There is no business model that would make sense for any Silicon Valley company to start building vehicles, no matter how innovative. The product cycle is too long, margins are too thin and labor costs are too high.
Some months ago, I proclaimed Google was beginning an epic war with traditional auto makers for the soul of the auto industry. Perhaps I engaged in a bit too much hyperbole.
As we move into the era of self-driving cars, I still believe Google will play a major role, but it’s not going to get into the business of building cars.
Google, along with its West Coast cohort of other giant technology companies such as Intel, Cisco, Microsoft and others, are intent on using self-driving cars as their key to moving into the personal-transportation business. These companies view cars and trucks as complex mobile computers that require software, microprocessors, radar and other technologies they can provide.
“The people on the West Coast want to change the world, and their view is this is going to happen very quickly. If auto makers do not make it happen, then they will move in and make it happen,” Gary Silberg, lead partner for the automotive industry at KPMG, said late last year.
Back then, I was worried Silberg was right and today’s auto makers, hindered by slowing global sales and a diminishing interest in cars and driving in general, eventually would lose out in a new technology revolution.
But now I’m convinced Detroit, Stuttgart and Tokyo have little to fear from Googlemobiles taking over the world. The reason is simple: Non-automotive technology companies do not have the patience for the long lead times, huge investments, slow returns, slim margins and government oversight that are as much a part of the automotive business as tires and steering wheels.
My epiphany occurred recently at auto supplier’s test track near Hanover, Germany.
I was in the passenger seat of one of’s automated-driving demonstration vehicles when the pilot took his hands off the wheel and a dummy darted in front of us, hanging from a tow line. The car came to a screeching halt with time and space to spare. On our second run, the car casually swerved around the surrogate pedestrian while the driver kept his hands in his lap.
Continental’s prototype also recognizes road signs and adjusts speed accordingly, navigates complex construction detours and automatically starts and stops in congested traffic. On the highway, it can handle basic driving tasks without assistance.
More than 1,300 specialists at Continental currently are working on practical automated driving technologies. Even so, the supplier says fully automated systems won’t be available until 2025 and those will be limited to freeway driving.
Google is much more optimistic. It introduced a self-driving prototype in 2009 and already has logged 500,000 miles (805,000 km) of crash-free driving. Could it use its immense resources to faster develop affordable, self-driving cars? Perhaps, but the extravagant guidance systems Google is showing off cost an estimated $150,000, many, many times the price of Continental’s simpler technologies.
More importantly, it is doubtful Google or any non-automotive tech company is interested enough in building cars to spend three to four years to develop a new vehicle and then spend millions marketing it to a skeptical public; especially for a typical automotive profit margin in the single digits.
Patience is not a virtue in Silicon Valley. In 2011, Hewlett-Packard introduced the TouchPad, a major new product designed to compete with the Apple iPad. When it didn’t sell well immediately, HP killed the program after six weeks, cancelled hundreds of thousands of factory orders and took a $1 billion write off.
You can’t walk away from mistakes like that in the automotive business. Today, nobody remembers the TouchPad, butstill gets punished for the Edsel, which ceased production in 1959.
There is no business model that would make sense for any Silicon Valley company to start building vehicles, no matter how innovative they hope they would be. The product cycle is too long, the margins are too thin and the labor costs are too high.
It’s like the old parable of the ham-and-egg breakfast: The chicken is involved, but the pig is committed.
Unless you are truly committed to the auto business, being involved is the smarter route. Going forward, that is the path Google and others are sure to choose.