Most BMWBLOG readers will be well aware of the fact that the automotive industry is currently witnessing a seismic shift from internal combustion engine and ‘non-connected’ cars to autonomous, connected and electrified (ACE) vehicles.
For the customers, this transition will not only change the type of cars that they drive but also the way they buy and own them, thanks in part to new mobility services (eg: Uber and BMW ReachNow) and some imaginative ventures spearheaded by the likes of Cadillac, Volvo (car subscription) and Tesla (OEM-owned dealerships with online purchasing).
Having said that, according to Silicon Valley venture capitalist, Evangelos Simoudis, the companies that stand to benefit the most from the advent of ACE cars are the ones that will be able to exploit the potential and opportunities around “big-data”. “Big data coming from inside and outside the autonomous vehicle and machine intelligence technologies used for the exploitation of this data are key ingredients in these next-generation vehicles,” Simoudis writes in his book, The Big Data Opportunity in our Driverless Future.
Given the magnitude of change that big data and ACE cars will bring to the automotive industry, BMWBlog recently decided to sit down with Simoudis to discuss his book and the challenges that the incumbent automakers face from new entrants like Tesla, Uber, Apple and Google.
Before we move any further, it is worth talking a bit more about Simoudis and his experience in the tech sector. Currently the Managing Director at Synapse Partners, Simoudis has been involved in the tech industry since the 1980s and has been working as a VC for nearly two decades. His areas of expertise include big-data, machine learning, deep learning and artificial intelligence. Apart from investing in start-ups, he also advises global corporations on how to embrace the tech revolution
and is of course, a published author. Lastly, he also has a blog covering the automotive sector, link to which can be found here.
Understanding Big Data
First things first — big-data is essentially the vast amounts of data and information collected by the carmakers relating to their vehicles and the customers.
According to Simoudis, big-data will, essentially, have four main uses in the next-generation vehicles — “[First], it will help in manufacturing the vehicles, [with] technologies like additive manufacturing and 3D printing. [Second,] you need it for the safe functioning of the autonomous cars … [which] will be [done] by collecting and analyzing data from maps, sensors and cameras, the transportation infrastructure and so on. Third, OEMs will need big-data to personalize the in-cabin experience for the customers … [And finally] big-data will also play a role in managing the fleets of autonomous vehicles through which the companies will be able offer mobility services.”
Interestingly, something that I had largely ignored about today’s upstarts, Uber and Tesla, before reading Simoudis’ book is that both of them owe much of their success to the exploitation of big-data. For instance, Tesla’s prowess in self-driving technologies comes down to the massive amounts of telemetry and mapping data that the company collects from its cars. Meanwhile, many of Uber’s most significant features such as driver’s rating, routing information and variable pricing, all utilize systematic analysis of big-data.
Moving On To The Big Tech Companies…
Apart from start-ups like Tesla and Uber, automotive OEMs will also be competing with established tech giants like Apple, Google, Amazon and China’s Alibaba, going forward.
These companies have more resources than the start-ups and also more experience than the automakers in areas including big-data, AI and the ‘platform’ business (Apple IOS, Google’s Android, etc). In fact, with services such as Apple CarPlay, Android Auto and Amazon Alexa, their presence is already being felt in the auto industry.
Notably, what really goes in favor of these tech corporations is that they are capable of providing a holistic ecosystem for connected applications to the customers. For example — ten years down the road, an Apple-powered car will, perhaps, be able to integrate and link your vehicle’s data with your smartphone, laptop, tablet, speaker, watch and home appliances. BMW or Mercedes cannot provide such interconnectivity that ultimately greatly enhances the customer experience. But according to Simoudis, there is still scope for the carmakers to compete.
He states,“It is very difficult to create an ecosystem [like that of the tech companies]. But what the OEMs can still do is create vehicle infotainment systems that can supplement the operating systems and application collections on the smartphones [and other gadgets]. In other words, the carmakers need to give a convincing reason to the customers to use their infotainment set-up over a smartphone or a system provided by a technology company (like Apple CarPlay and Android Auto). For me, the Mercedes-Benz MBUX system, in that way, is a step in the right direction. For the first time we are seeing an infotainment system from an OEM that incorporates intelligence, utilizes data and learns from the user to provide a very appealing customer experience.”
Why Tech Firms Are Getting Into Autos?
For all its hype and glamour, the automotive industry at the end of the day is a very capital- intensive and low-profit business.
If we look at 2016, the average operating profit margin for a mass-segment carmaker that year was 5.3 percent, while for luxury brands, the number stood at 8.6 percent. For Apple and Google, these figures are laughable. The former, with its relatively simple products, hits a profit-margin of 25 to 30 percent each quarter, whereas, the latter recorded an operating margin of 23.5 percent last year. So why are the two still eyeing a share of the car market? According to Simoudis, it all comes down to the size of the industry — “Amazon entered the retail industry in 1995. Retail, [as we know], is also a low-profit sector … But Amazon realized that because of the enormity of the industry, they could still build a very large business [by disrupting it] … and their foresight was absolutely correct.”
Similarly, Simoudis adds, “The automotive industry, despite its low-margins … is still an industry that is worth over $1 trillion, so companies like Apple, Google and even Amazon see a massive opportunity for growth … [Of course], it took Amazon about 20 years to build up itself a dominant authority in retail … but next-generation mobility is also not going to be a two-year process. Companies need to be prepared for the long-haul.”
OEMs Getting Out-innovated By Tesla
Coming back to Tesla, while it might be based out of the tech capital of the world (California) and chaired by a dot-com billionaire (Elon Musk), its R&D budget is still vastly inferior to that of the legacy carmakers.
While the VW Group, Daimler and BMW spent $15.3 billion, $7.6 billion and $5.5 billion on R&D in 2015 respectively, Tesla had to make do with just $717.9 million. Yet, it out-innovated the Germans in many crucial tech-related areas.
“There are two reasons for that,” Simoudis explains. “First, If you look at the corporate R&D today … it is mostly devoted on extending the existing, successful business models. So if we take the case of BMW, most of the company’s R&D is spent on the current lines of business (the 3-Series, the 5 Series, the 7 Series, the X-Series and so on). [In fact], in all, automotive companies spend $100 billion on R&D annually … but they are yet to answer as to how much of that investment goes for completely new concepts.” Meanwhile, the second problem Simoudis says is that, “corporate R&D in recent years has found it difficult to take disruptive ideas from the labs into production”.
He future adds, “This is why I often talk about ‘start-up driven corporate innovation’, in which my thesis is that because of how the corporate R&D is being utilized today, legacy companies need to more closely collaborate with the start-ups to get a better hold of the over-the- horizon technologies and opportunities.”
“OEMs like Mercedes and BMW have had outposts in Silicon Valley for a very long time, but they did not work closely enough with startups to focus their attention to the areas of electrification and autonomous technologies until very recently. [That said] Because of their resources, they have already overcome their latency in some of these areas, like electrification. However, with autonomous vehicles, it will be a bit harder as these technologies are more complex … and the people who are experts in these areas [are more likely to be found] at [technology] companies like Google, Baidu, Uber, Lyft … But we need to wait and see how things evolve— there is still a lot of time.”
Where Does BMW Stand Among All This?
Simoudis feels that BMW is taking next-generation mobility ‘very seriously’ and making significant advancements in all related areas.
“If you look at their product announcements, the investments of the i Ventures division and also their partnerships with other tech companies, it is clear that BMW is now taking next-generation mobility very seriously. They are not just sitting and waiting, instead they are active participants [of the upheaval].” However, “My advice to them is to experiment a lot more and not be afraid of failures… we are entering a brand-new world and many of the ongoing experiments will not succeed. But the point is to persevere, keep experimenting and keep learning.”
Adopting the Start-up Culture
Finally, the key to the OEMs succeeding in the era of ACE vehicles could be to adopt a start-up culture and mentality. Doing so will encourage a quick decision-making process (read: Elon Musk and Tesla) and also a willingness to take more risks, two elements that can be incredibly helpful in dealing with disruption. “Carmakers need to understand, what I call, the ‘start-up playbook’ and then decide whether they want to embrace it or not,” Simoudis comments.
However, I asked him whether it will be possible for German firms to make such a cultural shift as it is often said that Germany has a slower-moving corporate system than the United States and in particular, the Silicon Valley. “I don’t think is a geographic — culture issue,” he notes. “[Instead] I feel it is [more of] a corporate — culture issue … Even in the United States, there are corporations that are slow-moving compared to [say,] the start-ups in Berlin.” [Well, that is good news for BMW!]
The automotive industry is now in an interesting state, where we have some of the greatest business families of the industrialized world (Quandts of BMW, Agnellis of FCA and Toyodas of Toyota), going up against the most valuable companies in the world (Apple, Google, Amazon and Alibaba) and both being targeted by new-age visionaries with enormous public support (Tesla’s Elon Musk).
It is not going to be a winner’s-take- all situation and many of the aforementioned contemporaries are already happy to work alongside each other to split the $1 trillion jackpot. But I feel there will be at least a few major car companies that will lose their relevance in the coming years and a few tech companies and start-ups, that may not even build their own cars, but will still develop a dominant position in the automotive sector with their software expertise. For a better understanding of this potential change, we highly recommend reading Simoudis’ book.