Concentration in AV Tech Accelerates
November 2020

The current crisis is creating significant stress on the budgets of automotive incumbents. It has forced them to rethink the strategic allocation of their scarcer resources. The market-driven squeeze on R&D budgets comes at a time when incumbents need to spend significant amounts to meet CO2-related regulations as well as to fend off Tesla and other emerging OEMs. Electrification is ramping up quickly and companies realize they must be fully onboard or they will be left behind.

In July, I posted an article, The Crisis Reshuffles the Deck in the AV Space, where I analyzed the on-going transformation of the overall AV ecosystem. Like the rest of the industry, incumbents have come to realize that the effort required to bring AV tech to market is significantly bigger than anticipated, and that the expected mass ramp-up has been pushed out by several years.

It makes sense to rely on partners to develop AV tech as long as it is not about just taking a back seat. It frees up resources to focus on what matters most in the near to midterm, i.e. EVs, and leverages expertise wherever it is, in this case at tech companies. However, giving up on independent AV development comes at a long-term cost: OEMs will likely forego some mobility-related revenue streams and partial rights to future customer data.

Striking the right balance between in-house and outsourced development is key. Negotiating adequate terms in long term partnerships is even more critical given the strategic impact at stake. It will define long term profitability paths, even possibly be a matter of life or death.

 

Most Recent Partnerships between Incumbents and Tech Companies

Daimler Trucks is the latest OEM to throw in the towel. The commercial vehicle unit just signed a broad, global, strategic partnership with Waymo to deploy Level 4 AV technology on heavy duty trucks. Similarly, Traton, VW Group’s truck unit, and affiliate Navistar International agreed to invest in — and presumably partner with — autonomous truck tech major TuSimple

Mid-2020, Volvo Cars and FCA gave up on in-house AV development. They both selected Waymo as their exclusive, strategic partner for Level 4 technology. Last year, Renault and Nissan also signed with the Alphabet unit, though the announced scope is limited to exploring driverless mobility services in France and Japan.

Earlier this year, the VW Group finalized the deal announced in 2019 to purchase 40% in major AV tech developer Argo, in which Ford owns an equal share. VW Group folded its own AV development unit, AID, into Argo. It is interesting to note that the OEM also created Volkswagen Autonomy GmbH, an entity dedicated to designing autonomous vehicles which will likely be fitted with Argo’s tech.

At the beginning of 2020, Toyota made a significant investment ($400M) in Pony.ai, making the Sino-American startup a de facto AV tech development partner. It is noteworthy that Toyota also made a sizable investment last year in Uber ATG, the Uber entity that develops AV tech and is reportedly for sale. It is most likely about Toyota securing multiple sources, especially as ATG seems to be making slow progress.

Last year, Hyundai Motors joined forces with Aptiv to leverage the supplier’s AV development unit — formerly NuTonomy. The Korean OEM contributed $2B the new JV, which was recently named Motional. In 2018, Honda entered into a long term partnership with GM’s Cruise, committing $2.75B over 10 years. As a result, Cruise presented a jointly developed robotaxi last January.

If most OEMs have established collaborations to co-develop or acquire AV technology, some have remained on the sideline. This is the case for both BMW, who terminated its cooperation with Daimler a few months ago, and PSA, who seem to favor the fast follower strategy without clearly communicating how.

 

Significant Impact on the Startup Ecosystem

The concentration amongst AV tech developers has had a significant impact on the supporting startup ecosystem (mapping, data annotation, simulation, Lidar…) as it means fewer possible customers. The strongest startups now have access to potentially larger contracts. This translates in the ability to attract a bigger share of the available VC/CVC funds — e.g. Applied Intuition (simulation) with a recent $125M round. At the same time, others have fewer business opportunities, resulting in more difficulties fund raising.

For instance, this is the case for Lidar startups. Among the most mature ones, Velodyne, Luminar and Aeye have jumped on the SPAC bandwagon to go public at billion dollar valuations. Other have raised very large rounds this year, such as Waymo ($3B), Pony.ai ($729M) or Didi’s autonomous driving unit ($500M).

 

The Bigger Picture for Incumbents: Software Capabilities

AV tech is not the only domain where incumbents have surrendered. Google and Amazon are making significant in-roads in the automotive infotainment and digital assistant domains, respectively with Android and Alexa. They will likely soon dominate and leverage their market power to gain control over more data.

It is also worrisome for incumbents to witness the Google-Waymo affiliation as well asAmazon’s recent acquisition of Zoox. These companies are progressively gaining a stronghold on what could have been OEMs’ turf. As a reminder, Tesla addresses autonomous driving, infotainment and navigation with proprietary solutions.

The OEM shift towards tech companies ought to be put in perspective with the overall digitalization of the auto industry. The OEMs’ failure to develop a core software expertise for the overall vehicle, powertrain, chassis or in-cabin experience will make it all the more difficult for them to defend their standing. 

Incumbent OEMs and Tier 1 suppliers must address the strategic challenge related to the fast growing and critical role of software. Some companies plan to establish large in-house teams, e.g. VW Group with Car.Software, Toyota with Woven Planet or Bosch with its “cross-domain computing solutions” division. Nonetheless, it won’t be easy, due in part to corporate cultures, as demonstrated by VW’s rough start.

Marc Amblard

Managing Director, Orsay Consulting

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(photo credit: Waymo)

© 2020 by Orsay Consulting