Whats driving automotive industry ?
Technology and Software is driving the automotive industry today and is naturally creating massive opportunities for technology vendors.
Why? simply because there is a whole lot of money left on the table; multi-trillion dollars of economic impact to be specific ! There are enough articles about autonomous cars and ride share services along with the race of the electric cars. However, I’ll try to glue these macro trends together and point out how and why the value-chain is being disrupted; Potentially impacting multi-trillion dollars of economic value and becoming a mega opportunity for technology vendors to create value
The Value Chain
Lets look at a super simplified traditional automotive value chain before we look at how its changing. Its a simple one with component suppliers supplying to Tier 2 or Tier 3 parts manufacturers, who in turn supply to Tier 1 sub-systems / module vendors who then supply to Auto manufacturers (or OEMs). Consumers pay for the cars they purchase and obtain other adjacent services like repair, maintenance and Insurance etc. This is how the industry was for the last few decades; until recently maybe 5–6 years ago.
Who are the new entrants: Over the last few years, there have been new entrants and a disruption to this value-chain. Value flow is changing, consumer’s consumption models are changing and the core business models of traditional industry players are being impacted. New entrants mainly are ride service providers like ride hail services / car-share services together with pure-play software and technology vendors from other industries like Mobile and Cloud industries.
Why are they entering: These emerging vendors are mainly software focused. They have a greater appetite to pursue disruptive services and enable new user experiences. At the same time, the cost of failure for these services are small and the potential returns are out of this world !
Who is impacted the most: The Car OEMs and Tier 1 suppliers are facing the direct threat and an indirect or follow-on impact to other vendors like the Insurance, Warranties and Repair.
How is the value chain changing?
There are four key areas to look at
- Ride Hail and Car Share services
- Autonomous Cars
- Adjacent industry disruptions
- Car as Platform of Future
1- Ride Share Services
Traditional automotive value chain was driven by OEMs sitting on top of the food chain and controlling the entire consumption model. However, over the last 8+ years, ride hail services (Uber / Lyft etc) began entering into automotive value-chain without knowing the role they will play in today’s and future value-chain. For example, Uber has grown beyond anyone’s imagination with its services across 674 cities worldwide, offered by 1.5million+ Uber drivers, with over 40million rides monthly (Link). Surely this has changed the consumer behavior and consumption model. As a result of that, car-share services such as ZipCar, Turo and many others have taken off in a very big way (Link) further affecting the consumer’s fundamental need to own a car (or not). At this scale, it naturally affects a car OEM’s long term view of consumer’s car ownership and a potential disruption to their core business. Ride share market value is estimated to be $1.5T by McKinsey (Link) .
2- Autonomous Cars
If you took a ride share business model of 20%rev share with the driver, the ride share market generating $300B in revenues by 2030, adds up to a total $1.2Trillion . So imagine a scenario if these ride share companies makes their fleet fully-autonomous (no human drivers). It completely changes the dynamics of the exact same value-chain (both for them and the Car OEMs). Hence the ride-share and the Car OEMs are on the autonomous race in a big way. Not to mention the technology players like Waymo who has reached a key milestone of 10 million miles of self-driving driver-less car as of 10/10/19 (Link). This CBInsights article summarizes how the top 46 Car OEMs, ride share and Tech companies are in the Autonomous car race. This Fortune article believes its a $7 Trillion market for exactly the same reason.
3- Adjacent services
If ride-share services in autonomous-vehicles (mobility-as-a-service) becomes a dominant mode of transportation in 10–15 years with potentially no human drivers, then the adjacent services such as Repair & Services, After-market, Warranty, and Insurance will have a completely different business model for their premiums or repair/services. Automotive insurance industry at current premiums of $150B (Link) can be valued over $1T in the next 15years , however they will be structured very differently than what we know today, because humans don’t drive these cars anymore. Its the car that drives the car; so who’s responsible for an accident? the car :). Which means, potentially the entire automotive insurance industry morphs into something-I-don’t-know or maybe completely disappear (maybe :)). Now you see the value chain disruption has far reaching effects (beyond our imaginations).
4- Platform of future
Why are cars viewed as a “Platform of the future”? Its a personal space where we spend considerable amount of time either for everyday long commutes in dense urban settings or for inter-city travel. Car rides are pretty much without distractions. It becomes the second most important location outside of home as a new ad distribution network or a marketing platform.
We all know that value creation opportunity on digital platforms (PCs, Phones, TVs etc) is proportional to the time spent by users / consumers on each of those platforms per day.
- On an average, a typical PC user spends ~2 hours/day (Link). Microsoft and Apple, the makers of Windows / Mac PC drove the PC era and became one of the most valuable companies in the world
- Then came the Mobile phone era. Users on an average spend ~3 hours/day (Link). Apple & Google drove the phone era with IOS and Android to become one of the most valuable companies. Which also changed where and how people consumed content. It further created multi-billion dollar opportunities to companies like Netflix, Facebook, Yahoo and the likes to create newer services on Mobile.
- On an average people spend ~ 1–2 hours / day commuting everyday (Link). Weekends and holiday travel distances are longer. Car naturally becomes a location to target the consumers. Car is now seen as an OS for mobility (physical movement from location A to B), the “Car OS” has the potential to create the next most valuable company. Just like in PC and mobile worlds, car as a platforms has the potential to create enormous value outside of its core offering (mobility) through advertising, marketing and location based services. Moreover, a car-ride makes it a great captivating/engaging environment when its autonomous. Wired, Verge talk about those new experiences in autonomous cars.
In Summary: A mega opportunity for tech vendors
All of the above drivers creates tremendous opportunity to offer new technology solutions. Fundamentally, over the last 3 years (yes just 3 years), there has been a breakthrough in how machine learning / AI, affordable computing and access to large data-sets have transformed the way we develop and use applications. Specifically, how a software application perceives and understands the world around us is more contextual now (rather than a dumb piece of pre-programmed software doing the same repeated task). ML and Auto-ML have helped achieve very high levels of accuracy in inference and prediction at the same time in learning. Further, distributed computing and IoT has facilitated intelligent applications to run at the edge.
Cars are naturally becoming a consumer of these advanced technologies. Further consumer’s expectation of in-car experience and HMI will drastically change from mobility to a second-home experience.
There is need for newer components, modules, full-stack solutions, platform and services in the automotive industry. There will be need for newer ASICs, sensors, computing architectures, networking, security, distributed applications, connectivity, infotainment, ML/AL platforms, perception systems, assisted HD maps, full-stack autonomous systems with self-learning capabilities. These are being designed, built, tested and rolled-out as we read this article!
Venture capital investments in auto tech over past 24 months (~$11 B) is perhaps more than any investment over a decade prior to that. ~75% of those deals are linked to Autonomous vehicles and associated technologies. ~45% of those investments are from Corporate VCs and Enterprises (Link). Not to mention, there have also been a handful of successful exits and M&As too; Cruise Automation, Mobile Eye, Nutonomy to name a few.
Over the next 5 to 7 years there is more than $500 B opportunity to tap into for automotive technology suppliers (not including services).
It appears this vehicle is not making a U-turn anymore !