Navigant Research Blog

Automated Driving Space Threatens to Follow App Store Revenue Model

— July 27, 2017

Ride-hailing provider Lyft has shifted course and decided to develop its own automated driving system, joining most of the major automakers, suppliers, technology companies, and hundreds of startups in Silicon Valley and elsewhere. If the smartphone app economy is any example, this is not a good thing for any of the new players. The land rush into this space seems eerily similar to what happened in the years after Apple began allowing third-party apps onto the iPhone. Lots of early players made some money and many of them got healthy buyouts, but the vast majority never made a dime.

As of 1Q 2016, studies of Apple App Store revenue showed that the top 1% of publishers took home 94% of the more than $1.4 billion generated. The vast majority of apps in the stores of Apple, Google, and other companies have never earned anything. A 2014 analysis of the more than 1.2 million apps then available in Apple’s store showed zero downloads.

And the Automated Vehicle Market?

Most of the startups jumping into the automated vehicle space are focused entirely on developing the control software while using off-the-shelf hardware. Unfortunately, for most of these new entrants, the software side is quickly maturing. It seems increasingly unlikely that anyone is going to make a huge algorithm breakthrough that is going to justify a high purchasing or licensing price as these vehicles start coming to market in the next few years. A few more big acquisitions like Cruise Automation may happen, but it is rapidly becoming a buyer’s market for automated driving startups.

While the software will continue to evolve as engineers learn how to make it deal with edge cases, the real effort now needs to be focused on the hardware side. The cost of sensors and compute platforms must come down along with power consumption. Sensors must get more robust to withstand the rigors of daily use in the real world outside the mostly perfect weather bubble of Silicon Valley. Everything has to be integrated into the rest of the vehicle and made to work in all climates. These are expensive and time-consuming activities that startups are ill suited for.

The Right Moves?

Companies like Waymo are making the right moves in developing both the hardware and software as well the mobility services component for deployment. They are also forming partnerships with automakers to provide vehicles, rental companies for servicing, and network companies like Lyft for additional deployments.

Until now, Lyft has focused on partnerships with vehicle providers, including General Motors (GM), Waymo, nuTonomy, and Jaguar Land Rover. For Lyft to decide to develop its own automated driving stack seems like a needless waste of resources for a company that has yet to approach profitability.

Too Many Players?

Navigant Research’s Leaderboard Report: Automated Driving ranked incumbent OEMs such as Ford, GM, Nissan, and Daimler, along with suppliers like Delphi and newcomers like Waymo, at the head of the pack. There are already too many players in a transportation ecosystem that is likely to see significant consolidation in the next 2 decades. Anyone entering now is far more likely to be the next Color than the new Instagram. Venture capitalists considering putting money into self-driving startups that will probably part of the 80% with zero downloads are probably looking at a race to the bottom as that technology becomes commoditized. They should instead be focused on interesting new kinds of services that build on the data emanating from those vehicles.

 

Ford’s Big Management Shuffle Is About Changing Perceptions

— May 23, 2017

It is often harder to be a century-old company with a record of profitability than it is to be a young one with potential. This sums up the difference between legacy automakers like Ford and Tesla. With only two profitable quarters in its 14-year history, Tesla’s most recent resulted from strategic timing of paying bills and delivering cars. Meanwhile, Ford—despite periods of losses over its 114-year history—has generated immense profits, including records in the past 2 years. Nonetheless, Tesla is the darling of Wall St., while now former Ford CEO Mark Fields and communications VP Ray Day lost their jobs over the weekend.

In the 3 years since Fields succeeded Alan Mulally, the company’s stock price has dropped more than 35% despite record profits. Pre-tax 2017 profits are projected at $9 billion, which is more than Tesla’s total 2016 revenue of $7 billion. Yet, Tesla’s market cap recently topped that of both Ford and General Motors (GM). Clearly, the markets are placing their bets on the perception of where these companies are going in the coming years rather than on the fundamentals of each business.

Fields has been on point in Ford’s effort to be perceived as a forward-thinking technology company since his 2007 CES debut with Microsoft founder Bill Gates to announce SYNC. Even with repeated Las Vegas keynotes by Fields and Mulally and countless investments in developing automated driving and mobility services, investors perceive Ford and other companies that manufacture and sell physical objects as laggards compared to software startups.

Ford isn’t alone in this perception battle. Most automakers are making the pilgrimage to CES to woo the tech community. While few have been hit as hard as Ford, none of the incumbents are getting the love shown to Tesla.

In our Navigant Research Leaderboard Report: Automated Driving, Ford, GM, Renault-Nissan, and Daimler scored highest and ahead of several technology companies. Waymo is arguably somewhat ahead on the pure technology front, but automakers have necessary pieces such as manufacturing, service, distribution, and support infrastructure to make viable mobility businesses. Additionally, automakers have a proven ability to deliver physical products—not just the components and software that control them.

Ford’s leadership team, including Executive Chairman Bill Ford, EVP Joe Hinrichs, CTO Raj Nair, and many others, all supported the direction the company was heading under Fields. However, investors didn’t seem to believe in it.

During a press conference with new CEO Jim Hackett, Ford and Hackett both emphasized that the overall strategy of transformation into a mobility services company is moving full steam ahead. Hackett, who comes to the role from being chairman of Ford Smart Mobility LLC, aims to reinforce the strategy and focus on executing the plans. The elevation of Marcy Klevorn from CIO to EVP and the newly created role of President, Mobility highlights this ongoing commitment.

While Hackett’s success or failure won’t be evident for several years, Ford still needs to change investor and public perceptions to boost its stock price and the sales of vehicles it has today. That challenging near-term task falls to Mark Truby, who moves over from Ford of Europe to replace longtime PR chief Ray Day. Day and his team have had successes on the product communications front, but changing the overall perception of the company among investors who have favored high flying tech stocks has been elusive. Whether Truby or anyone else can succeed will be crucial.

 

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