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Car Makers Spinning in a Red Ocean

by Roger Lanctot | Sep 28, 2017

In spite of all of the terrible stories about vehicle-inflicted traffic and highway fatalities, the automobile industry continues to post impressive profit figures as total vehicle sales continue to climb toward 90M units annually and beyond. Simultaneously, all of the emerging opportunities for new transportation propositions such as electrified, shared or autonomous vehicles represent red oceans threatening to syphon off that profitable growth.

It's a troubling proposition for these public companies which must find ways to boost revenues or profits while faced with doom on all sides. Success in developing shared, electric or autonomous vehicles threatens the financial health of the very organizations driving the innovation. The more successful they are the sooner their irrelevance may arrive.

Car makers lose money on nearly every pure electric vehicle they sell. Shared vehicles are expensive to maintain and operate and experts note that every shared vehicle eliminates between seven and 20 vehicle sales. And the market for autonomous vehicles is likely to arise from a combination of commercial fleets or networked public transportation propositions - neither of which markets are either flush with cash or eager to embrace new technology.

In spite of these forbidding value propositions car companies are charging forward to claim leadership in driving automation with expensive acquisitions and massive investments in development teams. At the same time tens of billions of dollars are being invested in electrification spurred by the threat of global government intervention in the sale of fossil fuel-based vehicles. And soon, very soon, every connected car will be a candidate for networked or peer-to-peer car sharing.

It is therefore, perhaps, little surprise that investors such as Morgan Stanley and Deutsche Bank are struggling to handicap the contenders and find points of technology leverage to paint positive stories for investors. Two recent bulletins from these two organizations highlight the challenges of pitching automobile stocks based on potential technology research outcomes or strategic partnerships.

Business Insider quoted Morgan Stanley last week claiming that Ford 'needs profound change' to turn around its sagging stock price. Never mind that Ford has made multiple strategic investments addressing all of the aforementioned technological trends. Never mind that Ford has managed to sidestep profit-eroding engagements with ride hailing organizations like Lyft and Uber.

No, says, Morgan Stanley, Ford should leap into bed with Alphabet's self-driving car arm, Waymo, as the only way to catch up in the autonomous vehicle space. In fact, given that Waymo is headed by former Ford (and Hyundai) executive John Krafcik it is only natural that the companies partner on vehicle automation, claims Morgan Stanley.

The fact that Krafcik previously worked at Ford is probably one of the best reasons to assume that Ford will not do business with Waymo. Very few car companies generally and Ford in particular, welcome back wayward former executives. In addition, it appears that Morgan Stanley has completely missed the overriding automotive industry vibe of avoiding engagement with Google/Alphabet at all costs - with the exception of Android Auto and Android itself and the demands of the marketing department.

There is another factor, which is the inclination of every car company to develop its own, in-house differentiating solutions. Waymo's partnership with FCA will be a deal-breaker for virtually every other auto maker with the possible exception of smaller car companies too desperate for a solution to worry too much about differentiation.

Ford has placed its automated driving bet on Argo AI, led by former senior Uber and Google executives. The greater challenge, yet to be overcome by Waymo or any other automated driving players, is the business model behind monetizing self-driving cars. Partnering with Waymo will do little to solve this conundrum for Ford - so don't expect any relationship with Waymo to be touted by newly-minted Ford CEO Jim Hackett when he speaks to investors and analysts next week. Nice try, Morgan Stanley.

http://tinyurl.com/ya5ryw4x - Morgan Stanley: "Ford needs 'profound change' to turn around its sagging stock price" - Business Insider

http://tinyurl.com/y7xyg35f - "Jim Hackett's Big Moment - CEO's vision for Ford will become clearer this week" - Automotive News

Meanwhile, Deutsche Bank jumped on the stock tout soapbox to assert that General Motors was a mere six quarters away from the commercial deployment of autonomous vehicles. Clearly referring to GM's Cruise Automation team in San Francisco, Deutsche Bank claimed in a CNBC report that GM, not Tesla, is the automated driving leader based on the performance of Cruise Automation vehicles which are being tested "in some of the most complex urban environments."

http://tinyurl.com/yaotl6ky - "'GM, Not Tesla, is a Better Bet on the Autonomous Vehicle Future Right Now,' Deutsche Bank" - CNBC

This DB assessment is wrong on a variety of levels. First of all, to suggest that GM's stock price ought to be in any way tied to its autonomous driving progress or leadership based on Cruise Automation is ludicrous (apologies to the Tesla Model S). It is by-now clear to even a casual observer that Cruise is not - in spite of CEO Kyle Vogt or even GM claims to the contrary - stitched into the mass vehicle production roadmap of GM.

Cruise is an outlier operating vehicles mainly within one of the most carefully mapped environments on the planet: San Francisco. Cruise Automation has yet to define a profitable business model - though it is already in use for moving company employees. Who or, better yet, what organization is going to pay for a Cruise Automation-enhanced self-driving vehicle?

Deutsche Bank has changed its rating of GM to "buy" from "hold" based on this assessment - without any clear prospect of broad consumer or commercial demand for what GM may or may not be able to deliver. Surprisingly, DB turns a blind eye to the autonomous driving development that IS on GM's roadmap: Supercruise. In fact, Supercruise had a high profile debut on the Cadillac CT6 on the "Today Show" on NBC this week:

http://tinyurl.com/ybxxrayu - "Self Driving Car Begins Coast-to-Coast Trip at Today Studio" - NBC

The ground-breaking yet limited self-driving capability of Supercruise highlights the challenge to bringing the benefits of automated driving to the masses. The technology is expensive and the promise of assisting driving but not completely taking over the driving task without driver supervision has huge implications for liability and driver education.

GM's ability to overcome these hurdles to make Supercruise accessible to consumers is an extraordinary breakthrough, but Deutsche Bank is neither impressed nor interested. DB is obsessed with the Silicon Valley swashbucklers and their self-driving dreams.

The bigger issue, of course, is that electrification, automation and vehicle sharing as concepts do not exist in a vacuum. There are market forces behind the emergence of these technologies ranging from government mandates, to climate change, greying and growing populations, urbanization, and changing consumer preferences.

The winners and the leaders in these red ocean markets will be those that combine technical acumen with the cleverest and most compelling go-to market strategy. Complicating matters for legacy market players is the reality that market entry barriers are falling with the onset of these technologies even though the prospect of profits remains elusive. We all know about the billions of dollars going into this massive innovation engine. We need to pay a little more attention to how we are going to get money out of it.

Postscript: Ford, Lyft Will Partner to Deploy Self-Driving Cars - http://tinyurl.com/y9sjrj27 - Reuters

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