Established carmakers, not tech firms, will win the race to build the vehicles of the future
Mike Nudelman/Business Insider
Mike Nudelman/Business Insider
Apple's plans are unclear and unconfirmed. By some accounts it has put a few hundred people to work developing cars to match Tesla, another Silicon Valley firm that makes fast and luxurious battery-powered saloons. Others reckon that it is working on a self-driving car.
Plenty of other tech firms are turning their attention to cars. In February Uber, a firm that provides taxis through a smartphone app, said it would set up a laboratory in Pittsburgh to develop self-driving taxis. Sony recently put money into ZMP, a self-driving car startup; Google has been working for years on driverless cars.
Silicon Valley is eyeing up the auto industry for two reasons. One is that technology--in the form of electric cars, driver-assistance systems and fully autonomous cars--is already altering the industry. Another is that carmakers themselves look vulnerable, thanks to chronic overcapacity, hefty legacy costs and a spate of damaging recalls.
But whatever the future of the car looks like, it will be tough to overturn the incumbents in a business where clever technology is only part of the equation. Despite a reputation, once richly deserved, for sloth in adopting new technologies, most big carmakers are pouring resources both into battery power and other alternative forms of propulsion, and into automated driving. Ford and Nissan have both opened research labs in Silicon Valley.
Tech firms may get all the attention, says Haroon Hassan of Mitsubishi UFJ, a bank, but carmakers are formidable innovators and understand their business well.
Take electric cars first. The likes of Apple may not know much about pistons and gearboxes, but the big challenge for electric cars is batteries. Battery-powered cars have many advantages: refuelling at home, cheap running costs and no tailpipe emissions. But the market for pure electric vehicles is tiny (see chart 1).
Expensive batteries make for costly cars, and limited range and a lack of recharging infrastructure have put off most drivers. Nissan's Leaf, the world's best-selling electric car, attracted only 40,000 buyers last year compared with the 250,000 the company once hoped to shift. Tesla aspires to enter the mass market but so far it has dealt with the battery problem by putting lots of them in a big, expensive car, thereby limiting it to a luxury niche. The plunging oil price dents the prospects for electrification still further.
Still, at the moment purchasing such a vehicle is so pricey that saving money is less the point than drawing attention to its owner's green credentials. And in the future what will matter most to make the vehicles competitive is not the oil price but falling battery costs, since recharging is so cheap compared with filling up with petrol. This is the holy grail: improving the efficiency and lowering the cost of batteries to such an extent that the economics of the electric car are transformed.
The hope of would-be entrants to the industry may well be that the big carmakers have invested so heavily in internal-combustion engines that they will be loth to switch to electric power. That is overoptimistic. Even if a breakthrough in battery chemistry makes electricity competitive with petrol, big carmakers may yet be able to change course fast. Most of them are already making headway with pure electrics. The Chevrolet Bolt, for example, unveiled as a concept car in January, is expected to arrive in 2017 with a price tag of $30,000 and a range of 200 miles.
If Apple's ultimate goal were to build a self-driving vehicle, building an electric car first would not give it any particular advantage. Autonomous vehicles could just as well be powered by petrol as batteries. But at least developing and testing the highly complex software needed to control a driverless car is closer to what it and other tech firms already do for a living.
Again, however, it would need first to catch up with the established carmakers, which are also busy hiring software talent (see Schumpeter) and which have been introducing ever more sophisticated "assisted driving" features in their models, such as the ability to park themselves, and to navigate stop-go traffic unaided. The carmakers are also investing heavily in another essential step towards the fully autonomous car: connectivity features that will allow cars' on-board computers to "speak" to each other and to roadside infrastructure, so as to monitor traffic conditions.
The head of Google's autonomous-car project, Chris Urmson, nevertheless argues that the conventional carmakers' incremental approach will slow them down, and that a leap straight into fully self-driving vehicles will pay off quicker. However, even if he is proved right in terms of developing the technology, there are two other big barriers to overcome: regulatory approval, and drivers' nervousness at ceding control entirely to a computer.
Carmakers have had to become adept at handling mountains of regulations and fending off liability lawsuits. These will be huge issues when any self-driving car is involved in an accident--which they will be, even if less frequently than ones driven by humans. Slowly feeding in autonomy may be a better way of convincing road users and legislators of the technology's benefits. In a pessimistic forecast, the Boston Consulting Group reckons demand for cars with even limited self-driving features will never exceed 25% of sales, and fully autonomous ones will account for just 10% of sales by 2035 (see chart 2).
Perhaps technology firms can accelerate the future of the car. But whatever happens, this is a difficult business to break into. Google would like the carmakers it hopes eventually to supplant to help seal their doom by building its vehicles under contract.
Unsurprisingly, none seems too keen on this. Apple's cash pile of $178 billion is more than enough to set up a carmaking division and tool up its factories. But the technology firms have no manufacturing culture, and the skills needed to market, distribute and provide after-sales service for cars is unlike anything they are used to.
In all, the tech firms may be better off working with carmakers, to develop the software that will provide the brains of the self-driving car, and to improve the range and battery costs of the electric car. In the motor industry, supplying the key parts is generally more profitable than putting the cars together, even if you do not get your company's badge on the bonnet. In the future cars will be different but the brands will probably be much the same.
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