Risk-averse auto players account for only 5% of the investment in new fields, says McKinsey

23 June 2017

23 June 2017 A lack of ′startup culture’ in the auto industry means traditional players are only willing to invest in firms in new automotive fields (such as autonomous tech) at the ′marketable product’ stage. As such, it is tech companies and venture capital firms that are the players driving new automotive fields forwards, contributing 95% of the investment in these future market segments, according to new investment analysis by McKinsey. This means that culture change is needed in OEMs if they are to maintain their dominant role in the future of the industry. McKinsey’s SILA engine, which lists all companies that have invested in each given automotive field, shows that established auto players, including OEMs and suppliers, have only invested 5% of the total market spend in new automotive fields. McKinsey splits these new automotive fields into 10 subfields (such as semiconductors or telematics), each one under one of the four big ′second auto revolution’ fields sweeping the industry: autonomous tech, connectivity (IoT (Internet of Things)), what it calls ′smart/diverse mobility’ (including car sharing and E-hailing), and electrification. In its webinar ′Future mobility technologies – startup and investment landscape,’ McKinsey reveals that ~$40 billion ($38.9 billion/€34.8 billion) has been invested in these new automotive fields since 2010. These figures exclude the five largest ride-sharing firms, including Uber, Didi and Lyft (whose investment figures would dwarf and skew these figures otherwise), as well as Israel-based autonomous vision specialist Mobileye, which was bought by Intel for $15.3 billion (€14.4 billion), and would also have clouded the picture. The idea is to get a true picture of the underlying investment landscape. McKinsey also notes that its OEM investment figure could be lower than true spend due to undisclosed investments by large OEMs; however, it does not expect this to affect the overall investment picture that shows a lack of willingness to nurture new innovations at the initial stages before a business model is formed. In their absence, instead this role is being played by venture capitalist (VC) and private equity (PE) firms, as well as technology firms, who have a long-standing culture of rearing innovative startups in their early stages – and have reaped the rewards of doing so. As a result, technology and investment firms are rapidly encroaching into the auto industry – threatening to wrest control of high-value new auto fields from OEMs. This also threatens the current business models of carmakers – if new technologies take more of the limelight, less focus is placed on the car brands themselves, jeopardising their grip through the softening or destruction of traditional brand loyalties. These 10 automotive fields, which also include gesture/voice recognition, user interface (UI) technologies and ′parking and mobility optimisation’, have been the scene of a major investment race over recent years as the second auto revolution gathers steam, with a three-fold increase in investment between 2010 and 2016. These 10 fields are of course interrelated, and these interrelations between the fields are key to understanding the investment scene. For example, the autonomous solutions field is very close to the sensors/semiconductors field – which explains why semiconductor chipmaker Intel was willing to invest heavily in sensor and autonomous vision specialist Mobileye, as Intel encroaches ever further into the automotive scene. The fields ′vehicle leasing and fleet management’ and ′sharing solutions’ are also closely linked, and McKinsey’s visualisation spider diagrams show the fields are quite separate from the other eight fields, highlighting that they involve a very different kind of technology. In fact, the more traditional fields of ′vehicle leasing and fleet management’ and ′parking and mobility optimisation’ command much of the current investment by OEMs – painting an even weaker picture of their investments in the more high-tech fields such as autonomy and connected cars. Another field carmakers are investing heavily in is semiconductors, which is logical considering that as vehicles become more ′smart’, semiconductors will form an increasingly large physical part of the car, particularly when measured by value. Overall, it is the UI and most importantly ′backend and cyber security’ fields that have shown the greatest rise in investment in 2010-13 versus 2014-16, at $0.1 billion (€894 million) to $1.1 billion (€983 million) and $0.4 billion (€358 million) to a relatively hefty $2.7 billion (€2.4 billion) respectively. The latter has overtaken a flat $1.6 billion (€1.4 billion) sensor/semiconductor spend to exjoy the greatest investment in any of the 10 fields. This is a welcome sign of corporate responsibility, especially crucial with the increasing role played by autonomous cars. Venture capitalists meanwhile are investing most heavily in ride sharing, and tech companies are investing the largest proportion of the spend in autonomous solutions, particularly Google sister division Waymo. Google (including Waymo and parent Alphabet) has made it part of its core business to continually invest in new technologies, including in the auto sphere, essentially to both absorb and improve new technologies. For example, Google bought AI company Deep Mind, absorbing its operations and essentially improving upon everything they do. As said previously, McKinsey highlights that meanwhile OEMs tend to focus on investment into products – particularly finished products that already have a cash flow, which the OEMs can easily then bring to a large market with their added scale. The main exception to this is Ford’s investment in AI company Argo, which is an investment in underlying AI technology with no existing commercial product directly attached. Ford has been unique in doing a lot more of its new technology research and development in-house compared to other carmakers. This $1 billion (€894 million) Argo investment and its relatively gigantic R&D budget versus other carmakers, adjusted for company size, is unlikely to change dramatically under its new CEO, since new chief Hackett has been drafted in from heading Ford’s Smart Mobility technology division. The last element of McKinsey’s analysis looks at patent activity, taking an example of the autonomous field, and the number of active patents by each company playing a significant role across OEMs, suppliers and tech players. Interestingly, the biggest players here are not the premium OEMs but the volume OEMs, followed by the suppliers. Premium OEMs actually have relatively low activities, despite expectations that premium carmakers would be interested in the differentiation potential of autonomous technology, with their higher margins allowing new technologies often to be included in their cars first. However, this lack of activity may be due to premium OEMs seeing the joy of driving as crucial to their premium business models – making them more willing to outsource autonomous tech and focus on their new automotive fields that are more valued by their customers. As of April 2017, volume OEMs command around 900 active patents related to autonomous technology, compared to around 800 for suppliers, 300 for tech players and 250 for premium OEMs. The biggest patent holder is Ford with their heavy investments in AI, with around 240 patents, followed by volume rivals Toyota (~120) and General Motors (~110). Tech player Waymo also comes in alongside Toyota with around 120 active autonomous patents – but is actually an anomaly among tech players, with no others holding more than 40. Valeo is top among suppliers with around 100, followed by Denso and Continental on around 70 each. Porsche, part of Volkswagen Group, is also an anomaly for premium OEMs, with around 130 patents, followed by other premium OEMs such as Mercedes parent Daimler, normally considered a technology leader, as well as BMW, which have a surprisingly relatively low number of active patents in the field, at around 70 and 40 respectively. McKinsey’s auto-tech intersection specialist Thibaut Mueller ends his webinar by pressing home the importance of this autonomous field, highlighting that while a traditional taxi has a cost of around $2.50 (€2.23) per mile, an autonomous ′robo-taxi’ is expected to be able to perform the same task at a cost of only $0.30 (€0.27) and in so doing, is revolutionising transport in both the consumer and corporate markets. He says that this titanic shift will mean OEMs will have to broaden their operating models away from a consumer-ownership mentality towards a recurring model similar to a fleet management company. He calls this a ′massive deal changer in the true sense of the word.’ And while Mueller claims that the willingness of OEMs to nurture new startups from the ground up is ′not in their DNA’, he does expect this to change as the second auto revolution begins to flourish.