Amazon Flooding Smart Speaker Market

With the smart speaker market still comfortably in its youth, and voice as a computing interface just beginning to take hold, no one is sure what the best use cases for the technology are, or what the device that best captures the tech (as the smartphone did for mobile apps) will look like. Amazon’s solution: make a device for just about everything and see what works.

Here’s a breakdown of the new devices announced on the 27th

Echo – $100

  • The new Echo offers much better sound quality thanks to a dedicated subwoofer and tweeter which means it will compete more directly with Sonos and HomePod. It also has six interchangeable metal or sport fabric finishes for a new look.

Echo Plus – $150

  • The Echo Plus looks the same as the original Echo, this time in silver, white, or black, that also includes upgraded sound. It will act as a hub for smarthome IoT devices like lightbulbs (it comes with a Philips Hue smart bulb), locks, or thermostats.

Echo Spot – $130

  • With a circular 2.5-inch display, the Spot is a cross between the Echo Dot and the Echo Show. It runs certain screen-based apps, makes video calls, and is geared towards use-cases like a smart bedside alarm clock.

Echo Connect – $35

  • This device more or less turns any Echo model into a landline phone that allows you to make VoIP and traditional calls from you home phone number on you echo device.

Echo Buttons – $20 for two

  • The buttons seem to be made for the singular purpose of interactive games like trivia or Simon Says. You can bet we will see designated games in the Alexa Skills market that require use of the Buttons shortly. It is also said to be “the first of many Alexa Gadgets.”

New Fire TV – $70

  • The streaming box is smaller than its previous iteration and supports 4K and HRD video at 60fps. You’ll be able to control the new Fire TV with any Alexa device.

These additions come on top of existing products like the Echo, Dot, Tap, Look, and Show. If Amazon’s device lineup seems experimental, that’s because it is. After effectively losing in the mobile space, Amazon’s real goal is to become the de facto platform for the voice-controlled smart home. By flooding the market with hardware for every conceivable use case, Alexa hopes that by the time people realize that voice computing is here to stay, she will already be in enough homes to be the go-to platform that all IoT devices run on. For third party developers of smart home hardware, this is a classic network effect – hardware manufacturers want to make devices compatible with the platform that has the most users, and users want to buy the software (on Alexa speakers) that can control the widest array of smart devices. Furthermore, each new Alexa device means another trove of user data that is used to constantly improve the underlying AI software.

Remember, this is still a miniscule portion of Amazon’s business. Even though they have more than quintupled the number of people working on Alexa to over 5,000, the vast majority of their revenue comes from other segments like ecommerce and web services. This means they are able to sell these devices at a narrow margin, focusing instead on penetrating as many homes as possible. This recent product-line revamp makes the flagship Echo less than half the price of Apple’s upcoming HomePod and about on par with Google’s $130 Home device. We have written about our long-term outlook on the smart speaker market (here), which remains unchanged – the winner will be the product that delivers frictionless connectivity between devices and real increased efficiency. Amazon’s sprawling product line and compelling price points are attractive early on, but they could face difficulties with their lack of an ecosystem of staple products like phones and computers in the future. Nonetheless, Amazon’s aggressive expansion into the space is exciting for both tech-hungry consumers and those of us watching voice-first computing take form before our eyes.

UTM: What is it and why should you care?

Legislation and infrastructure are two of the biggest hurdles facing the unmanned aircraft industry. An Unmanned Traffic Management (UTM) system is an important solution. With nearly 30 years of experience in the Aviation sector over his career at the Department of Transportation, Federal Aviation Administration (FAA), and the FAA’s Unmanned Aircraft Systems (UAS) Integration Office, Jim Williams is an important influencer in the drone space.

Written by guest author Jim Williams, founder and President of JHW Unmanned Solutions.

What is the UTM? Unmanned Aircraft Systems (UAS) Traffic Management (UTM) is a concept created by NASA to safely integrate manned and unmanned aircraft into low altitude airspace.  If you are interested in the details you can take a look at NASA’s excellent website for UTM:  NASA UTM Home Page.  NASA’s goal for UTM is “Enabling Civilian Low-Altitude Airspace and Unmanned Aircraft System Operations”.  They are using lessons learned from previous research projects where they developed software to help improve the efficiency and safety of terminal area operations at major airports and applying it to low altitude unmanned aircraft operations.  They are building a system to allow operators like Amazon, Google, and now Uber to connect into a central coordinating service to manage unmanned operations at low altitudes (probably no higher than 400 feet above the ground).  Uber is included in the conversation because they plan to operate their urban mobility aircraft without a pilot on board.  Their business model is to have their air taxi aircraft operate autonomously similar to the way Amazon plans to operate their delivery aircraft.

Why is this capability needed?  Currently the FAA only manages airspace below 400’ near large airports which leaves the vast majority of the country’s airspace below 1200’ as uncontrolled.  Managed airspace is much easier for unmanned aircraft operations since the air traffic service provider can maintain safe separation between aircraft.  Low altitude uncontrolled airspace safety depends on manned aircraft pilots to see and avoid other aircraft near them.  Since the unmanned aircraft pilot is on the ground, she must rely on sensors in the UAS to allow her to detect and avoid other aircraft.  This adds cost and complexity to the system than can be reduced or eliminated by a functioning UTM system.

The core functionality of a UTM implementation will be managed by a UAS Service Supplier (USS).  There are currently no companies who have stepped forward to take on the role of a USS.  Several drone software companies have partnered with NASA to support the development of the concept (e.g. Skyward and Airware).  The role of the USS is still evolving but we know that the USS would be a commercial entity with approval and oversight by the FAA.  The USS would provide services like:

  • Command and control communications between the UAS Pilot and the aircraft
  • Ground based radar to detect manned aircraft and provide the location to the unmanned operators
  • High density weather sensors to provide critical environmental conditions to operators
  • Coordinate with the FAA air traffic control facilities when unmanned aircraft need to operate in controlled airspace
  • Control access to the airspace to approved operators and help identify unapproved aircraft to the FAA
  • Manage contingencies that alter routine operations (e.g. a severe weather event)

As you can see from the diagram below there are many functions that are required to support the UTM concept.  Each green box represents a service that could be provided by one or more companies working together.  Each USS could provide opportunities for individual companies to provide one or more of the functions listed above.

Notional UTM Architecture from the FAA NASA UTM Research Plan

The USS would be able to charge for their services to cover their costs but it is unknown if they would charge per flight or a monthly fee.  The FAA’s role would be strictly regulatory oversight but they would work closely with the USS to make sure the service was safe and fair to all operators.  The NASA concept envisions the USS would provide service to all operators like Uber, Amazon, and Google and does not envision that each operator would have to set up these shared services.  However, the actual business and regulatory model is still evolving.  Congress supported the concept by directing the FAA to participate in the NASA UTM program in the “FAA Extension, Safety, and Security Act of 2016” by creating research plan and creating a pilot program.  The plan is available on the FAA website FAA NASA UAS Traffic Management Research Plan and the NASA demonstration in 2018 is the “Pilot Program” mentioned in the law.

Current visual line of site operators would be unaffected by the implementation of UTM.  The service is directed at enabling UAS flights beyond visual line of site.  It is also intended to enable highly automated operations that would allow multiple UAS to be operated by a single person.  Many companies in the industry (e.g. Amazon and Uber) believe high levels of automation are essential to their business models.  NASA has conducted two technology demonstrations and plans two more to test the concepts and learn from issues that may come up.  The third demonstration is planned for early 2018 and will be the most ambitious.  The focus will be on testing technologies that maintain safe spacing between cooperative (aircraft equipped with transponders or ADS-B) and non-cooperative (aircraft only detectable by primary radar) over moderately populated areas.  The final demonstration has not been scheduled but would be close to an actual commercial application of the technology.  The plan is for the FAA to take over the program in 2019 to establish the policy needed to approve operations.

Amazon and Uber have both stated publicly that they believe UTM is a key enabler for achieving their business plans.  There are several other large corporations who are participating in the UTM program because they see the potential benefits for improving UAS integration into low altitude airspace.

However, there are still many unknowns that make the true business potential of the concept uncertain.  The central question is can the USS return their investment in software and infrastructure based on a cost-effective fee structure?  I believe the answer is yes and we will see the first implementations of UTM by 2020.  This opinion is based on the participants in the NASA program and the amount of effort those participants are investing in the demonstrations.  Many obstacles remain, but the work is continuing with enthusiastic support from the UAS industry.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Take Cover: Collateral Damage from Next Transportation Wave

Special thanks to Austin Bohlig for his work on this note. 

Last week we introduced our 2040 Automotive forecasts, available here, detailing our projections for electric vehicles, autonomous vehicles and fleet services. We believe the global automotive industry is quickly approaching a transformation during which we expect to see three themes emerge: 1) the transition to electric, 2) fully autonomous vehicles and 3) a higher percentage of people relying on ride sharing services as their primary source of transportation. While we believe these three themes will create enormous market opportunities, we also believe this transformation will upend many multi-billion dollar industries:

  • Traditional car OEMs
  • Oil companies
  • Auto parts suppliers
  • Insurance companies
  • Ride sharing drivers

Traditional Car OEMs. While we believe some traditional car OEMs can and will transition to the autonomous future, we anticipate the road ahead will be bumpy for most and the automotive competitive landscape with see a complete overhaul. Companies such as Tesla and Waymo are meaningfully ahead in the race to fully autonomous systems, and see them as the leading players over the next 20 years. That said, we expect a handful of traditional carmakers to compete on strong brand recognition and leverage their car manufacturing expertise. While some of these traditional car companies will be able to develop self-driving systems internally, we believe the more effective strategy will be to enter the space inorganically.

Oil Companies. We estimate that by 2040, 86% of all new passenger and light vehicles sold will be purely electric, which is up from less than 1% today. Catalysts to the shift to electric cars will include affordability, OEMs focused on electric technologies, government intervention, and the rollout of fully autonomous vehicles. As we migrate towards these systems driven by alternative energy, the world will consume less gasoline. According to The WSJ, transport fuel accounts for ~50% of crude oil demand, with cars alone accounting for 25% of total demand. While leading oil companies such as Exxon and Chevron believe peak oil demand will not occur until after 2040, we believe the shift to electric puts oil companies at significant risk, given the amount of oil the Auto industry consumes. We also believe consumers will increasingly rely on ride sharing services, which could result in the number of total cars on the road to go down, and, in-turn, negatively affect oil consumption.

Funding Budgets. Taxes received on motor fuels is a key source of funding for road construction projects; however, as we consume less gasoline, states will need to find new ways to generate tax revenue. Political leaders have introduced bills and other legislation on ways to tax drivers on the road who are utilizing alternative energy systems. For example, some states charge an annual fee ranging from $40 – $300 to use electric vehicles on their roads. Other states have recommended taxing the number of miles one drives on the road, or we believe states could increase the tax applied to fleet service companies. Bottom line is states will need to be creative to implement new tax initiatives in order to fund infrastructure projects, but at the same time not be too much of a burden on the consumer.

Auto Parts Suppliers. We also believe tougher times lie ahead for auto parts suppliers such as O’Reilly Automotive (ORLY), AutoZone (AZO) and Advance Auto Parts (AAP). Electric vehicles have far fewer moving parts under the hood than internal combustion engine (ICE) vehicles; in-turn, they require less upkeep and maintenance. For example, we conducted a Tesla cost of ownership study in July and found that there are only 18 moving parts in Tesla’s engine, compared to about 20,000 in the average ICE vehicle. While Tesla may be a step ahead of everyone else, we believe other electric vehicles will also have significantly fewer moving parts than traditional cars. With fewer oil checks and other engine related issues, demand for auto parts and services will decline. Furthermore, as more autonomous cars enter the market with vehicle-2-vehicle communication technologies, we believe the number of accidents that occur annually will meaningfully shrink; lower demand for exterior work offers additional headwinds for the industry.

Insurance Companies. With self-driving cars reducing the number of accidents on the roads, not only will the need for body work reduce, but more importantly, the number of casualties caused by car accidents will decline, both of which will reduce insurance premiums for consumers. Additionally, fewer consumers will need to carry car insurance if they rely solely on ride sharing services for their primary source of transportation. While we believe it will take time for autonomous cars to be fully deployed on common roads, we believe 98k Fully Autonomous vehicles (Level 4 and 5) will enter the market in 2020, and soon after begin to ship in higher volumes. Although we believe Level 1 (Driver Assistance) and Level 2 (Partial Automation) systems will still be sold in 2040, we estimate the two groups combined will account for <6% of all new vehicles delivered and >94% of systems will take the form of fully automated vehicles.

Uber, Lyft and Taxi Drivers. As the transportation transition plays out, we expect consumers to increasingly rely on ride sharing services. We estimate that in 2016, 5% of all passenger cars and light vehicles were dedicated to ride sharing services. As ride sharing becomes more cost-effective and reliable, we believe that by 2040 68% of all vehicles in use will be dedicated to fleet services. For the foreseeable future, Uber and Lyft drivers alike will benefit, due to the increased demand for these services. However, eventually most fleet services will roll out fully autonomous systems and eliminate drivers from the equation. Both Uber and Lyft are investing heavily in fully autonomous driving technology; we also anticipate Tesla and Google’s Waymo entering the ride sharing market.

Parking Lots. With few car owners and more fleet service users, cities will no longer need the parking capacity to store these cars. While at first this will likely hurt companies that own parking ramps, we believe many of these locations lie on valuable real-estate, which may be sold to commercial and residential real-estate developers for an attractive premium. That said, parking lots will not completely go away because fleet services will need locations to store their autonomous systems when they are not in use.

Bottom Line. While the transition to electric vehicles, fully autonomous systems, and fleet services will create multi-billion and even trillion-dollar market opportunities, it will also come at the expense of other industries such as the traditional car OEMs, the oil & gas sector, insurance companies, and ride sharing drivers. However, we believe the emergence of these themes will be a significant net positive to society, because it will make our roads safer.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Auto Outlook 2040: The Rise of Fully Autonomous Vehicles

Special thanks to Austin Bohlig for his work on this note. 

Today, we are introducing our 2040 Automotive Model, available here, detailing our projections for electric vehicles, autonomous vehicles, and fleet services through 2040.

The global automotive industry is quickly approaching a transformation that should fully take shape by 2040. While 20 years doesn’t seem very far away, keep in mind that technology is advancing at an accelerating pace — the next 20 years of innovation will see changes equivalent to what we’ve seen over the last 50 years. We expect to see three major automotive themes emerge: 1) the transition to electric, 2) fully autonomous vehicles, and 3) a higher percentage of people relying on ride sharing services as their primary source of transportation. We believe these three themes will create enormous market opportunities. While some of the traditional auto players will capitalize on these emerging themes, the competitive landscape will change dramatically as more technology companies enter the space to bring these revolutionary technologies to market.

Theme #1 – Transition to Electric

According to Bloomberg New Energy Finance, 84.0M new passenger cars and light commercial vehicles were sold globally in 2016, up ~5% y/y. Of all vehicles sold, 81.5M were internal-combustion engine (ICE) vehicles, 2.0M were hybrid, and 440K were electric. While electric vehicles only accounted for <1% of new vehicles shipped in 2016, this segment of the market has seen tremendous growth over the past 4 years, and we believe we are nearing an infection point for demand of electric vehicles. By 2033, we believe electric vehicles will surpass 50% of total market share. By 2040, we believe 86% (87.9M) of new cars sold will be electric vehicles; from 2020 – 2040 the electric category will experience an ~18% unit CAGR, while ICE vehicles will decline ~13% over that same time period.

Over the next 20 years, electric vehicles will become more affordable, but due to the advanced sensors, onboarding computing processors, and other components that will enable fully autonomous driving capabilities, we expect electric car ASPs to increase modestly. That said, in order for ICE and hybrid vehicles to compete, these categories will see prices steadily decline. In 2040, we believe the global passenger and light vehicle automobile market will represent a $3.8T annual market opportunity, up from $2.9T in 2016. The bulk of the growth will be driven by electric vehicle demand, which we anticipate to increase from $20B in 2016 to $3.4T in 2040, representing a ~18% CAGR.

While affordability will be a meaningful catalyst to electric car adoption, there will be multiple additional catalysts driving the shift to electric vehicles:

  • OEMs Focus Towards Electric – Today, and for the next 20 years, we believe the leading electric car OEM will be Tesla, but we anticipate almost all other traditional car manufacturers will eventually switch their focus to electric vehicles. Volvo was one of the first to do so, and recently announced all new cars they manufacture will be electric or hybrid starting in 2019. We anticipate other OEMs to make similar announcements in the coming years, providing additional tailwinds to the industry.
  • Government Intervention – We believe we will see legislation over the next 5 – 10 years enticing consumers to buy electric vehicles through subsidies; gas powered vehicles may even from the road. France and Britain plan to ban the sale of gas and diesel vehicles beginning in 2040. Scotland recently announced similar plans but with an implementation date of 2032. While this may seem extreme, it’s not unprecedented, even in the US: In the early 1900s, when the Model T began shipping in volume, the government banned horses from operating on the same public roads as automobiles.
  • Transition To Fully Autonomous – Although autonomous cars can take the form of ICE or hybrid vehicles, the majority of autonomous vehicles deployed will be electric cars because there are many synergies between the technology implemented in electric vehicles and what will be incorporated in fully autonomous systems. In addition, given our thesis that most car OEMs will switch their focus to electric, it only makes sense autonomous cars will follow suit.

Theme #2 – The Rise of Self-Driving Vehicles

Today, 99.9% of all passenger and light commercial vehicles on the road have little to no automation capabilities. However, Tesla and a few additional OEMs have made great strides in introducing what the industry classifies as Level 2 (Partial Automation). By 2040, we expect that over 90% of all vehicles sold will be “Highly” and “Fully” autonomous systems, classified as Level 4 and 5 automation, respectively. Here’s a brief definition of the different forms of automation according the National Highway Traffic Safety Administration (NHTSA):

  • Level 0: No Automation – A human controls all the critical driving functions.
  • Level 1: Driver Assistance – The vehicle can perform some driving function, often with a single feature such as cruise control, but the driver maintains control of the vehicle.
  • Level 2: Partial Automation – The car can perform one or more driving tasks at the same time, including steering and accelerating, but still requires the driver remain alert and in control.
  • Level 3: Conditional Automation – The car drives itself under certain conditions, but requires the human to intervene upon request with sufficient time to respond, but the driver isn’t expected to constantly remain alert.
  • Level 4: High Automation – The car performs all critical driving tasks, monitors roadway conditions the entire trip, and doesn’t require the human to intervene. But self-driving is limited to certain driving locations and environments.
  • Level 5: Full Automation – The car drives itself from departure to destination, and the human is completely removed from the process.

This will not be a gradual transition from one level to the next; we expect most players to skip Level 3, going straight from Partial Automation to High or Full Automation. We also view Level 4 and 5 as very similar levels of automation; Level 4 has a steering wheel but Level 5 does not. So, in our forecast we combine Level 4 and Level 5 into one category labeled “Fully Autonomous.”

Self-Driving Car Rollout Begins in 2020, Inflects in 2028

We estimate that ~130K Level 2 vehicles will be sold in 2017; over the next few years, the industry will see a significant acceleration of Level 2 vehicles delivered, occupying a growing percentage of new vehicles sold through 2033. However, we believe 98K Fully Autonomous vehicles (Level 4 and 5) will enter the market in 2020, which is when the transition to self-driving will start to take shape. While some Level 1 and 2 systems will still be sold in 2040, the two groups combined will account for <6% of all new vehicles delivered, and >94% of systems will take the form of fully automated vehicles. It will take time for fully automated vehicles to gain meaningful traction, largely due to legislative hurdles, but beginning in 2028 we believe the industry will see an influx in demand for Level 4 and 5 automobiles. We expect the industry will go from shipping 98K Fully Autonomous vehicles in 2020 to 96.3M in 2040, representing a 41.2% CAGR over that time frame.

Leaders in Autonomy

While there will be many companies that will benefit from the transition to fully autonomous vehicles, a few companies are already positioning themselves to be early key players:

  • Tesla – Tesla has already established their dominance in the electric vehicle market, and we expect their commanding market position to prevail through 2040. We estimate that Tesla currently controls ~20% of the global electric vehicle market, and although we anticipate competition to increase in the years to come, we believe Tesla can maintain low-to-mid teens market share through 2040. Almost all Teslas today incorporate Level 2 driving automation, and while Tesla is hoping to get fully autonomous cars on the road by 2019, we believe their near-term focus will be ramping production of the Model 3 and less on getting fully autonomous cars on the road. That said, we view Tesla’s leadership around autonomous driving technology and AI is a step up from almost everyone else, and expect larger deployments to begin in 2020.
  • Waymo – It is still not completely clear what Waymo’s go-to-market strategy will be with regards to autonomous cars, but the company will have a meaningful presence. Waymo’s biggest competitive advantage thus far is the millions of miles their self-driving cars have driven and the terabytes of data gathered, which they can use to train their self-driving car algos. Waymo has already launched a ride sharing service in Phoenix, AZ, and we wouldn’t be surprised if they sell a Waymo branded self-driving car or develop a self-driving car OS that they license to third party car OEMs.
  • Traditional OEMs – It will be a significant challenge for traditional car OEMs to compete as we transition to electric and full autonomy, but there will be some legacy car brands that effectively transition by leveraging decades of car manufacturing expertise to compete with Tesla and Waymo. Ford is one traditional car company that has begun the transition, including promoting a CEO with deep autonomous experience and acquiring leading startups in the space (Argo). While some of these traditional car companies will be able to develop self-driving systems internally, we believe the more effective way will be to enter the space via acquisition.
  • Start-Ups & Others – The self-driving car industry is still in the very early innings, and other tech giants such as Apple, Uber, Lyft, and relatively unknown startups will deliver meaningful innovation. There are many technological gaps that still need to be solved before self-driving cars are fully deployed on public roads.
  • Apple – We continue to expect Apple to play in the self-driving car market, possibly bringing a self-driving car to market, or, more likely, developing an autonomous system for self-driving cars. We’ll cover this with more detail in a future note.

Theme #3 – Transition to Ride Sharing Services

In addition to the world transitioning to electric and autonomous vehicles over the next 20 years, we expect an increasing number of consumers will forgo owning a car and rely fully on ride sharing services for transportation. While we anticipate the number of cars sold will continue to increase through 2040, many of these new cars will go directly towards ride sharing services.

We estimate there were 1.3B passenger and light vehicle cars in use in 2016, of which 5% were dedicated to ride sharing services. In the coming decades, as ride sharing becomes more cost effective and reliable, the percentage of cars dedicated to ride sharing services will increase steadily. By 2040, we estimate that 68% of all vehicles in use will be dedicated to fleet services. As a result, the number of cars personally owned by individuals will decrease at a -2.0% CAGR from 2020 to 2040. Today, companies such as Uber and Lyft dominate the ride sharing market, but we anticipate other leading tech companies (Tesla, Waymo, etc.) and traditional car OEMs to introduce a ride sharing services as well. We also envision a future where individuals that own an autonomous car are able to deploy the system to a fleet service when they are not using the car (e.g., while at work), extracting value from the car’s dormancy.

Bottom Line

The global automotive industry is quickly approaching a paradigm shift, and the types of vehicles on our roads and the competitive landscape in the car market is going to change significantly by 2040. Level 1 and 2 automated vehicles will still be sold, we estimate that >94% of new cars sold will be fully automated in 2040. Some of the traditional auto players will successfully transition to these emerging themes, but several tech companies are most likely to become leaders in the space. Over the next several decades, the biggest headwinds to full autonomy will likely be legislative rather than technical, but the safety and efficiency benefits of autonomous cars will provide a strong tailwind to broad public acceptance and rapid market growth.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

The Consortium Conundrum & the Race for Autonomous Driving

The ambitious and multifaceted endeavor that is fully autonomous driving seems simply too large a task for one company to undertake. In the race for autonomy, automakers, software experts, hardware manufacturers, and ridesharing companies are turning to each other in an effort to expedite their collective progress on the matter.

Foregoing traditional practice and the opportunity for market dominance, several companies are hoping their combined efforts will bring them further than they could get on their own. Bringing a self-driving car to market not only poses many technical challenges, but it will involve a cultural shift in the way humans are transported and how they interact with machines every day. Such an unprecedented project has spurred unprecedented relationships that involve everything from young and nimble tech startups to century-old auto manufacturers coming together. These strategic partnerships present a challenging conundrum.

Lay of the land. The web of players banding together to tackle autonomy is tangled. In the interest of brevity, here is a list of some of the more significant partnerships:

  • The Open AutoDrive Forum attempts to act as an open dialogue to standardize the area of autonomous driving with participation from over 60 companies across auto, software, mapping, ridesharing, hardware, and education.
  • BMW, Intel (and Mobileye), Fiat Chrysler, and Delphi have partnered to establish an industry standard for self-driving fleets and hope to bring vehicles to market by 2021.
  • Fiat Chrysler is also working with Waymo to develop autonomous vans based on their Pacifica model.
  • Waymo partnered with Avis to augment their fleet service capabilities.
  • Uber has announced partnerships with Daimler, Volvo, GM, Didi Chuxing, and Toyota.
  • Waymo and Lyft have entered into an arrangement.
  • Jaguar Land Rover is investing $25 million in Lyft to fund autonomous vehicle activities.
  • Intel, Toyota, Ericsson, and Nippon Telegraph & Telephone have formed what is called the Automotive Edge Computing Consortium to develop the technology for an ecosystem of connected cars.
  • HERE mapping, a 3D mapping initiative, is owned by a consortium of companies including German automotive companies BMW, Daimler, and Audi, along with now Intel and Tencent.
  • There have also been several other groups arising that include Nvidia, LiDAR company Velodyne, and auto engineering firm Bosch.

Where a consortium makes sense. In an area of commodity technology like wi-fi or Bluetooth, industry standards make certain that a rising tide lifts all boats and the collective group benefits from cooperation more than each could on its own. This concept manifests itself in bodies like the Wi-Fi Alliance and the Bluetooth Special Interest Group. This model can sometimes be an effective way to implement standards that encourage broadly adopted technology and safety, and bolster more substantial relationships with the government. For example, vehicle-to-vehicle (V2V) communication is one area in which a consortium could be effective. ‘Out-communicating’ your rivals does not afford you an edge, so competition for this technology does not make sense – the higher goal is safety. Cooperation on building and implementing the best system possible would benefit all companies and, most importantly, consumers.

But partnering up is usually inefficient. Innovation feeds off of competition. Great competitors play offense to attack their rivals. Partnerships that bring entities together inorganically, often out of obligation, typically play defense. While sharing technology, patents, or engineering talent may create synergies or expedite the time to market on paper, it often creates a clash of competing interests, muddled accountability, and a diminished sense of urgency. In an area of intense competition, like building an autonomous vehicle for public roadways, small differences in technology can create large gaps in capability and time to market. This is an area in which a consortium would be ineffective. Although a strategic partnership may bring together certain components of the system (e.g., an automaker, a chipmaker, a software company, or a ridesharing network), the group’s combined efforts cannot match those of a single, capable entity on a clear mission. We believe the most effective player is one who can quickly deploy resources at scale and one that is nimble enough to react quickly and decisively in the highly dynamic field of autonomy. For instance, General Motors may not have the balance sheet (mkt cap $51B) or the knowledge to spend $5 billion on a battery factory, but could most likely garner the necessary insights via a strategic partnership.  Even so, due to their image as a traditional automaker and their adherence to the status quo, it is unlikely that they could raise or deploy the funds necessary to do so. On the other hand, Tesla has effectively been given an open checkbook from their investors to pursue new manufacturing paradigms, battery production, and autonomy.

A history lesson. It’s a challenge to find examples of strategic partnerships that have yielded revolutionary innovation. In fact, Peter Simoons suggests that 80% of ad hoc partnerships fail outright. If history repeats itself, the countless companies collaborating on autonomy may form solid organizations, but true innovation will evade them.

Shared Mission. A couple of years ago Tesla found that about 15% of Model S vehicles were making a strange noise when the car hit 17 mph. On a Saturday morning, Musk gathered the Tesla motor design team along with a group from SpaceX. He instructed the team to fix the issue by Monday, setting into motion what’s known inside of Tesla as “heroics.” By Monday the problem was solved. Having Tesla and SpaceX working together to solve a problem may sound like a strategic partnership, but it’s decisively different. Most SpaceX and Tesla employees believe they work for Musk, and walk through walls to inch towards his goals. It’s a lack of this type of shared mission that causes consortiums to stumble.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.