Detroit, Silicon Valley

Automakers in Silicon Valley

The press and blogosphere are abuzz with rumors and opinions about Google becoming a car manufacturer, suggestions that Apple should buy Tesla Motors, and countless breathless headlines that tend to end with “will change the auto industry forever.”

While the majority of these comments are unsubstantiated and often lack technology understanding and solid business rationale, the sentiment at the core is correct: embedded software is critical to achieve the functionality, safety and brand differentiation consumers expect from modern cars. In-vehicle software is becoming increasingly complex and challenging the traditional carmakers that, by and large, lack experience developing sophisticated, high quality and user friendly software systems.

Automotive OEMs recognize, albeit very slowly, the need to revamp the in-vehicle infotainment (IVI) systems in their vehicles and to offer consumers the same rich and sophisticated experience they are accustomed to when interacting with smartphones and other contemporary consumer devices.

Since traditional automakers are not yet in a position to lure Silicon Valley talent to Detroit, they set up research and development centers in the Bay Area (see map). At last count, 13 OEMs and suppliers (not counting Valley-native Tesla) have set up shop in Silicon Valley; others have more clandestine operations and are scouting for local talent. As the data below shows, these operations are still very modest, but they are expected to expand rapidly.

Silicon Valley Automotive Employees

(Source: Financial Times, 2015)

 

 

 

 

 

 

The picture is almost the opposite at Tesla Motors, which strives on its innovation culture and non-traditional approach to automotive engineering, manufacturing and business operations. Non-automotive Silicon Valley companies pursue Tesla’s software engineers and Apple is rumored to offer new recruits from Tesla 60 percent salary increase and a $250,000 sign-up bonus. Nonetheless, this should not be construed as evidence that Apple is planning to get into the automotive manufacturing business.

Hopes or trepidations – depending on your point of view – that Apple is going to become yet another car manufacturer are misguided. Same for Google. These companies want to use their technology and market influence to keep drivers and passengers connected and engaged as part of their existing business model which, by and large, isn’t congruent with the auto industry.

Mobile Digital Identity

Consumers living the always-connected lifestyle expect continuous access to information and services that are customized to their needs. They use service and content providers of their choice and share information with peers and others in a manner they choose. The digital identify of these consumers is defined and managed by their smartphones, or, more accurately, by their login information.

Consumers expect their digital identify to be ever-present, independent of where they are and what mode of transportation they happen to be using at the moment. For instance, a person’s telephone address book, Sirius XM subscription and GPS destination information should be available not only in her own car, but also in the car she rented or even when she is in the passenger seat.

This is in stark contrast to the model offered by automakers, in which the car’s VIN (vehicle identification number) serves as the consumer’s digital identity, which means the vehicle maintains a separate set of navigation information, may or may not have a Sirius XM subscription, and the phone’s address book and call history are disconnected from the user’s smartphone.

Furthermore, the way automakers see it, consumers have no choice but pay for wireless data plan, satellite radio service, navigation map updates and so forth, all are services the consumer already paid for and are already available—at a significantly higher quality—through smartphones.

Back to Silicon Valley

All things considered, it makes little sense for Apple, Google and others to get into automotive manufacturing. The market for electric vehicles continues to be small and unprofitable, even for Tesla, which old only 35,000 cars and lost $16 million on $1.1 billion revenue in 2014. Market condition might be more favorable in 5-10 years, but for now these companies should take a wait-and-learn attitude when it comes to actual manufacturing.

It does makes a lot of sense for them to embed their technology and users’ ecosystem in cars from multiple OEMs, and deliver an ongoing, uninterrupted experience to information producers and consumers while in transit.

Automakers should use Silicon Valley’s help to rethink and redesign their approach to engaging consumers and offer models centered on the consumers’ mobile digital identity rather than the car’s VIN. They should work with Google, Apple and others to better understand consumer expectations and how to incorporate drivers and passengers into their content and services ecosystem.

While we are on the subject, Silicon Valley technologists and commentators should develop broader and deeper understanding of the business and technology complexities involved in car manufacturing, supply chain management, safety standards and so forth. Knowledge and appreciation of these will only serve to accelerate technology innovation and enhance the value of tight collaboration between Silicon Valley and Detroit.

(Map source: Guide to Silicon Valley’s Auto Corridor, Automotive News, 2014)