues

I know Evangelos has strong interest in the automotive industry so I am sure he will closely monitor changes as the occur and write new posts with his perspectives on emerging changes and how they will affect the evolving “mobility ecosystem landscape.” I expect that this will include how various elements of the “sharing economy” will impact this landscape, both here in Silicon Valley and elsewhere. Some questions in my mind that have been raised by recent developments include the following:

  • Will new government policies and regulations constrain the future sharing economy? Democratic party presidential candidate Hilary Clinton recently raised issues about what she referred to as the “on demand” or so-called “gig economy” and raised questions about what recent trends on this front may mean for future workplace protections and what jobs and labor markets will look like. These issues are likely to get additional attention as the presidential campaign intensifies and many players in the sharing economy come under scrutiny for classifying their workers as independent contractors rather than part-time or full-time employees, entitled to health-care benefits, sick time and paid time off. These issues have already caused tensions and labor conflicts in a number of countries in Europe and elsewhere.
  •  To what extent will incumbents’ dealer networks represent a major (competitive) barrier for new car entrants? HBS Professor Clayton Christensen and his colleagues at HBS’s Forum for Growth and Innovation have concluded that Tesla does not represent a new model of disruption—in which products start at the high end and move down—and that “GM, Toyota, and others could shift to EVs relatively quickly, using their existing manufacturing capabilities, supplier networks, and dealerships [my bold] to fend off the threat” [from Tesla and other new entrants that target the core market of incumbent players. In a related article, Professor Christian Sandström of Chalmers University of Technology and Ratio Institute of Sweden notes that it will be “politically challenging for Tesla to make dealers obsolete” and that “it would be virtually suicidal for incumbents to even consider circumventing their dealers.”  But Sandström admits that Tesla has introduced “a new product architecture and a new business model” that gives it competitive advantage vis-à-vis the incumbent, much larger players. It is interesting to note that in mid July, 2015, San Jose Mercury News reported that “Texas Gov. Greg Abbott  said Tuesday that he sees no reason to change the Lone Star State's vehicle sales law that prohibit auto manufacturers from bypassing third-party dealerships and selling their cars directly to consumers.” And it adds that “Tesla…will have to wait until at least 2017 to try and change the legal landscape for auto sales in Texas. That's the next time lawmakers convene in Austin to craft and pass bills.”
  • How will new and small innovative players affect the future transportation value chain? Availability of large amounts of risk capital—including China and other parts of Asia—and reduced capital requirements to play in certain parts of the transportation value chain create opportunities for new and smaller players to enter the fray. Telsa has shown that new players can have success when going up against the large, traditional OEMs, especially in the electric car segment—although Clayton Christensen and his colleagues question whether Tesla’s success is sustainable (a more recent entrant in the electric car segment is Faraday Future. New entrants may also find lower barriers to entry in other parts of the emerging mobility ecosystem, and the target opportunities may also be of less interest to the large incumbents in the industry. One example of how 3D printing (a rapidly evolving industry characterized by a steady flow of innovations) can affect the future design and manufacturing of transportation vehicles has recently been demonstrated by Divergent Microfactories in southern California. The company recently built the chassis for a sports car by 3D printing metal alloy “nodes which “connect in a modular system with carbon-fiber tubes to form the car’s underlying structure,…[and the company] plans to license its system to small teams that can build localized, lightweight, super-efficient cars anywhere in the world,” according to an article in the OC Register.
  • How quickly and extensively will innovations spread to other segments of the transportation industry? As battery technologies improve and also lead to innovative (and lower cost) charging systems for quick recharging of electric batteries, we could see accelerating innovation in other forms of personal transportation. One interesting example of this is what the Taiwanese scooter company, Gogoro, is now doing by producing what has been called the “Tesla of scooters.” Besides building a scooter with beautiful design and selling it at an attractive price, a recent article noted that “…company is throwing in two years of free maintenance, one year of theft insurance and two years of free electric battery swapping from Gogoro’s 32 charging stations in Taipei.” While it is uncertain whether Gogoro will have long term success, we can expect similar innovative ventures in Asia and Europe with electric scooters, motorcycles and other forms of personal transportation. And other parts of the cargo transportation segments will be affected by rapid technological progress—both hardware, software and communications technology. If we look further out into the future of passenger transportation, we may well see dramatic changes brought by concepts like the hyperloop of Elon Musk, and other radical ideas that are no doubt being considered in labs around the world.

Simoudis: The Innovation-Driven Disruption of the Automotive Value China (Part 2)

This second posting provides additional insights into what the large OEMs are doing, and what Evangelos feels they need to do, to stay competitive. Here are a few excerpts from his posting and some of the conclusions that he reaches based on his own observations and analysis:

  • Data shown from PwC and BCG make it clear that “other industries do not view automotive OEMs as top innovators despite their high R&D investments.” And Evangelos concludes that “While investing heavily in R&D, automotive OEMs had not been investing in technologies and business models that are now used by newcomers to disrupt them (software, big data, user experience, additive manufacturing/materials, energy storage, sharing economy, direct to consumer).”
  • A corollary of what the previous bullet says, Evangelos notes that “ the bulk of their [automotive OEMs] R&D investments tend to focus on a) sustaining innovations, e.g., improving driver ergonomics but not radically re-thinking the driver experience (compare the Google Maps experience vs the in-dash navigation systems of 2013 model year passenger cars), and b) innovations that are necessary to comply with government regulations.”
  • The last part of this second post addresses what automotive OEMs are doing on the “innovation outpost” front, through corporate venture groups, research labs, incubators and business and corporate development offices. As I noted in my earlier posts on this topic, we now have an impressive automotive presence in Silicon Valley. But Evangelos makes it clear that success of these operations are by no means guaranteed, and recommends that the companies take the following steps to improve their chances of success of their Silicon Valley outposts [for more detail of each step, please see his full post]:
    • Establish the right approaches to work with each innovation cluster.
    • Create collaborative relations between companies in the two parts of the automotive value chain
    • Improve the coordination between the groups working within the innovation ecosystems, the central R&D organizations of the parent companies and the business units.
    • Establish the right culture, timelines and innovation KPIs [Key Performance Indicators].
    • Attract the right talent.

Questions and Issues

Automotive OEMs are not unique in facing major and growing innovation challenges as potential disruptions are made possible by new technologies, business models and changing consumer and enterprise needs and preferences. Most of the 10 companies listed in the PwC list of top innovators—Apple, Google, Samsung, Amazon, 3M, GE, Microsoft, IBM, Tesla, and Facebook—face growing competitive challenges, and many of these players have significant presence in Silicon Valley and no longer “rest on traditional R&D” to meet these challenges. Most are embracing open innovation, including working with agile and innovative startups in Silicon Valley and beyond.

Some of the questions and issues all of this raises in my mind include:

  • How will consumer attitudes to car ownership and use—in the US and other countries—evolve and how quickly will changes emerge? All the players in the automotive ecosystem will need to gain deep understanding of changes on the demand side of the car equation as well as the technology-enabled supply side of the equation. Complexities and uncertainties abound, and no simple answers to difficult questions exist. My own company, Strategic Business Insights, is currently involved in research around the demand side of cars, through a project called Peak Car, helping major players in the automotive industry understand consumer attitudes towards cars across different consumer segments in the United States.
  • What new and emerging risks and uncertainties arise as cars use more advanced computation and communication technologies? Hacking is becoming increasing common and serious and it seems hackers are always a few steps ahead of those who build defensive systems. What kinds of car-related hacking incidents will we see? How serious will they be, and will they help accelerate consumers’ declining interest in owning cars and therefore stimulate increased use of the sharing economy? Interestingly, a couple of days after I had written the first draft of this blog post, I discovered the following article in the Wall Street Journal: “Automobile Cyber Threats Sharing Group Expected to Operate by Year’s End” The article notes that “The automotive industry is creating a joint effort to combat cybersecurity threats with an information sharing and analysis center (ISAC). That center is expected to be operational late this year, said representatives of two auto associations involved in the effort.” And it adds that “the auto ISAC will serve as a central hub for intelligence and analysis that will provide timely sharing of cyber threat information and potential vulnerabilities in motor vehicle electronics and their associated in-vehicle networks.”
  • Will automotive OEMs follow Evangelos’s recommendations and therefore have success with their Silicon Valley Innovation Outposts? Serious challenges face these players as they attempt to integrate new processes and thinking coming out of their Silicon Valley operations into the operations of their mother ship, as well as ensuring successful transfer of new products and services into the appropriate divisions of the mother ship. And how much time will these companies give their Silicon Valley outposts before they must produce results that demonstrate that these investments are paying off? These are probably difficult questions, in part because the goals and associated success metrics may be difficult to quantify. But it will be interesting to see if existing SVIOs continue to grow and expand, thus reflecting (relative) perceived success and if so, this might help stimulate others to establish new SVIOs.

In closing this blog post, I must admit that in addition to having professional interest in these automotive developments, especially as they relate to the Silicon Valley innovation ecosystem, I must admit to also having a personal interest in these developments, especially when it comes to electric car issues. Our son, who had worked as digital modeler for the Acura division of Honda for almost 9 years, accepted an offer about three months ago to join the Los Angeles-based electric car startup Faraday Future (which I referred to above). I will therefore follow their startup journey with great interest, but will also try to understand and evaluate their position within the overall evolution of the electric car industry (and even the larger transportation industry), a theme that I know my friend Evangelos Simoudis also shares (and he will likely have additional insightful posts on related issues and developments in this area in coming months).

Brief Bio

Eilif—a transplanted Norwegian who has spent his whole professional life in Silicon Valley—has led and participated in a number of syndicated research programs and numerous consulting projects during his 35 years at SRI International (formerly Stanford Research Institute) and Strategic Business Insights (a spin-out from SRI, located on the Menlo Park campus of SRI). He has also been Adjunct Professor of Economics at a number of Bay Area universities. Most of his work has focused on eCommerce, Learning, Innovation, and Virtual Technologies, and in recent years much of his work has focused on the Nordic region, especially Finland and Norway, including projects for Tekes and the Norwegian Research Council, and two projects funded by Nordic Innovation. He has been a Board member of Silicon Vikings for the last 5 years, and have been the Chair of the Special Interest Group on Entrepreneurship and Learning since its beginning.

etrondsen@sbi-i.com 

@EilifT

 

 

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