Apple’s market capitalization briefly exceeded $750B last year, despite falling from that high it is the world’s most valuable public company. ARM, the UK-based leader in low power processors for mobile and embedded devices, was just acquired for $32B. What these companies have in common is that neither of them makes anything. Apple uses a variety of contract manufacturers, most notably Hon Hai, to build its iPhone, iPad, and Macs. ARM goes one step further and licenses its chip designs to semi-conductor fabricators for a royalty stream. Both are adept at developing valuable intellectual property (IP) and have optimized their businesses around IP monetization. For either company owning manufacturing plant would increase capital intensity, reduce margins and erode shareholder value.
So what does this have to do with the capital intensive, manufacture-at-scale global automotive industry? Everything as it turns out. By way of analogy consider the recent history of the smartphone industry. A decade ago Nokia, RIM and Palm dominated. Then in 2006 Steve Jobs introduced the iPhone, a radically better device that drove Apple’s meteoric rise while mortally wounding the slow to react incumbents. What happened next is the really interesting part: Google acquired Andy Rubin’s Android startup, refocusing it as a smartphone operating system. Rather than use the manufacturing abilities of recently acquired Motorola, Google decided to build reference phone designs and open source Android. One key requirement was that Android phones were required to connect to the Google store and provide Google with telemetry. Within a few years Android taken over 80% market share and Apple had become more of a high-end niche player (the Tesla of phones, but with better margins).
So now really back to cars: it costs several billion dollars to develop a world-class vehicle platform. Leveraging the platform across as many models as possible without compromising unique brand attributes maximizes profit per vehicle (see 1970-80s Detroit badge engineering for what not to do). Volkswagen are the masters with just four platforms supporting tens of vehicles across brands as diverse as Skoda, Audi, Bentley and Porsche.
Now the fun part: let’s say you and I run successful a cloud services company with over $100B in cash. We might look at the rise of Android and apply the lessons learned to automobiles. Our goal would be to gain an unassailable position as the de facto standard for connected and autonomous vehicles in six (relatively) simple steps:
- Invest several billion dollars into developing a modular vehicle architecture that accepts multiple powertrains and is flexible enough to underpin family sedans, sports coupes and crossover SUVs. We might arm our recruiters with signing bonuses and stock options and point them towards VW’s platform engineers to speed things along.
- Pay careful attention to creating stable interface points: both physical (such as firewall position and suspension mounting points) and virtual (such as cloud and vehicle software APIs). We would ignore legacy technologies, implementing truly secure high speed networking (STP with Gb not Kb throughput), a 48v electrical system, push firmware upgrades to every device, etc.
- Leverage our firm’s extensive cloud services infrastructure, machine learning capabilities and monetization model for third party developers. We understand that the ecosystem is key and will pull out all the stops to make it compelling for both developers and consumers.
- Build a series of reference vehicles and certify them for sale in key markets initially and worldwide ultimately. We use more petty cash to ensure that we had a seat at the table for vehicle regulation and standards discussions. This will help us to avoid surprises and ensure that our designs remained legally compliant in all markets.
- Open source the design and allow anyone to manufacture either a complete vehicle or subsystem royalty free. The only requirement is that every vehicle must connect to our cloud services and share telemetry data with us. We might get the ball rolling by working with a few of the larger Chinese manufacturers anxious to make the jump to world-class product much faster than their Korean and Japanese neighbors.
- We would setup a component certification function to ensure interface compliance and safety. Testing costs would be borne by the component manufacturer and once certified we would help create a market for their component (think B2B app store). The objective is to remove the big company politics and purchasing department inertia to unleash innovation: from novel powertrain systems to HMI advances. The best ideas and most compelling value will quickly bubble to the surface. We might acquire some of the best ideas to make them available to the whole ecosystem.
Our six stage plan represents a double digit billion investment, perhaps 10-15% of the cash on our balance sheet. However, we would have fundamentally changed the economics of being a vehicle manufacturer. Unburdened of R&D, legal and regulatory compliance, qualification and purchasing negotiations, the minimum efficient scale to deliver world class product falls through the floor. We are aligned with consumer purchasing preferences moving from horsepower to infotainment; something likely to accelerate with the rollout of autonomous vehicles. As an added benefit consumers can keep their cars current with lifetime free software updates from us and the ability to upgrade modular hardware components every few years. Like watches there will likely always be high-end niche manufacturers, but the potential for this approach to gain traction should worry mainstream manufacturers and suppliers.
Another point to consider is that by focusing on IP creation rather than manufacturing plant we can employ a bottom-up rather a top-down market entry strategy: i.e. we could start with low cost vehicles in highly populated, but less litigious and regulated markets such as China and India. We can them move upmarket with our manufacturing partners once we collectively gain experience.
P.S. If you happen to run a successful a cloud services company with over $100B in cash, or know someone who does, I have a great idea for you.