i3 | September 25, 2019

Automakers and Startups Align

Technology is redefining the automobile even as new ways of getting around are appearing all over the world. The result is a slew of innovative startups vying for a piece of the action. Through closely held investment funds and other ventures, old guard automakers are looking to work with all sorts of technology and mobility-focused startups.

Doing this enables automakers to both prepare for the future and avoid extinction, say industry insiders.

Wanting a Say in the Future

“The auto industry is on the verge of massive disruption and transformation. One of the reasons automakers are investing in startup companies is to expand their knowledge, capability and expertise,” and to capitalize on that transformation, says Michelle Krebs, executive analyst at Cox Automotive in Detroit, MI. She points to General Motors’ acquisition of Cruise Automation to accelerate its development of self-driving cars. And although there’s certainly talent within automakers to work on such tech, Krebs says, investing in startups keeps insiders focused on near-term needs.

“Nobody knows what the future is going to look like or, more important, when auto companies can make money on this stuff,” she adds. “The auto companies must focus on today’s business, because that’s what’s making them money that can be invested in the future. There’s a lot of experimentation, and quite frankly investing in a startup is a way to experiment without betting the farm.”

To be sure, automakers’ investments in or acquisitions of other companies is not a new trend. But, “what’s different now is the urgency to start developing the vehicles of the future and the mobility services of the future to have a business ongoing,” Krebs says. “The affordability of new vehicles has gotten out of the reach of many people which opens the door to new ways of acquiring personal transportation,” she adds.

In a 2018 report titled Evolution of Mobility: Four Predictions for the Future, Cox forecast declining interest in personally owned vehicles; increasing interest in car sharing and other mobility alternatives as those become more affordable; car subscription services gaining the most traction among those alternatives; and younger people (millennials and Gen Z) being more likely to adopt these alternatives than older generations.

Further, a separate Cox report last year found rising awareness of self-driving technology accompanied by a growing desire for the safety benefits the tech conveys.

But most people still want the option to drive themselves. Nearly half of all consumers would never buy a fully self-driving (Level 5) vehicle, Cox reported. Gen Z and millennials, at 48 and 39 percent respectively, were most open to purchasing self-driving cars.

“If you look at the 100-plus year history of the automobile powered by an internal combustion engine, part of the key differentiator in product and in intellectual property is the level of expertise developed by various companies around what is actually an incredibly complex piece of machinery,” says Johan De Nysschen, a consultant who formerly was president of multiple automakers — GM’s Cadillac division, Infiniti Global Ltd. based in Hong Kong, and both Audi of America and Audi Japan. “What happens if the internal combustion engine and the transmissions and all of those things that make up today’s car is suddenly replaced by a far more simplified series of electric motors and a standardized battery,” he says. “Your ability to differentiate technically the product substance is far more limited. And so, your hundred years of heritage that you’ve built up suddenly counts for very little, because everybody’s at the same starting line. And that explains why there are so many startups in this field,” he says.

Some automakers were quicker to perceive this shift and bring needed expertise in-house, and they now have the early mover advantage, De Nysschen says.

“Other companies have clearly recognized now the level of disruption that is impacting the auto industry is going to separate the winners from the losers very rapidly,” he says. “Everybody is rushing to try to tap into these various nuclei of expertise that are popping up everywhere.”

Of course, certain regions of the world will transition to electrified vehicles at a faster rate than others, but “automakers don’t make cars for one geography. They make for a global market,” De Nysschen says. Therefore, they will develop cars for their existing portfolio while they also invest in technologies for zero emissions vehicles, rapid advances in connectivity, 5G, artificial intelligence, self-driving capability and new mobility services induced by burgeoning megacities.

“The real money in the future is going to lie downstream of the factory gate, and auto companies have to look no longer at selling the car, but rather at a business model where they are generating revenue from every mile that the vehicle is utilized, whether it’s by one owner or by 500,000 owners across the lifecycle of that vehicle — and that gives you an idea of what is motivating the auto companies to get into these startups and new ventures,” De Nysschen explains.

Mike Ramsey, senior research director for automotive and smart mobility at Gartner points to the increased investment. “Ten years ago, there was not a lot of investment capital going into the auto industry. Now there’s a lot of money chasing it, and that’s going to lead to innovation,” he says. It’s mostly driven by fear of disruption, Ramsey says. “Most of the technologies they think will be important in the future are not mechanical. They’re software-based technologies, where the auto industry has traditionally been weak, and they have to acquire because they can’t develop — not right now.”

Meanwhile, Jeremy Alicandri, managing director of Maryann Keller and Associates (MK&A), a global automotive strategy consultancy envisions a future where cars are “increasingly commoditized.” He says, “We’re seeing an erosion of the traditional attributes that distinguish automakers and link to their profitability, like brand and performance.”

“Why automakers are investing in startups is, they want to have a say in the future, but they don’t want to put all of their R&D dollars and research and talent into doing that,” Alicandri says. “No one really knows what’s going to prevail, so they’re trying to spread and minimize that risk — and also [cast] a wider net, [such] that whatever does prevail, maybe they have a little piece of it.”

This also explains automakers’ partnerships with one another and with larger “Tier 1” suppliers, Alicandri notes, pointing to Tesla’s joint venture with Panasonic in a battery “Gigafactory” in Reno, NV.

In 2009, Volkswagen, Daimler and BMW were the earliest to perceive the importance of software in cars and open Silicon Valley R&D offices, says Liz Kerton, executive director of the Autotech Council, an auto industry association that introduces automakers and their tier 1 and tier 2 suppliers to startups worldwide looking for investors. Today, there are 36 carmakers with offices in Silicon Valley and “a lot of industries that were separate are now overlapping,” especially as automakers morph into mobility companies, Kerton says. The result, in the Autotech Council, is a group of member companies that function collaboratively as a team to support and buy innovation as a whole.

For automakers, “the idea is embedded that ‘we are not going to own a technology. The best we can do is be first to market. And if we can get a six-month advantage by being faster, that’s how we are going to be the innovative brand.’”

By 2029, Kerton surmises, transportation as a service could encompass anything from a car, scooter, helicopter, drone or an EVTOL (electric vertical takeoff and landing) vehicle like that envisioned by Uber Elevate and shown in prototype by Bell Nexus at CES 2019.

“The companies who have already made the commitment of working with startups, are the cutting edge of the automotive industry, which are the change makers,” Kerton says. “I don’t think we’ve hit the follower stage yet.”

It's Not All About Self-Interest

According to data compiled by Crunchbase in 2018 and reported by Crunchbase News, the venture capital investment tracking firm’s publication — the top 20 global automakers collectively participated in more than 50 startup fundings last year (the most since 2012), and were the leading or sole investors in about one-third of those. Mostly the money went to tech companies for self-driving and electric cars, and ride hailing services. But developers of solid-state batteries, 3D metal printing and computer vision technologies were also in the mix, Crunchbase News reported.

Investments ranged from $65 million put into Desktop Metal (a 3D metal printing company) by Ford, to $1 billion invested by Toyota in the ride-hailing firm Grab. In fact, Toyota was the largest investor in ride-hailing companies, Crunchbase News said, with an additional $500 million placed into Uber and a joint investment of $300 million with Softbank in Getaround. In May 2018, GM spent $1.1 billion acquiring Cruise, but this was not included in Crunchbase News’ compilation.

More recently, in July, Volkswagen invested $2.6 billion in Argo AI, a self-driving car technology platform, joining Ford as an equal partner in the company. This investment included $1 billion in funding and the contribution of VW’s Autonomous Intelligent Driving company, which has 200 employees and was valued at $1.6 billion. The deal also stipulates that VW will buy $500 million worth of Argo AI shares from Ford over the next three years, diluting Ford’s prior commitment of $1 billion to Argo AI. (Ford retains its commitment to put $600 million into Argo AI in the same period.) Together, VW and Ford are now majority stakeholders in the startup.

At the same time, Ford announced it will be the first automaker to use VW’s dedicated electric vehicle architecture called MEB, for high-volume production of a zero-emission vehicle in Europe beginning 2023.

Quin Garcia, managing director of Autotech Ventures, based in Menlo Park, CA, says, “Most automakers globally are trying to reposition themselves as a company that’s more than just manufacturing cars.”

Some are gravitating toward smart city and mobility services technologies (Ford), others toward industrial or elderly assistant robotics (Honda and Toyota) and still others toward trucking (Tesla), he points out.

“Pretty much every major automaker has done or is doing joint projects with startups. Most major automakers have made strategic investments into externally managed VC funds and most automakers have made some direct investments into startups or acquired such startups,” Garcia says.

“This enormous wave” of automaker investments began about 2009, but it was about seven years ago when technology giants and very well-funded startups such as Lyft, Uber and eSurance entered the fray, Garcia recalls. And that spurred automakers to invest because they perceived a threat.

“Another reason is that automakers recognize that they have difficulty attracting and retaining certain types of technology talent,” especially the type needed to develop software and business model innovations, he says. “So essentially what they’re doing is relying on startup companies for external research and development.”

Autotech Ventures was founded in 2014, assembled its first fund in 2015, and now manages more than $200 million, which it invests in transportation-related startups, in cooperation with large transportation corporations, including automakers. Its investments span 21 startup companies, and they compose “the world’s largest syndicate of transport corporations, from every segment of the value chain,” Garcia says.

“It’s known that urbanization rates globally are increasing, so innovation has to change how people get access to mobility,” says John Suh, vice president of the strategy and technology division of Hyundai CRADLE, the corporate venturing arm of Hyundai, based in Menlo Park, CA. With branches also in Tel Aviv, Beijing and Berlin, it invests “off the balance sheet” of its parent automaker, which is its primary funder. And since its creation in early 2017, it has funded 30 companies, concentrating on five major themes, Suh says: artificial intelligence (AI); robotics; smart city; smart mobility; and eco-friendly energy (battery and hydrogen fuel cell technologies). AI and smart mobility are preeminent, and CRADLE has a five- to seven-year timeframe for integrating a startup’s tech into a Hyundai vehicle or, if it is software, one to two years to migrate it into the cloud, he says.

“Every investment we make has to have a strategic fit,” Suh declares. But CRADLE doesn’t always invest alone. For example, he notes, it has co-invested in startups with Toyota’s VC arm, called Toyota AI Ventures, as well as with Kia.

Automakers aren’t necessarily investing in startups just for pure self-interest, says Stonly Baptiste, co-founder and partner at Urban Us, a Brooklyn, NY-based VC firm that specializes in smart city technology.

Urban Us has joined with the automaker MINI — owned by BMW — to operate URBAN-X, a technology accelerator (also based in Brooklyn) that targets companies focused on working, living and getting around in cities in a sustainable and resilient way. “We’re not building a strategic funnel for BMW,” Baptiste says. “There’s a much more mission-driven alignment with BMW/MINI that prompted the decision for us to shape our fund into this direction, and for them to shape their innovation efforts into our direction.”

While BMW sees the same changes in the automotive and mobility industries other automakers do, they’re doing one thing different, Baptiste says: focusing on shifts in other, city-related industries that might produce value for them. “This is all thinking decades ahead, about what’s important in the city in the future.”

“The fundamental question is, what will an automotive company be in 10, 20 or 100 years?” says Micah Kotch, managing director of URBAN-X. “It’s not enough to say they’re going to be mobility companies. “It’s a question of scope and ambition and the kinds of bets that a company can make.”

URBAN-X’s ultimate purpose, Kotch says, is to “help the best founders in the world who are reimagining city life to level up” and to do this in 100 cities globally over the next five years.

However, the parent BMW Group “is still very much in the experimentation phase with regard to what is the business model around cities,” so URBAN-X provides “a look around the corner, with respect to real life operating conditions in cities,” he says.

Besides URBAN-X, BMW Group runs a more traditional investment outfit in BMW iVentures, plus a collaboration wing in BMW Startup Garage.

iVentures, a $370 million VC fund launched in 2011, focuses on consumer-facing mobility services and is co-located with the BMW Group Technology Office in Mountain View, CA. But five years later the mandate was expanded to encompass technology startups that could help BMW manufacturing and sales, too, says managing partner Ulrich Quay. It now has investments in 40 companies spanning seven sectors, “reflecting what the company is doing today and will do tomorrow.” But with an average of $5-$10 million invested in each company, iVentures looks for “world class startup companies that disrupt existing businesses,” have “certain maturity,” and “help generate a lot of opportunity for BMW,” Quay says. The motivation, he says, is both financial and strategic.

Meanwhile, Startup Garage’s mandate is strictly strategical. Founded in 2015, it is only collaborative with the goal of taking a startup’s already-developed technology and creating a proof of concept (POC) with it, for integration in BMW vehicles. Startup Garage makes no investment and takes no equity in stakes in any of the companies with which it works, but rather relies on VCs like iVentures or accelerators like URBAN-X to have already played in that sphere.

It started with three POC projects but now works on 25 per year, across 20 research fields. Roughly 60% to 70% are software-oriented engagements. Most are in Germany, and the rest are in the U.S., Israel and Asia.

“We would like to flourish with startups. We want to bring their innovation to market. It is a supplier-client relationship,” says Bernhard Schambeck, head of Startup Garage, which is based at Garching, a city north of Munich, Germany where technical and scientific research companies predominate. “Our industry is changing in many ways. There are a lot of technological challenges in terms of electrification, autonomous driving, connected cars and so on,” he says, adding that these startups directly help BMW overcome those, gain a competitive advantage, and be faster to market with innovations.

That precludes sharing its startups’ POCs with other automakers, but Startup Garage does look to competitors’ VC arms for candidates. “They have an interest that their startups can scale,” Schambeck stresses.

So as technology continues to change the world, automakers and startups are forming innovative partnerships that bear watching.

Sept/Oct 2019 i3 Issue Cover

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