Sunday, December 6, 2015

Winning The Driverless Car Wars

From Bloomberg:
When it comes to the glorious new future of self-driving cars, I’m something of a bear.

Not a radical skeptic, mind you: I think self-driving cars are coming, eventually. I just think that “eventually” might be further off than people suggest. Getting to “level-four” automation -- where the car drives itself, all the time, with no human input -- is still a formidable challenge. Getting to level-three automation, where the car mostly drives itself most of the time, seems imminent. But the actual advantages of level-three automation over cruise control and early warning systems seem dubious. If people are distracted when the car needs them to take over, then level-three automation could end up being more dangerous than the older systems. And if people aren’t distracted, which is to say they are grimly staring at the road with nothing to do for hours at a stretch, then it seems worse than actually driving the car.

Nonetheless, I do think fully self-driving cars are coming; I just think they’ll be coming closer to 2030 than 2020. Even a fashionably late arrival, however, raises an interesting question: Who will own the business?

The candidates are essentially four: Uber, Tesla, traditional car companies, or traditional Silicon Valley firms such as Apple and Google. Below I’ll sketch out the main strengths and weaknesses each candidate brings. But first I want to explain why the answer is not necessarily “the company that’s leading the field right now.” And that answer starts with a question: Why does General Electric control so much of the market for Computed Tomography scanners?
Yes, I know you’re confused, so let me get to the point: GE didn’t invent the CT scanner. That honor goes to EMI laboratories.  Godfrey Hounsfield, the inventor, eventually received a Nobel prize in medicine and a knighthood. Yet the market share went to three manufacturing giants founded in the 19th century, rather than the comparative upstart.

Why should this be the case? Actually, it’s not that rare. Innovators often see some other company reap the fruits of their invention. Sometimes that innovator is outdone by another innovator (think Henry Ford and his assembly line), but established companies also horn in on the market. They have a lot of what economists call “complementary assets” to help monetize the invention: manufacturing expertise, distribution networks, sales forces. This is one reason that biotech firms so often end up getting bought by Big Pharma: The small firm may have a great drug candidate, but the big firm has the cash and experience to take the drug through clinical trials, the manufacturing expertise to make the stuff in large amounts, and the distribution networks to put the stuff in the hands of patients.
So remember that when we ask, “Who is going to control this market?”, that is different from “Who is going to have the breakthrough that gives us a level-four self-driving car?” That company may end up owning the market, or it may end up pushed to the side as less innovative firms copy the advances, and push them out to the market using their complementary assets.

So let’s look at the complementary assets of our various candidates:

1)     The first asset Apple and Google have is enormous piles of cash. They can afford to push a blue-sky project like self-driving cars almost indefinitely, and to subsidize them for a good long while if they want to bring them to market. The second big asset they have is brand; people love their products. And the third asset they have is that both companies are, in their own way, really good at building user interfaces people like. They already have their own mapping systems well developed, and that will be crucial when it comes to moving those self-driving cars around.

Drawbacks: Neither company has much experience with direct manufacturing, and auto manufacturing, with its combination of very expensive products and high minimum efficiency of scale (a fancy term for how close to capacity you need to run the plant in order to make money), is a direct manufacturing business. That’s very different from the one they’re in, along nearly every axis you can imagine, from design culture to labor force management. If either of these companies places in the race to self-driving cars, expect them to license out the technology, or sell just the systems, not a whole car....MORE