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The Automotive Industry: On The Eve Of Disruption

Electrification and autonomous driving are just two of the forces disrupting the auto industry, as incumbent automakers compete with new entrants into the field.

2017 Auto/Aero Site Guide
Ride-sharing companies like Uber are among those investing in autonomous-driving technologies.
Ride-sharing companies like Uber are among those investing in autonomous-driving technologies.
The auto industry is changing faster today than it has in 100 years.
— Mary Barra, CEO, General Motors.

The (auto) industry is at an inflection point for massive change… not just evolutionary change.
— Tim Cook, CEO, Apple

By 2030, 25 percent of miles driven in the U.S. could be in shared self-driving electric cars…automakers and parts suppliers would face the most profound challenge to their business models in a century.
— Boston Consulting Group3

The comments by Mary Barra, Tim Cook, and BCG underscore the dramatic changes that confront the auto industry. Paraphrasing a popular song of the late 1960s, the auto industry is on the eve of disruption. The incumbent automakers face five forces that are reshaping the industry: electrification, autonomous driving, connectivity, shared mobility (ride sharing), and new entrants.

1. Electrification:
Ten years ago, Tesla introduced it all-electric roadster. It was a new design, from the ground up, that caught the fancy of high-end motorists.

The Tesla Model S, introduced in 2012, outsells several rival luxury models — and in its “ludicrous” mode can go from 0 to 60 mph in less than three seconds. Some 500,000 customers placed a $1,000 deposit for the right to purchase Tesla’s new Model 3, which recently went on sale, and has a range of over 300 miles. As of this writing, Tesla’s value, as measured by its stock market capitalization, was higher than GM, Ford, Honda, Nissan, and Fiat-Chrysler.

In the neighborhood where I live in northern Nevada, Teslas are more common than Chevys or Camrys. The Tesla Gigafactory, with a projected investment of $5 billion and 6,500 jobs, is transforming the economy in Reno, Nevada.

Together, hybrid and full electric vehicles are expected to command up to 33 percent of all auto sales by 2027 — with hybrid vehicles accounting for most of that percentage. To be sure, Tesla has its doubters and detractors. Its CEO, Elon Musk, has acknowledged the challenges the company faces as it scales up to 500,000 vehicles per year. Nevertheless, Tesla has disrupted the auto industry in a big and significant way.

While the internal combustion engine will continue to be the dominant mode of propulsion for many years to come, all of the major auto companies are spending more on electrification — and plan to introduce more hybrid electric (which still has a combustion engine) and full electric vehicles. Tightening emissions requirements across the globe and the disruptive success of Tesla are pushing automakers in this direction.

Over the next decade, hybrid electric vehicles will see the most growth, as the mass adoption of full electric vehicles is still some time away. Together, hybrid and full electric vehicles are expected to command up to 33 percent of all auto sales by 2027 — with hybrid vehicles accounting for most of that percentage. Within two decades, with continuous improvement in the cost and performance of batteries and charging technologies, full electric vehicles will likely command a significant percentage of new car sales — something even the oil companies acknowledge.

2. Autonomous Driving:
In 1908, when Henry Ford introduced the Model T, the primary mode of intra-city transportation was the horse. Within a decade, horse-powered transportation was obsolete. The automobile transformed the American economy and our very way of life.

Today, we are on the cusp of autonomous driving — cars that drive themselves. Not all forecasters agree with the aggressive timing forecasted by the Boston Consulting Group (above), as current autonomous technology is not yet ready for nationwide, all-weather driving. But the question is when — not if — autonomous driving will become ubiquitous.

Incumbent automakers, Silicon Valley giants, and high-tech startups are all seeking a piece of the autonomous pie. Apple recently confirmed that it is “focusing on autonomous systems” for vehicles, which Tim Cook dubbed “the mother of all AI (artificial intelligence) projects.” With its massive cash hoard and software expertise, Apple has the resources to make a significant impact in autonomous systems.

Google’s autonomous car division, Waymo, has spent the past several years developing and testing autonomous software. Its vehicles have accumulated over three million miles of testing on public roads. And Intel recently paid $15.3 billion to acquire Mobileye to “accelerate the future of autonomous driving,” and will create a fleet of 100 self-driving cars, which will be on the road by the end of this year. The CPU powering Intel’s autonomous system will be able handle 20 trillion operations per second.

As of this writing, Tesla’s value, as measured by its stock market capitalization, was higher than GM, Ford, Honda, Nissan, and Fiat-Chrysler. Cities and states are aggressively competing to host autonomous driving testing and attract companies in this space. Pittsburgh, once known for its steelmaking, has become a hub of autonomous driving research. Uber has partnered with Volvo and set up a fleet of autonomous vehicles, with backup drivers who are currently picking up riders in the Steel City. Ford recently invested $1 billion in Argo AI, a startup headquartered in Pittsburgh with ties to Carnegie Mellon that focuses on artificial intelligence. And the Reno, Nevada, regional transit authority is partnering with University of Nevada researchers, electric bus builder Proterra, the Governor’s Office of Economic Development, and the Fraunhofer Institute to test autonomous systems in public transit.

The impact of autonomy is huge, and extends beyond the auto industry. McKinsey and others predict that full autonomy will lead to up to a 90 percent reduction in auto accidents, reduce congestion, change car ownership patterns, and free up billions of square feet of developable space now devoted to parking. First responders, hospital emergency rooms, insurance companies, developers, and even state DMVs will all be affected.

3. Shared Mobility:
Ride-sharing is not a new phenomenon. In the analog era, many of us in urban areas car-pooled to take advantage of HOV lanes. The advent of the smart phone 10 years ago enabled ride-sharing and ride-hailing to expand, and led to the creation of companies such as Uber and Lyft, which have disrupted the taxi, rental car, and public transportation industries.

The automakers know that they are next to face this disruptive force, as people move away from riding in vehicles they own to ones that they “share,” prompting vehicle manufacturers to redo their future business plans. Many of the auto companies have made substantial investments in ride-sharing and ride-hailing services. In a decade or two, the widespread adoption of shared, autonomous vehicles will cause a broad change in public and private transportation.

4. Connectivity:
Vehicles are rapidly connecting to each other and to the Internet of Things, allowing cars to share information about vehicle speed, road conditions, traffic flow, and the like. Toyota, Intel, and other technology and auto companies recently announced a consortium to create an ecosystem for big data for vehicles, and to support apps based on cloud computing. Toyota anticipates that the data volume between the cloud and vehicles will reach 10 exabytes per month by 2025 — 10 times current data.

In a report on vehicle connectivity, IBM notes that a new vehicle produces almost 25GB of data every hour. This has the potential to create an array of new digital services, new economic value, and new business opportunities “that we are only just beginning to understand.”

5. New Entrants:
Industry forecasters, ranging from management consulting firms to Wall Street analysts, forecast that new business models — based on shared mobility and connectivity — could increase automotive revenue pools by over a trillion dollars. Thus, it is no surprise that the auto industry has attracted new entrants from Silicon Valley, such as Google, Apple, and Intel, that want to share in these revenues, and are putting pressure on the incumbent automakers.

Some are calling Silicon Valley ”the new Detroit,” but the incumbent automakers don’t want to repeat the mistakes of Kodak, and are aggressively pushing ahead on autonomy, electrification, and connectivity. As noted by Dieter Zetsche, chief executive of Daimler, incumbent automakers such as Mercedes “do not plan to become the Foxconn of Apple.”

It is likely that Silicon Valley and the incumbent automakers will interact as “frenemies” — cooperating on some projects and competing on others. Partnerships between Silicon Valley firms and automakers are emerging at a rapid pace, as neither industry can go it alone in the new and disrupted auto industry. As noted by Geoff Colvin of Fortune, the coming synergy of traditional auto manufacturing and technological innovation presents the auto industry with many opportunities for growth.

Economic Development Opportunities
What does this disruption mean for communities seeking new economic opportunities in the auto industry? Many automakers and suppliers are deploying resources to adapt to the changes caused by the move to electrification and autonomy. On the hardware side, the growth segments in the disrupted auto industry include batteries; electric motors; semi-conductor chips; cameras, radar, laser, lidar, and other sensors; and advanced materials such as high-strength steels. On the software side, as the auto industry moves to a software-based digital car, regions with strong software talent will attract new economic opportunities.

In the words of one of my favorite singers, Bob Dylan, “The times they are a changin’.” Those who understand and embrace the changes taking place in the auto industry can make lemonade out of disruptive lemons.

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