Facing myriad threats from Silicon Valley, auto makers are
racing to gain ground in everything from car sharing to driverless
technology. At stake: who will control the future of
transportation.
By Mike Colias and Tim Higgins
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (October 20, 2018).
General Motors plans to roll out a robo-taxi service next year
that will let urbanites hail a driverless Chevrolet Bolt. Ford is
overhauling a dilapidated Detroit train station to become a tech
hub aimed at attracting software superstars. Daimler wants to merge
one of its divisions with archrival BMW to create a juggernaut for
services like ride hailing and car sharing.
And Toyota says it's evolving into an entirely different
company, one that focuses more on services that move people around.
"It's a matter of surviving or dying," says Chief Executive Akio
Toyoda.
The global auto industry thinks it sees the future, and it will
require a transformation without precedent in business history: The
giant industrial sector has to turn itself into a nimble provider
of software and services.
This week brought yet another signal of the forces it's up
against: Uber Technologies Inc., which has chalked up about $4.8
billion in operating losses over the last six quarters, is laying
plans for an initial public offering that bankers think could value
it at $120 billion. That's more than General Motors Co., Ford Motor
Co. and Fiat Chrysler Automobiles NV combined.
Auto executives say they need to avoid a nightmare tech scenario
that's become a common refrain at industry gatherings. They don't
want to become the next "handset makers" -- commodity suppliers of
hardware, helplessly watching all the profits flow to software
makers like Apple Inc. and Alphabet Inc., the parent of Google.
Both companies are investing in software for driverless cars.
"We are transforming our hardware-based company into a business
that piece by piece will press further into the service economy,"
said Jürgen Stackmann, a Volkswagen AG board member in charge of
sales, in an interview with The Wall Street Journal this week.
Industries from Hollywood to publishing to retail are similarly
trying to transform themselves into tech businesses as they
confront disruptions from Silicon Valley.
In the auto industry, executives must confront entrenched
corporate cultures and limited budgets in a business that is low
margin and highly vulnerable to downturns in the economy. They must
sustain profits in the traditional, capital-draining business of
cranking out millions of cars each year, as they simultaneously try
to invest in costly future technologies -- financial constraints
not faced by tech rivals.
Even with financial backing, car companies will still need to
change mindsets internally and get different parts of the company
working collaboratively to support the new ventures, said Doug
Betts, a veteran auto industry executive who also spent nearly two
years working at Apple Inc.
"Typically, car companies are not very good at that," said Mr.
Betts, now a senior vice president of global automotive operations
at J.D. Power. "There are these really strong and huge silos that
over 100 years have gotten good at what they do and also good at
throwing rocks at everybody else."
Software expertise is also a weakness, Mr. Betts said, because
auto makers have long depended on their suppliers to write code
rather than building that talent internally.
Auto makers point out that they have one advantage that
newcomers to the industry don't: vehicles.
"Ultimately, you can have the best services platform there is,
but if you don't have the vehicles to operate on it, that won't do
you much good," said Sam Abuelsamid, a senior analyst with Navigant
research. "That's where the manufacturers have an ace in the
hole."
Many analysts believe businesses like Uber and Alphabet's
self-driving tech subsidiary Waymo LLC won't have the appetite to
get into the low-margin, capital-intensive business of car
manufacturing.
Some auto executives say they can hold on to their roles as
hardware providers while also tapping into the growth of
more-profitable services. Mr. Stackmann said VW can earn millions
more customers than it currently has by offering transportation as
a service through a network of connected cars.
"They talk about scalability, but where is the added value from
Uber?" he said. "We have a technical foundation and will build
connectivity into our vehicles to connect them and our customers to
our ecosystem. In the long term, the question will be: Why do you
need Uber?"
Uber's $120 billion valuation isn't guaranteed. It was among
proposals recently submitted to the company by investment banks
looking to represent the ride-hailing firm in an initial public
offering that could take place early next year, according to people
familiar with the matter. The valuation takes into account a range
of factors, including Uber's food delivery business and ownership
stakes in Didi in China and Grab in Singapore.
The figure stands in stark contrast to the downbeat outlook in
Detroit, where shares of Ford and GM are stuck at multi-year lows,
even though the two car makers have rung up more than $50 billion
in operating profit since the start of 2016.
Tasha Keeney, an analyst with ARK Invest, which owns shares in
GM, Alphabet and Tesla Inc., said $120 billion "seems very
overpriced." Though she sees strong consumer interest in ride
hailing, she said the challenges Uber has confronted in its
autonomous-car program could hinder its growth longer-term,
especially as rivals advance the technology faster, building
robo-taxi fleets that compete with its business.
Auto industry executives have long seen tech-industry threats
coming. The valuation of Elon Musk's Tesla has soared in recent
years, pulling even with GM's, as it has shown it can create a
fiercely loyal customer base for electric cars. Google began
working on autonomous-vehicle technology in 2009 and its
self-driving car unit Waymo is today considered a leader in the
technology.
Meanwhile, more people are moving to large, congested cities,
and technology is giving them more options for getting around
without owning a car.
While demand for new cars and trucks remains robust and selling
them will remain a core part of the industry's business in the
years to come, many executives believe the long-term profit growth
is limited as new forms of transportation proliferate and more car
owners ditch their vehicles for shared ones, hurting sales.
Car companies are trying to diversify into new business models
that, much like Uber, sell transportation as a service. Revenue is
generated by usage as opposed to a one-time vehicle sale, and
because the service isn't as capital-intensive as building and
selling cars, executives believe it can ultimately command higher
margins.
They envision networks of automated vehicles, which riders could
hail via smartphones, similar to the way Uber and Lyft Inc. operate
now but without drivers. By 2030, such fleets could account for
one-quarter of miles driven in the U.S., Boston Consulting Group
estimates. Intel Corp., the chip-maker whose processors are being
used in some autonomous vehicles, foresees this new, so-called
passenger economy -- when today's drivers become passengers in
driverless cars, shuttles and other vehicles -- generating as much
as $800 billion by 2035 and $7 trillion by 2050.
To make the shift, many car makers are restructuring their
businesses, aiming to free up capital to make the new investments.
Some auto companies, like GM, Ford and Toyota Motor Corp, are
investing in new tech startups, purchasing artificial-intelligence
and robotics firms, and hiring thousands of workers in tech hubs in
California and Tel Aviv, Israel. Several car companies have
acquired or invested in makers of lidar, laser-based sensors that
help driverless cars navigate. The auto makers are tapping the tech
world for software-engineering talent, a skill traditionally in
short supply in the car business.
GM Cruise, the car maker's autonomous-car unit, has grown from a
40-employee startup acquisition in early 2016 to more than 900
people in San Francisco. In May, the company established GM Cruise
as a standalone entity to attract outside investment. The move
cleared the way for a $2.25 billion infusion from Japan's SoftBank
Group Corp.'s tech-focused Vision Fund, which should provide the
working capital it needs to launch the driverless taxi service it
hopes to debut in some U.S. cities next year. Executives at GM
believe such a network could in the long-term generate profit
margins of up to 30%, versus the nearly 9% margin it posted
globally last year.
Many companies are also striking alliances with each other and
their would-be tech rivals to spread the risk and costs of
developing these new ventures.
Honda Motor Co. this month pledged to invest $2.75 billion in GM
Cruise and help develop the technology. Rival German car makers BMW
AG and Mercedes-Benz parent Daimler AG have proposed a joint
venture to combine the companies' car-sharing and ride-hailing
services.
"Obviously, every company would like to do everything by
themselves...except that we can't," said Carlos Ghosn, chief of the
three-way Renault-Nissan-Mitsubishi alliance, during an event this
month.
Daimler AG plans to create a separate business unit called
Daimler Mobility AG next year focused on on-demand transportation.
An Uber-like ride-hailing service Daimler started a decade ago,
Mytaxi, has grown popular in Europe. The mobility unit could
eventually become a candidate for an IPO as the car company seeks
to tap the huge market valuation enjoyed by Uber, analysts say.
"As pioneers in automotive engineering, we will not leave the
task of shaping future urban mobility to others," Daimler Chief
Executive Dieter Zetsche said last spring.
Toyota is slimming down its core business units to free up cash
for investments. The Japanese car maker is also investing in Uber,
pledging to integrate its autonomous driving technology into Uber's
own self-driving prototype.
Over the last year, GM has taken journalists and investors
through a factory in suburban Detroit, where workers plan to build
self-driving Chevrolet Bolt electric cars that have no steering
wheels or brake pedals. The message: It has the manufacturing might
to crank out thousands of robot cars, while tech rivals like
Alphabet's Waymo unit must equip their autonomous systems onto
vehicles they purchase from traditional car companies. Waymo has
said it will start an autonomous car service sometime this
year.
"We are the only company that has all of the necessary assets
under one roof," GM Chief Executive Mary Barra told analysts
earlier this year.
--William Boston and Sean McLain contributed to this
article.
(END) Dow Jones Newswires
October 20, 2018 02:47 ET (06:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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