By on October 28, 2016

google prototype-early

Every now and then, a critical mass of clever, ambitious folks excited about a particularly good idea coalesces, often in a particular geographic region, and humanity gets lucky. The American colonies in the late 18th century and Detroit in the early 20th century are historical examples. Silicon Valley, starting in the 1980s, is probably our best contemporary example.

In recent years, those modern titans of technology have turned their futurist eyes towards personal transportation. Whether explicitly or in sotto voce tones, they’ve indicated that the traditional auto industry personified as “Detroit” was a dinosaur about to go extinct. Not knowing the auto industry metaphor of becoming an obsolete buggy whip manufacturer, the tech industry saw Detroit’s future as “making handsets” — i.e. low tech assemblers.

Tesla was going to show us the new electron driven future, Google was going to make cars that drove themselves, and the Apple of the tech world’s eye was going to do nothing less than completely reinvent the automobile, just as it had done with music players and telephones. The push towards self-driving, autonomous cars and trucks was only going to accelerate the ascendancy of Silicon Valley as the new Motor City.

Just because you’re good at one thing, however, doesn’t mean you’re good at another.

The history of business and industry has many examples of successful people and firms that have failed when trying new ventures. Sticking to what you know is sound reasoning in business. You may not be the black swan that you think you are.

Now, while Tesla is still moving forward and slowly expanding its lineup of EVs, the profit it is reporting this quarter is the first black ink the firm’s had in three years, and most of that is attributable to the sale of clean air credits to other automakers, not making and selling Tesla cars. Both Google and Apple have retreated from their ambitious plans to seemingly become automobile manufacturers. As Bill Ford, the great-grandson of one of those guys in early 20th century Detroit put it, “The conversation has really shifted.”

According to Bloomberg, Google co-founder Larry Page told a private meeting earlier this year that he was “heartbroken” by the lack of progress of the company’s autonomous car project, though a Google spokesman denied that Page was disappointed by the project’s accomplishments to date.

Silicon Valley may have bitten off more than it could chew. Besides developing autonomous driving technology, a serious engineering undertaking all on its own, making an automobile is about as complicated a process as manufacturing can get. For each individual car or truck model, between 20,000 and 30,000 parts have to be designed, engineered, tested and mass produced (using almost every material science and manufacturing process known to humanity), and then the assembled whole has to work reliably in a severe environment for ten to twenty years. There is a lot more to making a car than emailing Foxconn some schematics and blueprints.

James Kuffner has worked in both the tech and automotive industries, in both Silicon Valley and in southeastern Michigan. He used to run Google Robotics and is now CTO of the Toyota Research Institute, Toyota’s artificial intelligence lab not far from their main North American R&D center in Ann Arbor. Kuffner says, “Despite what a venture capitalist tells you, making a car is hard.”

Instead of using automakers as low tech assemblers for their own branded cars, it looks like Google and Apple are retreating to the position currently held by traditional automotive suppliers. They’ll supply software for autonomous driving, not build automobiles, and the auto and tech industries will establish technical partnerships. Uber is testing Volvo SUVs as robot taxis in Pittsburgh, and Fiat Chrysler is providing 100 Pacifica minivans for Google to autonomize. The Google-FCA hookup was consummated after Google and General Motors could not reach a deal over proprietary issues concerning technology and data.

It’s not surprising that ownership of data proved to be the sticking point. Owning mineable data is becoming almost as important as owning technology.

Tech firms want access to vehicle performance and manufacturing data, saying they could use that data to get better profit margins than the traditional automakers earn. Automakers don’t want their proprietary data ending up in the hands of competitors, and with Silicon Valley having made noises about getting into the car biz, competitors don’t necessarily have to have the word “Motor” in their corporate name.

Swamy Kotagiri, chief technology officer of Magna International, an automotive vendor that does everything from making components to assembling entire cars under contract, like the BMW 5 Series, says that things will likely wash out based on the industries’ areas of competence. Tech firms will supply infotainment and some self-driving tech but automakers will ultimately control anything that could touch on safety.

While they may not compete directly with product going forward, the industries do compete in hiring talent. Though Tesla and other Silicon Valley firms made a big deal about “not being Detroit”, many of the engineers they’ve hired for their automotive ventures have been auto industry veterans. Going in the other direction, GM spent a billion dollars buying Cruise Automation in part, according to CEO Mary Barra, to help the car maker attract software engineers. Ford has made similar, though smaller, investments in outside tech firms.

While the domestic auto industry (including Toyota with their Ann Arbor R&D center), the state of Michigan and area universities are making major investments in turning the Detroit area into the center of self-driving vehicle research, the industry and region understand that they are competing with California for talent.

However, I wouldn’t underestimate the ability of the automakers to compete. The traditional automakers are old hands at dealing with geographic preferences of talent. I once asked a car designer how come so many car companies have styling studios in California and he said, “Designers like pretty girls and the beach too.”

Even though for the price of a 1,000 sq ft fixer-upper bungalow in Palo Alto you can be living in a large home on a lake in Oakland County, Michigan, software engineers still apparently prefer Silicon Valley to Detroit. Just a couple months ago, Ford announced that they were doubling hiring at their Palo Alto facilities.

[Image: Google]

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26 Comments on “Silicon Valley Discovers ‘Making a Car is Hard’...”

  • avatar

    ‘Making a Car is Hard’

    Unlike a certain something on anyone who has to drive one of those.

  • avatar
    SCE to AUX

    Regarding Tesla’s Q3 profit: “…most of that is attributable to the sale of clean air credits to other automakers, not making and selling Tesla cars”

    Actually, they’re related. Without the sale of its cars, it would have no credits to sell.

    • 0 avatar

      Yes,but those credits only exist due to givernment fiat,if you’ll pardon the pun. Only if Tesla pays some politicians millions of dollars to “re-election funds” do these credits then become law. One hanf washes the other. Money talk,and you don’t get something for nothing.

    • 0 avatar

      This is the expected evolution: “Tesla can’t make a profit” becomes “Tesla is making the wrong kind of profit”.

      I think Tesla has produced more electric vehicles than any other US manufacturer, though, so I guess it depends on the metric you want to use.

      • 0 avatar

        We’ll see how smoothly the Model 3 rolls out and how good sales will be without the $7500 tax credit (assuming it expires for them as currently legislated.)

        Then we’ll be better able to make predictions on the future of Tesla auto.

      • 0 avatar
        DC Bruce

        No, what it is is regulatory arbitrage. Tesla takes advantage of certain regulations and the other auto manufacturers’ current decision that it is cheaper to buy credits from Tesla than to adjust their product mix to make such a purchase unnecessary.
        So, until it makes an overall profit from selling things: vehicles, solar panels, etc. Tesla exposed to two big external risks: that the regulations will change to eliminate the arbitrage (always a possibility with regulations) and that the calculus which leads fossil fuel car manufacturers to buy credits rather than adjust their fleet mix to eliminate the need to do so will change.

        And, of course, the other unanswered question is whether Tesla’s electric car is scalable. Right now it makes an expensive niche car, which just about everyone agrees, is inferior to its gasoline-powered competitors at the same price point, but for the fun and novelty of electric propulsion.

        Are there any gasoline-powered car manufacturers, who are independent, that successfully make similar niche cars — in terms of price and volume?

    • 0 avatar

      As I noted on the other thread, the issue is with the timing of the revenue.

      Tesla had virtually no revenue from emissions credits in Q2. (At the very least, it was so low that the company didn’t bother to report it.)

      That was followed by considerably higher revenue from emissions credits in Q3 than it has ever booked before. The company should be explaining this disparity, as one should presume that Q3 was an anomaly. Furthermore, some effort may have been made in Q2 to delay revenues so that it would be able to report that alleged profit even though it may be attributable to a one-time event. It was a one-time event that was responsible for its only other quarter in which it has earned a profit, so this wouldn’t be a surprise.

      • 0 avatar
        SCE to AUX

        That’s interesting. Musk made no secret of his desires for Q3 performance, so your explanation makes sense.

        It’ll be a long time until they’re above water again.

      • 0 avatar
        Paul Alexander

        He wrote an email to employees saying that Q3 was going to be pivotal going into next year. Certainly sounds like they booked Q2 emissions credits revenue in Q3. Not a difficult trick.

  • avatar

    I honestly wouldn’t throw in the towel yet. Tech is an iterative process. While nobody wants to be driving version 2.1 of a particular car that was useless until you got to 3.0, it’s also rare that the first generation of a product coming out of SV is as perfectly refined as something that has been refined and developed by their competitors over 100+ years. But the flip side of that is that eventually someone does get it right. If you look at things like PDAs and early smartphones, there’s 15-20 years of sub-par products that were useful for that sliver of the population who absolutely had to have that capability. Then someone finally hits the right iteration and it explodes into the global market that we have today. I don’t think that anyone seriously expect any of these companies to nail it on their first try, and Tesla’s still working out the kinks on V3 so that they can build V4.

  • avatar
    healthy skeptic

    Apple and Google have had to scale back their ambitions, but Tesla has not. If anything, they keep getting more ambitious. This article sounds like it applies more to the first two companies.

    • 0 avatar

      Yeah, Ronnie has some weird conflating going on in this article:

      “the Apple of the tech world’s eye was going to do nothing less than completely reinvent the automobile, just as it had done with music players and telephones.” Assuming he means Tesla as “the Apple of the tech world’s eye” in that sentence, it implies they created music players and phones. Assuming instead he’s referring to Apple as the tach world’s Apple (huh?), then no, Apple never said anything about reinventing the automobile, but people loved to speculate on what their unannounced Project Titan was/is.

      A better parallel would have been to Google, who DID announce intentions to reinvent driving with their cars. Eventually. Maybe.

  • avatar

    Toyota for one is not letting either Google or Apple into their cars. I haven’t paid much attention but there are a few open source car projects that manufacturers are supporting instead.

    • 0 avatar

      The auto manufacturers should errrrr get on a call…. If they all agree not to let apple or google into their cars they will go a long way to removing the threat.

      • 0 avatar

        And others would want “Android Auto” or “CarPlay” to be a selling point.

        If the ‘tech world’ sticks to what it knows best, then the automakers have nothing to worry about –and maybe could decide they don’t need to develop their own Sync or Uconnect.

  • avatar
    SCE to AUX

    Ronnie – Given your interest/affection for Elio Motors, any comments about them re: the theme of this article?

    • 0 avatar

      I think Elio is proof of what Kuffner said, making a car is hard. They are using virtually no high tech, repurposing existing components and they’ve still burned through almost $100 million without getting to production. To be sure, Apple and Google have financial resources that make it easier, but they still have to engineer and build something. Even something relatively minimalist like the Elio or Tata’s Nano is a pretty big undertaking.

  • avatar

    You have a massive investment in production, labor, and intellectual capital. The car itself probably costs a tiny percentage of the sale price to actually make. Think of Henry Ford’s River Rouge plant where iron ore and coal went in one side and cars out the other, and shipping planks were measured to match the same ones used in the car. They get very close to commodity price for all the actual bits.

    Now, to do this from the bottom of the arc is a lot harder. You don’t already own a production plant amortized when the Buick LeSabre was fresh. You don’t have an office full of engineers, some retiring and some fresh out of school. You don’t have established relationships with the local politics. etc.

    I have great respect for Tesla for actually making a car I see occasionally. I don’t care about his stock, or how he leveraged one company he owns to save another he owns, but that I can sit behind a Tesla at a stoplight is impressive.

  • avatar

    I’ve always thought the idea of an Apple car was stupid considering that Apple would not get the kind of margins it was accustomed to. Charging people many multiples of what it actually cost to make an iPhone is one thing, but to expect that business model to work in the car world is… delusional at best.

    The Apple car idea… I can only think that Tim Cook was looking to rid the Steve Jobs-sized monkey off his back, the notion that he doesn’t know how to “innovate”.

    • 0 avatar

      I agree the whole “Apple Car” thing seemed to be more about Tim Cook’s ego and wanting to get out of Steve Job’s shadow than it was a strategic, business case that Apple should be in the car manufacturing business.

      Cook wanted some sort of legacy to point of instead of iPhones with bigger screens.

    • 0 avatar

      For all the reasons in this article, it would be very difficult to create a profitable auto company from scratch. But a profitable auto company can make a buttload of money, so it’s worth thinking about. The margins aren’t as high as electronics margins, but the total bucks are worth having.

      • 0 avatar

        “But a profitable auto company can make a buttload of money, so it’s worth thinking about.”

        Couldn’t you say the same thing about anything with the word “profitable” in front of it? Why doesn’t Apple get in a “profitable” oil business?

        Just a terrible fit for a company like Apple to try its hand at making cars.

  • avatar

    Apple and Google never expressed their intention to become car producing OEMs. So, they tried to ‘Foxconn’ car makers, contract them, rather than the other way round. Obviously, car makers see Apple and Google in a supplier role. This epic battle has not been fully fought yet IMO. There’s a considerable chance that Silicon Valley companies will try to ally themselves with reputed car companies that are strapped for cash, themselves in a domineering role, simply because they have the capital to operate as they see fit. Apple already tried to towards McLaren.
    Btw, I wouldn’t ‘overestimate’ Detroit either. Compared to the German and Japanese brands, the Big Three do a poor job in staying competitive on export markets and the big-money earning market segments, also when it comes to sheer innovative power, brand appeal, fuel economy, environmental aspects. That all new automotive ventures, like Lucid Motors and NextEV, still want to settle themselves in and around Silicon Valley, may serve as a warning. They do so despite the prospect of having to compete for qualified personnel which will cost them dearly.

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