Navigant Research Blog

Autonomous Vehicles as Both a Sustaining and Disruptive Innovation

— December 9, 2016

Electric Vehicle 2While listening to a recent episode of the Exponent podcast, co-hosts Ben Thompson and James Allworth had a vibrant discussion on one of their regular topics: sustaining versus disruptive innovation. The topic was in the context of whether Apple should acquire Netflix, but as the hosts’ conversations often do, it got me thinking about the auto industry. With self-driving vehicles, transportation is on the precipice of a dramatic change that many argue will be exceptionally disruptive. I’d like to take a slightly contrarian view by arguing that autonomous technology will be sustaining to parts of the auto industry and disruptive in ways that many in the tech industry may be missing.

Sustaining vs. Disruptive

Disruption is an often abused word in the world of technology, but as defined by Harvard University’s Clayton Christensen, it boils down to innovations that create new markets and value networks and eventually displace existing market leaders. Sustaining innovations evolve existing markets and improve value.

An example of the latter is the way that manufacturing automation improved productivity and quality in the way cars are built over the past several decades. However, as in any complex analysis, these things are never simply binary. While new manufacturing technology was sustaining for automakers, it was extremely disruptive to the people that worked in their factories. Similarly, any argument that autonomous vehicles will be purely disruptive of the auto industry is a vast oversimplification. If automakers had followed the path of Nokia in the mobile phone business and ignored the threat posed by Apple when it introduced the iPhone in 2007, incumbent automakers would be facing extinction in the face of autonomy.

Instead, I would argue autonomy will instead be sustaining for many (although probably not all) automakers. Someone will need to build these vehicles regardless of whether they are piloted by computers or humans, and the companies that already have design, engineering, and manufacturing expertise are well-positioned to do so.

Just as other real-world examples are rarely black and white, there will be disruption from the autonomous vehicle. Most obviously it will affect those that make a living from driving, whether by taxi, bus, or truck—society will have to address this employment displacement in the next decade.

Retail Side

Perhaps the less anticipated and more impactful disruption is faced by the retail side of the auto industry. There are nearly 17,000 franchised car dealers in the United States currently selling about 17.5 million vehicles a year with more than 1 million employees. If transportation shifts as expected over the next several decades (i.e., from an individual ownership model to on-demand autonomous mobility services), the business of these retailers will evaporate. It won’t be overnight, but it will almost inevitably happen.

However, someone still needs to own these vehicles, right? Sure, but unlike the Silicon Valley investors that pumped Uber’s valuation to more than $60 billion, I doubt it will be standalone ride-hailing companies. I’m increasingly of the opinion that mobility services will be provided by the manufacturers themselves, leveraging their existing expertise in building, logistics, and financing along with strategic investments in the software platforms needed to connect people with rides.

Disruption by its nature takes people by surprise. The self-driving car will be both sustaining and disruptive, and probably not in the obvious ways.

 

Automakers Expanding From the Garage to the Home with Energy Storage

— September 1, 2016

Lithium BatteriesAs the residential energy storage industry continues to take shape around the world, the landscape of companies involved is becoming increasingly diverse. While the industry is still in nascent stages, the number of new companies entering the market (and their differing backgrounds) is growing. Companies offering dedicated residential energy storage products include battery pack manufacturers, inverter manufacturers, software providers, solar PV vendors/developers, and automotive manufacturers. With the growing popularity of EVs, it comes as no surprise that automakers are looking to leverage their battery expertise to develop complementary products. These companies are eyeing a piece of the residential storage market expected to be worth $5.4 billion annually by 2025, according to Navigant Research’s Residential Energy Storage report.

In June 2016, after months of speculation, automaker BMW officially announced a residential energy storage product featuring the same batteries used in its i3 vehicles. The company joins several of its competitors that have already repackaged their vehicle batteries into home energy products. Fellow German automaker Daimler already offers Mercedes-branded home battery systems, and Nissan offers a similar product through a partnership with energy technology specialist Eaton. These companies are not alone; EV pioneers Tesla and BYD both have dedicated residential energy storage products and are actively working to expand in this area.

Seeking Advantages

Automakers see several advantages as they enter the increasingly crowded market for residential energy storage systems. Customers looking to purchase or lease EVs may be prime candidates for purchasing residential energy systems. The ability to upsell EV customers to also purchase home battery systems could provide a lucrative sales channel with lower customer acquisition costs than competitors. Additionally, automakers are actively working to position themselves within the emerging vehicle-to-grid space. Both BMW and Nissan have announced vehicle-to-grid pilot projects with power providers Pacific Gas & Electric and Enel, respectively. These programs seek to utilize the available capacity in EV batteries and the flexibility of EV charging to help alleviate congestion and reduce peak demand on the grid.

Furthermore, automakers may have a distinct advantage in the coming years through low-cost access to repurposed EV batteries. Some companies have already capitalized on this resource through partnerships with storage project developers to supply these used batteries at a competitive price. According to analysis in Navigant Research’s Alternative Revenue Models for Advanced Batteries report, “the effective energy capacity available from EV [lithium ion] batteries for second-life stationary energy storage system applications is projected to exceed 1 GWh per year in 2022.”

Across the growing energy storage market, new players are entering and looking to leverage their expertise from a variety of complementary industries. Automakers are not alone in having identified the advantages their existing businesses will provide as they compete in the energy storage market. Solar PV providers, energy service companies, and even utilities are all seeking to leverage their customer base and technical expertise to provide the most attractive and cost-effective solutions in this rapidly evolving market.

 

Progress on Automotive Cyber Security, but Still Much to Do

— August 8, 2016

CarsharingWhen I joined Navigant Research two years ago, I sat down on my first day and wrote a post on this blog about automotive cyber security. At that point, most of the industry was still largely refusing to acknowledge that cyber security was even something to be concerned about. Things have changed quite dramatically since then, but there is still a long way to go, as recent news shows.

All of the major automakers except for Tesla have come together to establish the Automotive Information Sharing and Analysis Center (Auto-ISAC). Like ISACs in other industries, the Auto-ISAC provides a mechanism for manufacturers to share non-competitive information about security threats and collaborate on understanding and correcting these vulnerabilities. Since the Auto-ISAC started operations at the end of 2015, it has also begun to add suppliers to its member ranks.

Developing Best Practices

At the recent Billington Automotive Cybersecurity summit in Detroit, the Auto-ISAC announced the development of a set of cyber security best practices for the industry. Industry executives and regulators—including General Motors CEO Mary Barra, National Highway Traffic Safety Administration director Mark Rosekind, and Secretary of Transportation Anthony Foxx—discussed the importance of designing for cyber security and what is being done to address threats.

In August of 2014, Tesla was taking the lead on hiring white hat hackers to work on security from inside, and other companies are now doing the same. Tesla, GM, and Fiat Chrysler Automobiles have all established responsible disclosure programs that provide a means for researchers to submit information about vulnerabilities they have discovered.

A pair of Silicon Valley startups, HackerOne and Bugcrowd, have developed platforms for submission and vetting of vulnerability disclosures that are used by these automakers as well as dozens of other technology companies. Bugcrowd has also developed a reputation system for researchers that submit vulnerability information and works with client companies to select groups of white hat hackers to conduct pre-release testing on new products.

Numerous startups including Karamba Security, Argus Cyber Security, and TowerSec have popped up in recent years to develop both hardware and software solutions to help detect and stop intrusions from malicious attackers. Since everyone familiar with cyber security acknowledges that no complex system can ever be guaranteed as secure, manufacturers are also working on resilience to keep vehicles safe in the event of an attack and be able to update them quickly after vulnerabilities are found.

Navigant Research’s Automotive Cyber Security report projects that by 2025, more than 45 million vehicles annually will have telematics capabilities that enable over-the-air software updates, just as Tesla does today on its vehicles.

Vulnerabilities Continue

Despite the progress, recent news shows that there is still much work to be done on existing vehicles. In Houston, Texas, a pair of car thieves have been arrested after stealing 30 Jeeps in 6 months by hacking the vehicles’ ignition systems with a computer. Charlie Miller and Chris Valasek have again hacked a vehicle, taking control of the steering and brakes. After FCA corrected the vulnerability that enabled last year’s remote hack, they connected a computer through the onboard diagnostic port this time.

Yet another group of researchers have even demonstrated how a signal generator could be used to provide false reflections and fool the radar sensor of a Tesla with its AutoPilot driver assist active.

There will be undoubtedly be many more such demonstrations in the coming years as vehicles get more sensors, more connectivity, and more automation. From here on out, the industry can no longer afford to relax and will have to remain vigilant and ready to respond quickly to threats. Fortunately, they seem to be doing just that.

 

John Krafcik Takes the Steering Wheel of Google Car Project

— September 29, 2015

Someday, Google’s vision of cars without steering wheels, accelerators, or brake pedals may come to fruition. For the foreseeable future, however, intelligent people will still be necessary to guide the process of actually developing and building those machines. Incidentally, Google has just hired one of the smartest in the business, John Krafcik. The former Ford, Hyundai, and TrueCar executive is now the CEO of Google’s self-driving vehicle program.

As the former head of product planning and later CEO of Hyundai Motor America, Krafcik demonstrated his ability to run an operation that develops, manufactures, and markets vehicles to a mainstream audience. Prior to his decade with Hyundai, Krafcik spent 14 years at Ford, where he is reputed to have coined the term “lean manufacturing” in an article he wrote while working on his MBA at MIT.

Navigant Research’s Autonomous Vehicles report projects that by 2025, approximately 45 million light duty vehicles with at least Level 2 semi-autonomous capability will be sold globally every year. Level 2 is defined as a system that can automatically control at least two primary functions—such as steering and speed. Widespread adoption of Level 4 systems that can handle all primary driving functions without human intervention are unlikely before the 2030s.

Google and the Automotive World

For Google, Krafcik brings a reality check to the company’s automotive ambitions. Unlike Google’s primary businesses, the automotive industry is one of the most heavily regulated in the world, and the product can put lives at risk. Representatives from several manufacturers have acknowledged that they have been approached by Google about partnering on autonomous vehicles. However, Google’s approach so far has been to have manufacturers supply a vehicle platform while Google provides a black box of software that the manufacturers have neither control nor influence over. Given the many unresolved legal and ethical questions around autonomous vehicles, this approach has been rejected so far.

Krafcik knows how the auto industry functions and why it so often appears to be extremely conservative in rolling out state-of-the-art technology. He has a keen understanding of how to mass manufacture vehicles in high volumes and what mainstream consumers want in a vehicle. At the same time, he is an acknowledged risk taker in taking his companies into new market segments. Under his leadership at Hyundai, the brand steadily expanded from a second-tier purveyor of value, building credibility with consumers and critics so that it can now sell luxury cars like the Genesis without being laughed at.

Krafcik’s Credentials

This writer has known Krafcik for 8 years and he is clearly an engineer and manager that appreciates a challenge. Prior to being promoted to CEO at Hyundai’s American branch, the office had a rotating door of occupants who struggled with the home office’s demands. Krafcik managed to occupy the post for an unusually long 5 years and is likely the best candidate that Google could have hired.

Chris Urmson will continue leading the technical development side while Krafcik opens possibilities as this project evolves into a real business. Krafcik is well-respected in the industry, and if Google decides to pursue OEM partnerships, he is far more likely to be successful in brokering deals than those that have a distinctly Silicon Valley mindset. On the other hand, if Google opts to get into the manufacturing of cars, Krafcik knows that side of the business equally well—whether Google wants either its own factories or a contract builder like Magna Steyr to handle the work. Whichever path Google takes, the future looks interesting. And that is said without even knowing if Apple will get involved.

 

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