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 â€²startupÂ culture’ in the auto industry means traditional players are only willing to invest in firmsÂ in new automotive fieldsÂ (such as autonomous tech)Â at the â€²marketable product’Â stage.Â As such,Â itÂ isÂ tech companies and venture capital firmsÂ thatÂ are the players driving new automotive fields forwards,Â contributing 95% of the investment in these futureÂ market segments,Â according to new investment analysisÂ byÂ McKinsey.Â This means that culture changeÂ isÂ needed in OEMs if they are to maintain their dominant roleÂ 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 theseÂ new automotiveÂ fields into 10 subfieldsÂ (such as semiconductors or telematics), eachÂ oneÂ under one of the four big â€²second auto revolution’ fieldsÂ sweeping the industry: autonomous tech, connectivity (IoTÂ (Internet of Things)), what it calls â€²smart/diverse mobility’Â (includingÂ car sharing and E-hailing), and electrification. In its webinar â€²Future mobility technologies â€“Â startupÂ and investment landscape,’Â McKinsey revealsÂ thatÂ ~$40 billion ($38.9 billion/â‚¬34.8 billion)Â has been invested in these new automotive fields since 2010. These figures exclude the five largest ride-sharing firms, including Uber,Â DidiÂ and Lyft (whose investment figures would dwarf and skew these figures otherwise),Â asÂ well as Israel-basedÂ autonomous vision specialistÂ Mobileye, which wasÂ bought by Intel for $15.3 billion (â‚¬14.4 billion), and would also have clouded the picture.Â The idea is to get a true picture of theÂ underlying investment landscape.Â 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 pictureÂ that shows a lack of willingnessÂ toÂ nurture new innovations at the initial stages before a business model is formed.Â In their absence, instead this role is being played byÂ venture capitalist (VC)Â andÂ private equity (PE)Â firms, as well as technology firms, whoÂ have a long-standing culture of rearing innovativeÂ startupsÂ in their early stages â€“ and have reaped the rewards of doing so. As a result,Â technology and investment firms are rapidly encroaching into the auto industry â€“ threatening to wrest control of high-value new auto fields from OEMs. This also threatens the current business models of carmakers â€“ if new technologies take more of the limelight, less focus is placed on the car brands themselves, jeopardising their grip through the softening orÂ destruction of traditional brand loyalties. These 10 automotive fields,Â which also include gesture/voice recognition, user interface (UI) technologies and â€²parking and mobility optimisation’,Â have been the scene of a major investment race overÂ recentÂ years as the second auto revolution gathers steam, with a three-fold increase inÂ 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 â€“ which explainsÂ whyÂ semiconductor chipmaker Intel was willing toÂ invest heavilyÂ in sensor and autonomous vision specialist Mobileye, as Intel encroaches ever further into the automotive scene. The fields â€²vehicle leasing and fleet management’ and â€²sharing 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 â€²vehicle leasing and fleet management’ and â€²parking and mobility optimisation’ command much of the current investment by OEMs â€“ 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 â€²smart’, semiconductors will form anÂ increasingly large physical part of the car, particularlyÂ when measuredÂ by value. Overall, it is the UI and most importantly â€²backend and cyber security’ fields that have shown the greatest rise in investmentÂ inÂ 2010-13 versus 2014-16, at $0.1 billionÂ (â‚¬894 million)Â to $1.1 billionÂ (â‚¬983 million)Â and $0.4 billionÂ (â‚¬358 million)Â to a relativelyÂ heftyÂ $2.7 billionÂ (â‚¬2.4 billion)Â respectively. The latterÂ hasÂ overtakenÂ a flat $1.6 billion (â‚¬1.4 billion) sensor/semiconductor spend toÂ exjoyÂ theÂ greatestÂ investmentÂ inÂ any of the 10 fields.Â 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 ofÂ theÂ spendÂ in autonomousÂ solutions, particularly Google sister division Waymo. Google (including Waymo and parent Alphabet) hasÂ madeÂ itÂ part of its core business to continually invest in new technologies,Â including in the auto sphere, essentially to both absorb and improve new technologies. For example, Google bought AIÂ companyÂ 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 â€“ particularly finished products that already have a cash flow, which the OEMs canÂ easily then bring to a large market with their added scale. The main exception to this is Ford’s investment in AIÂ companyÂ Argo, which is an investment in underlying AI technology with no existing commercial product directly attached. Ford has been unique inÂ doing a lot more of its new technology researchÂ and development in-houseÂ compared to other carmakers. This $1 billion (â‚¬894 million) Argo investment and its relatively gigantic R&D budget versus other carmakers,Â adjusted for company size,Â isÂ unlikely to changeÂ dramatically under its new CEO, since new chief Hackett has beenÂ drafted in from headingÂ Ford’s Smart MobilityÂ technologyÂ 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 â€“ 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).Â Tech player Waymo also comes in alongside Toyota with around 120 active autonomous patentsÂ â€“ but is actually an anomaly among tech players, with noÂ others holding more than 40.Â ValeoÂ 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,Â followedÂ byÂ other premium OEMs such as Mercedes parent Daimler, normally considered a technology leader, as well as BMW,Â whichÂ haveÂ a surprisingly relatively low number of active patents in the field, at around 70 and 40 respectively. McKinsey’s auto-techÂ intersectionÂ specialist Thibaut Mueller ends hisÂ webinar by pressing home the importance of this autonomous field, highlighting that while a traditional taxi has a cost of around $2.50Â (â‚¬2.23) per mile, an autonomous â€²robo-taxi’ is expected to be able to perform the same task at a cost of only $0.30Â (â‚¬0.27)Â and in so doing,Â isÂ revolutionising transport in both the consumer and corporate markets.Â 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 â€²massive deal changer in the true sense of the word.’ And while Mueller claims thatÂ theÂ willingness of OEMs to nurture newÂ startupsÂ from the ground up is â€²not in their DNA’, he does expect this to change as the second auto revolution begins to flourish.