Automotive > Infotainment & Telematics Blog

Valuation Consternation in Detroit

by Roger Lanctot | Apr 14, 2017

These are trying times for car companies. Auto execs are left to watch speechless as the valuations of marginally profitable or completely unprofitable organizations such as Tesla, Uber and Lyft rise while auto maker valuations languish. It’s an old story that valuation growth remains elusive for incumbents in a slow growth, low margin industry – while insurgents surge in value sustained by venture capital.

Mike Jackson, CEO of Autonation, is the latest automotive industry executive to wade into the valuation swamp. Jackson says he voted for Hilary Clinton and thinks Donald Trump can be a little erratic, but he likes Trump’s easing of auto industry regulations. He also thinks Tesla Motors is over-valued and may be a Ponzi scheme and that GM is undervalued. All of this is according to Automotive News which cited Jackson speaking at the National Automobile Dealer Association and JD Power &Associates Automotive Forum preceding the New York Auto Show. – “AutoNews Now: Tesla “inexplicable” Autonation CEO Says”

The motivation behind Jackson’s comments was the announcement that Tesla Motors’ market value has now surpassed both Ford Motor Company and General Motors. With his comments, Jackson officially joins former GM Vice Chairman of Global Product Development, Bob Lutz, who has frequently questioned the viability of Tesla’s business model.

Tesla’s surge past Ford and GM comes despite multiple strategic investments and acquisitions in car sharing, ride hailing and autonomous driving technology and companies by both Ford and GM. GM went so far as last year investing $500M in Lyft in an if-you-can’t-beat-em-join-em gesture intended to vault GM into a leadership position in the mobility-as-a-service market. Ford bought Chariot, among other strategic investments.

Taken alongside the launch of the Maven car sharing service and the acquisition of Cruise Automation, GM appears, on the surface, to be setting the foundation to take on Tesla with connected, automated, shared vehicles. But it’s not been enough to move the needle and the Lyft investment may ultimately be orphaned as GM pursues its own in-house ride hailing development efforts and app – hence, the collision course.

To my mind, the core of the over/under-valuation misread by Jackson is a function of the car sharing positions of GM and Tesla. Tesla is prepared and positioned for the lucrative car sharing transformation that is overtaking the automotive industry. GM is less so.

But for automotive industry stalwarts like Jackson, value derives not from connectivity, but from sold cars. Jackson confers the long-term value advantage on GM based on the company’s success in China (the largest and fastest growing auto market in the world) and its exit from the European market (a devastating destruction of value and the denouement of a 100-year effort to make a go of it and take advantage of Opel’s small car expertise).

Jackson turns a blind eye to GM’s fledgling car sharing efforts – most likely because dealers have thus far largely been left out of the Maven business model. Since Jackson perceives little value in connectivity or autonomy his assessment of GM’s value is based almost entirely on the company’s ability to sell cars.

Jackson is missing the tectonic shift altering the automotive ownership landscape. This, too, is perhaps no surprise since the change is happening at a glacial pace. Jackson is more or less dismissing the potential upside valuation implications of GM’s Maven car sharing service and the $600M Cruise Automation acquisition.  

Jackson also ignores the connectivity advantage posed by Tesla and he overlooks the fact that Tesla is unlikely to exit EV-friendly Europe and is just hitting its stride in China. In both instances, Tesla is positioned to sell a lot more cars even as it masters the art of vehicle connectivity and autonomous driving.

Connectivity is the key to the valuation delta between GM and Tesla. Every Tesla is connected. This is a boast that GM cannot make. GM builds LTE modules into every one of its cars in the U.S., China, Europe and Brazil, but not all of those modules are provisioned and connected beyond the free period at time of purchase.

More significantly, Tesla has not only connected its cars, the company is also gathering probe data from its cars in cooperation with traffic provider INRIX. This is the first essential step toward building a truly networked offering of vehicles capable of functioning as a self-driving car sharing service.

Industry sources indicate that GM is working on developing an in-house ride hailing capability that could be deployed as an application to OnStar-equipped vehicles. Such a strategy will put GM in direct competition with Lyft. But GM has so far failed to gather data from its cars in real-time in a manner designed to enable a networked car sharing solution.

It’s possible that a GM-developed app launched on smartphones might allow GM to sidestep the added cost of programming the solution into the cars. But it would also put added pressure on that path to market – requiring users to download yet another app to their smartphones – unless of course it were to be integrated with GM’s existing smartphone app.

GM’s long obsession with customer privacy and avoiding the cost of collecting data wirelessly from its cars has put the company behind the eight ball when it comes to capitalizing on the OnStar proposition. After 20 years, the OnStar service ought to be operating as the largest community-oriented, crowd-sourcing capable car network in the world. Instead, each of the 12M nodes on the OnStar network is discrete with little or no data exchanged with any other vehicle on the network.

OnStar subscribers will get more value today regarding traffic and driving conditions from using the Waze traffic information app on their smartphones than they can get from OnStar. In this way OnStar is a little like Brazil. Brazilians say of their home: “Brazil is the country of the future…and always will be.” OnStar is the telematics service of the future and always will be.

When GM invested $500M in Lyft more than a year ago, I wrote that GM ought to integrate Lyft tightly with OnStar and leverage Lyft’s service and its technology throughout its customer relationship touch points including dealers. In essence, GM should leverage Lyft to make every GM vehicle sharable by taking advantage of the OnStar hardware and software built into most GM cars.

In fact, I provided a list of bullet-point recommendations for this strategic investment:

If GM is serious about being disruptive and if Lyft is to be part of that intention here are some suggestions:

  1. Integrate Lyft into the OnStar service thereby allowing OnStar subscribers to become Lyft drivers.
  2. Offer OnStar subscription discounts to Lyft drivers (of OnStar-equipped vehicles).
  3. Integrate GM dealers into the driver and vehicle inspection process for Lyft recruitment – including closing open recall items.
  4. Offer $100 in Lyft ride credits to GM vehicle owners to have their cars checked for open recalls – GM dealers will use Lyft drivers to dispatch mechanics to pick up customer cars at home or work and return them after making required repairs.
  5. Offer Lyft drop-offs and pick-ups universally at all GM dealerships for routine maintenance and repairs – no charge.
  6. Integrate free Lyft rides into automatic crash notification/roadside assistance support as part of the OnStar service.
  7. Offer Lyft incentives to returning former OnStar subscribers.
  8. Extend Lyft’s generous driver incentives to OnStar subscribers.

Needless to say, none of this has happened. GM has, instead, attempted to lease GM vehicles to Lyft drivers in a manner that many Lyft drivers consider to be onerous and disadvantageous. GM is also believed to be planning to deploy thousands of potentially self-driving Chevy Bolt’s with technology from Cruise Automation in cooperation with Lyft – or maybe independently of Lyft. No comment from GM on the latter.

In fact, the relationship with Lyft is looking increasingly tenuous as GM and Lyft stand on opposite sides of the regulatory divide. GM lobbyists are seeking Federal and state support for a regulatory framework limiting public road self-driving car testing to vehicles from car companies only. Lyft is a member of the Self-Driving Coalition for Safer Streets advocating a more liberal on-road testing regime open to all.

It’s clear that GM, Lyft and Tesla are on a collision course. Whether GM creates its own service and application or piggybacks on Lyft, it is clear that treating connected OnStar-equipped vehicles as an actual network represents a massive cultural change for GM. For Tesla, such a leap into a realm of networked cars capable of optimizing vehicle distribution, sharing and monetization is a bunny-hop. As for Lyft, networking cars is what the company does every day.

Tesla’s superior preparation for this next stage of vehicle usage and sharing suggests a significant advantage for Tesla – piling upon already formidable advantages. While GM has long possessed the ability to wirelessly deploy new features and enhancements via its OnStar in-vehicle connections, it is Tesla that has pioneered and monetized this capability with enhanced driving modes, features and functions for which many Tesla owners have paid.

Tesla has also successfully deployed driver monitoring technology capable of disabling autopilot if Tesla drivers fail to conform to the hands on the wheel requirement. GM says it will introduce driver monitoring technology when it makes Supercruise available late this year – but how it will work and how accepting GM customers will be remains to be seen.

 The key to Tesla’s success thus far is the company’s undisputed control of and access to vehicle and driving data. Tesla is in an advantageous position for modeling a car sharing or ride hailing-capable service platform based on historical data already gathered.

But more importantly, Tesla has established the confidence and trust necessary to deploy a ride hailing/car sharing business proposition on the existing connected platform in its cars. Tesla owners are familiar and comfortable with Tesla remotely accessing their vehicle data.

The barriers to enabling a car sharing/ride hailing platform via OnStar are formidable. There is no heritage or history of data sharing among OnStar users.

GM already tried and failed at peer-to-peer car sharing in cooperation with RelayRides. When RelayRides, now known as Turo, shifted its focus to long-term rentals – it chose to part company with GM. It’s worth noting that Turo ultimately decided against requiring special hardware, such as an OnStar module, to support its peer-to-peer solution.

Mike Jackson is correct to single out GM as being in the best market position, even if he doesn’t really understand the underlying role OnStar will play in enabling the expected leap into a world of car sharing and ride hailing. But he is underestimating the magnitude of the technological and cultural gulf facing GM, and he under-estimates and misunderstands the nature of the customer relationship paradigm shift achieved by Tesla.

It’s hardly a surprise that Tesla’s allure would escape an auto dealer principal. Tesla’s direct sales and service model is antithetical to the dealer-focused way of doing business. Tesla’s success simply makes no sense to Jackson – nor to multiple Automotive News columnists who chimed in in support of Jackson-grade skepticism.

I say it’s time for the nay-sayers and skeptics to set aside their cynicism and take a closer look at the power of a platform. What Tesla is doing to the automotive industry is nothing less than what Amazon is doing to retail and what Apple did to Nokia and Blackberry.

Twenty years after GM introduced the first automotive connectivity platform, it is getting schooled by an upstart from Silicon Valley. Tesla is destroying all pre-conceived notions about the limited sales potential of electric vehicles and the invulnerability of the auto industry to startups. It boils down to platform. Tesla continues to prove that it has the most open, flexible and secure platform in the business and the company continues to mine new sources of value from that seemingly bottomless resource.

It’s not too late for GM to get on board and restore OnStar to its rightful brand-defining role as the focal point of value creation and brand differentiation. (GM need only listen closely to its fanatical Volt drivers to get a better handle on what turns these pioneers on.) If GM can listen. If GM can change course. The company may yet again be recognized as the mightiest car maker in the world or, as an executive with a GM competitor in China put it to me this week noting the plethora of ex-GMers populating competing car companies, as the West Point of the automotive industry.

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