Will Silicon Valley Disrupt the Auto Industry?

A century ago, Henry Ford produced his first Model T, which transformed the nascent auto industry into the “industry of industries” and was one of the signature events of the 20th century. Today’s auto industry still has its roots in Henry Ford’s mass production system, with about a dozen incumbent players that dominate the design, production and sale of automobiles around the world.

Recent technology developments, coupled with government regulation in the form of progressively tougher fuel economy regulations, are forming a perfect storm of events that may have the same transformative and disruptive effect as Henry Ford’s mass production system did in the early 20th century.

Pressure is building on automakers to meet exceedingly tougher fuel economy standards by 2025, which I’ve seen firsthand as a Board member of two major auto suppliers. Companies are using a combination of two strategies to meet these standards: light weighting through the use of new materials such as advanced high strength steels; and efficiency improvements to the engine and drivetrain, such as the extensive use of turbocharging in internal combustion engines and the on-going electrification of vehicle powertrains, ranging from mild hybrids to fully electric vehicles.

The best car on the road today, per Consumer Reports, is built by a company that didn’t exist 15 years ago. That company, Tesla, has confounded skeptics and naysayers by making electric vehicles cool and desirable, and is also seeking to change how vehicles are marketed by taking on the long entrenched franchise dealer network. Not lacking for bold ideas, Tesla’s CEO Elon Musk recently announced that his company would set up a $5 billion “gigafactory” near Reno, Nevada to build batteries for its vehicles. His goal is to reduce battery costs by up to 40%, which he believes will make electric vehicles fully competitive with those powered by more traditional means.

Google and Apple (if media reports are correct) are entering the industry with their considerable cash hordes, formidable brand images, and well-deserved reputations as disruptors of the status quo. Google has been experimenting with self-driving, autonomous vehicles for the past several years and unveiled a prototype last year that it designed from the ground up. Google has over 700,000 hours of testing its autonomous vehicles in city driving and continues to perfect its software.

In February, the Wall Street Journal set off a flurry of media speculation when it reported that Apple plans to build its own automobile (an iCar?) by 2020. While Apple has not confirmed or denied these reports, it has been sued by battery maker A123 for allegedly poaching vehicle-related engineering talent. Judging from the reaction of some of the incumbent auto makers, including the former CEO of GM who questioned Apple’s ability to produce a vehicle, Apple has already had a disruptive influence — which will only grow if it carries out its rumored plans. To be sure, the history of the auto industry is that most new entrants fail. Over the past decade, we’ve seen several companies try — but so far, Tesla is the only new entrant that has enjoyed a measure of success.

But that won’t stop others from trying — and for good reason. By some accounts, software and electronics now account for about 40% of the value of a vehicle and that percentage will increase. A recent analyst report by JP Morgan calculates an annual automotive market of $1.6 trillion, which dwarfs the combined PC and smartphone market of $666 billion. Years ago, Peter Drucker, the iconic management consultant commented that the auto industry was the “industry of industries,” so it should come as little surprise that the titans of Silicon Valley would want to participate.