In the previous post I described a new value chain that will connect companies providing on-demand personal mobility services and three emerging models for this value chain. This value chain is the result of the consumer shift from a car ownership-centric transportation model to a hybrid model that blends car ownership with vehicle access through a combination of on-demand mobility services and public transportation. It is also based on the stated intent by the providers of certain of these services to adopt Autonomous Connected Electrified (ACE) vehicles. Various acquisitions, partnerships, including the recently announced partnerships between Waymo and Avis, and Apple and Hertz, and investments by automotive industry incumbents and by companies offering, or intend to offer, on-demand mobility services point to new ecosystems that will be developed around this value chain. In this post I provide a deeper analysis of the emerging value chain and explore investment opportunities in startups that will participate in it.
In my book The Big Data Opportunity In Our Driverless Future I identify two distinct value chains that have been established because of the car ownership-centric personal transportation model that has been dominant for the past 70+ years: the vehicle manufacturing and sale value chain, and the vehicle use value chain. The fleet-based on-demand personal mobility value chain is an emerging third and is the result of the growing adoption of shared personal mobility.
It is important to understand this new value chain in order to:
- Establish where economic value exists, where it is decreasing, and where economic value can be created through the development of new solutions and business models. For example, controlling the autonomous vehicle’s AI-based platform will be very important and could provide benefits similar to those recognized by Microsoft and Apple because they controlled the operating system of personal computers.
- Determine how transportation incumbents, and particularly automotive industry incumbents, will need to reconfigure their existing businesses, and what types of new businesses they will need to set up in order to fit into the new value chain. Though such analyses one can identify the opportunities for incumbent disruption, and the areas that will experience margin compression in the process becoming unattractive businesses. For example, small-batch vehicle manufacturing will become extremely important in order to cost-effectively produce next-generation vehicles to be used for on-demand shared mobility.
- Identify opportunities for new partnerships, investments, and acquisitions to expand the ecosystems being formed in each component of this value chain. For example, could venture investors receive a quicker ROI by funding startups that are addressing the on-demand shared personal mobility use case, or the use case of utilizing autonomous trucks in long-haul logistics?
- Appreciate the complexities associated with global deployments of next-generation vehicles (passenger or freight), many of which will be electrified and autonomous, and be in a better position to craft strategies for such deployments.
- Measure the impact of other industries, such as energy and utilities, financial services and insurance, on this value chain.
Participants in the fleet-based on-demand personal mobility value chain must have expertise in one or more of the following areas: 1) Vehicle Design and Manufacturing, 2) Fleet Acquisition, 3) Fleet Operations, and 4) Fleet Servicing and Maintenance.
Design and manufacturing of next-generation vehicles will be significantly different than in the value chain presented in the book. Next-generation vehicles, and particularly ACE vehicles, will need to include an Operating Platform. Vehicles used to offer mobility services will need to incorporate a User Experience Platform (UX Platform) that is significantly more complex than today’s advanced infotainment systems.
The Operating Platform of an ACE vehicle brings together the Autonomous Vehicle Stack, the Electric Propulsion System, and the Connectivity System that connects the vehicle to its operating environment through the Internet. The Autonomous Vehicle Stack consists of the hardware, e.g., sensors such as Lidar, software, e.g., AI applications for perception, localization and planning, and data, e.g., sensor data, high definition digital maps, that make the vehicle’s autonomous operation possible. Big data and AI are at the core of the Autonomous Vehicle Stack to perform the data fusion, perception, localization, and planning functions that are at the core of autonomous mobility. The Electric Propulsion System consists of the batteries, electric motor, and power control software system that makes the electric vehicle’s propulsion possible.
The UX Platform controls the in-cabin experience. It consists of the hardware, e.g., infotainment system, software, e.g., telematics, AI applications for cabin personalization, and data, e.g., infotainment content, passenger preferences, that address passenger needs while traveling in vehicles with Level 4 or Level 5 driving automation. An example of such platform was recently demonstrated by Waymo. The UX Platform will likely have components running on the vehicle, the cloud, and the passengers’ mobile devices. Uber’s customer application is another early example of an UX Platform running exclusively on smartphones.
Fleet acquisition deals with ordering a set of vehicles that have specific configuration(s), financing each order, leasing vehicles to a Fleet Operating Company (FOC), insuring the leased vehicles, and managing each vehicle’s warranty.
Fleet operations consist of: reservations and transportation solution pricing, transportation fulfillment, payments, demand generation and management, and fleet management and optimization.
Fleet maintenance is already emerging as a major issue for ride-hailing companies. In fleet-based on-demand personal mobility it will consist of maintaining and servicing the fleet, refueling/recharging each vehicle, taking care of vehicles that have broken down or been in accidents, and (owning and?) managing the physical locations where vehicles are stored, maintained and serviced, when not in operation.
Whereas the automotive OEM dominates the vehicle manufacturing and sale value chain, the Fleet Operating Company will dominate the new value chain. The FOC will:
- Own the relationship with the customer (reservations, payments);
- Understand in detail the customer’s transportation and logistics needs so that it be in the position to anticipate them and address them;
- Control the fleet of ACE vehicles (under lease or direct ownership) providing the transportation and logistics solutions under a personalized and consistent rider experience.
In order to erect sustainable barriers to entry, have access to information-rich data, and build high-margin businesses, the FOC will also need to control technology-related intellectual property around the vehicle’s Operating Platform, and the UX Platform. For example, Waymo, which has stated its intention to become an FOC, installs its own Operating Platform in its vehicles, and has recently demonstrated its UX Platform.
While the new value chain is not expected to supplant either of the other two for the foreseeable future, it will definitely disrupt and alter them in major ways. Next-generation vehicles will lead to the emergence of new Tier 1 part suppliers, e.g., NVIDIA, Samsung through its acquisition of Harman, and Intel through its acquisition of Mobileye. The role of car dealers, gas stations, parking garages, repair shops and several other businesses will diminish.
Incumbent automotive OEMs are facing a choice which will force them to split into four categories:
- Category 1: OEMs offering conventional vehicles only. Examples include FCA, Subaru and Mazda.
- Category 2: OEMs offering conventional vehicles and next-generation vehicles. Examples include Toyota, Nissan, BYD, Tata, Mahindra, and Changan.
- Category 3: OEMs offering conventional vehicles, next-generation vehicles, and on-demand mobility services. Examples include GM, Ford, Daimler, BMW, VW/Audi, Geely/Volvo, PSA and a few others.
- Category 4: OEMs offering next-generation vehicles and mobility services. Examples include Tesla and Nio.
By analyzing the areas of expertise of companies that want to play a leading role in next-generation mobility we can identify high-value, short- and long-term opportunities for startups, as well as predict areas where new partnerships and acquisitions are likely to occur. We consider four types of companies that in these early days have shown that want to play a leadership role in the emerging value chain: incumbent automotive OEMs, e.g., BMW, Tier 1 Suppliers, e.g., Delphi, Transportation Network Companies (TNCs), e.g., Uber, and Internet companies, e.g., Google/Waymo.
Table 1 summarizes the types of expertise that OEMs, Tier 1 Suppliers, TNCs, and Internet companies possess across the fleet-based on-demand personal mobility value chain.
|OEM||Tier 1 Suppliers||TNC||Internet Company|
|Vehicle Design & Manufacturing||x|
|Operating Platform||Started development & acquisitions||Started development & acquisitions||Started development & acquisitions||Started development & acquisitions|
|UX Platform||Infotainment only||Today using smartphones||Started development|
|Fleet Operation||Reservations, ride management|
|Fleet Service & Maintenance|
|Big Data & AI||≈||≈||x||x|
|x strong capability|
|≈ some capability|
Table 1: The areas of expertise among three types of companies participating in the ACE mobility services value chain
Several incumbent and newcomer automotive OEMs, such as BMW, Tesla, and Nio, Tier 1 suppliers such as Delphi, and Bosch, Internet technology leaders such as Google/Waymo, Apple, and Baidu, TNCs such as Uber, and many startups are developing complete Operating Platforms, Autonomous Vehicles Stacks, or specific layers in such stacks. For example, Mercedes and Bosch have partnered to jointly develop an Autonomous Vehicle Stack. Other OEMs, for example GM and Ford, have acquired such stacks (Cruise, and Argo respectively). Ford is working with Autonomic to develop an Operating Platform. Corporations such as Audi, Tesla, SiriusXM, Samsung/Harman, Google and Apple, as well as many startups, e.g., Mojio, are developing either complete UX Platforms, or individual layers of the stack.
Within the next 5-10 years we will see increasingly larger scale deployments of next-generation vehicle fleets to provide on-demand personal mobility services. It is not yet clear how the companies that want to participate in this value chain will choose to do so, but a period of broad “experimentation” has already started. During this period, we are seeing growing internal development efforts, investments in and acquisitions of startups, as well as conventional and unconventional partnerships around innovative technologies and business models. For example, for the time being, Waymo incorporates its Operating Platform in FCA’s internal combustion engine minivans. Lyft could use GM’s ACE vehicles that incorporate Cruise’s Operating Platform. Cruise was a startup that GM acquired. BMW has invested in a variety of startups from Zendrive (driver analytics), to Ridecell (fleet management), Moovit (multimodal transportation reservations), and Chargepoint (electric vehicle charging stations) among several others. Companies that want to participate in this value chain, and more specifically companies that want to have a leadership role, must make strategic decisions. As we see in Table 1, each of the three company types that are actively working on offering on-demand shared personal mobility services is missing key areas of expertise. These companies must determine which areas of expertise they will need to develop and which to access through partnerships, investments, and acquisitions.
Car rental companies, and even airlines as we consider personal mobility drones and flying cars (and here), could provide key areas of missing expertise and become important participants of the new value chain. More specifically, car rental companies offer:
- Expertise on acquiring vehicle fleets (they order about 2M new vehicles every year from OEMs). However, despite the large number of vehicles they order they are still not able to customize the designs of these vehicles because of the automotive industry’s scale-based manufacturing model and the pricing pressures it imposes.
- Expertise of how to manage, service, and maintain such fleets over many locations. This, of course, doesn’t mean that the fleet management software systems rental companies already use will be sufficient to address the needs of on-demand mobility fleets. New software will need to be written from scratch, presenting opportunities for startups like Ridecell and Bestmile, but the experience contributed by car rental companies is valuable nonetheless.
- The physical locations to park, service, and maintain vehicles, as well as offices and call centers to provide services to consumers.
- Global reservation systems. These systems will also need to be expanded to deal with the type of reservations on-demand mobility services require in order to take advantage of the customer and vehicle-related insights that can be generated from big data exploitation.
- Three important types of data. First, customer data from their reservation and loyalty program systems that can augment the data collected by the other companies in the value chain. Second, vehicle performance data from the log of each vehicle in their fleet (past and present). This data will be particularly useful initially as companies deploy their autonomous vehicle stacks on conventional rather than electric vehicles. Finally, car rental companies can equip their vehicles with sensors to enable them to capture driving environment data (traffic infrastructure data, data about objects that can impact the operation of an autonomous vehicle, e.g., trees, barricades, pot holes, etc.) from every mile they travel. This last type of data can be used to train and/or update the predictive models that are used by autonomous vehicles, as well as the high-definition digital maps utilized for the navigation of such vehicles
Similarly, airlines contribute important expertise in big data exploitation, fleet leasin, as well as fleet operations and management. It is interesting to note that airlines have better big data exploitation and insight generation capabilities than car rental companies.
Table 2 summarizes the areas of expertise car rental companies and airlines contribute to the ACE mobility services value chain.
|OEM||Tier 1 Suppliers||TNC||Internet Company||Car Rental Company||Airline|
|Vehicle Design & Manufacturing||x|
|Operating Platform||started development & acquisitions||started development & acquisitions||started development & acquisitions||started development & acquisitions|
|UX Platform||infotainment only||today using smartphones||started development|
|Fleet Operation||Reservations, ride management||x||x|
|Fleet Service & Maintenance||x||x|
|Big Data & AI||≈||≈||x||x||x||x|
|x strong capability|
|≈ some capability|
Table 2: Areas of expertise contributed by car rental companies and airlines
Both car rental companies and airlines have long experience and know-how addressing transportation regulatory issues and dealing with federal, state, city and international governments regarding such issues. This experience will be extremely important while establishing the right next-generation mobility businesses and in addressing existing regulations that can provide obstacles to the rollout of high-value services, as well as provide input to new regulations being considered by various governmental entities.
Finally, both car rental companies and airlines may have an extra incentive to enter into such partnerships because they feel pressure to get into higher-margin businesses. Both industries have been financially disappointing to their investors. Corporations in these industries have tried to improve their financial position through acquisitions. However, thus far they have not been able to demonstrate that such acquisitions improve the characteristics of their low-margin businesses, or that they can get into new, high-growth, and high-margin areas on their own.
While estimates (here and here) vary greatly, the next-generation mobility market is expected to be very large (investment banks estimate it in the hundreds of billions of US dollars). Sensing the size of the market opportunity, automotive OEMs, global TNCs, and large Internet conglomerates are already working to stake their positions in the emerging value chain. In addition to internal product and mobility solution development these companies are aggressively acquiring, partnering, and investing in established companies and startups. Table 3 below provides some examples of this effort to work across this value chain, using models I previously described.
|Vehicle Design & Manufacturing||FCA||Chery, SAIC, BYD, BAIC, Ford||BMW, FCA||GM, SAIC||GM, JLR, Ford|
|Operating Platform||Waymo||Baidu, NIO, Bosch||Intel Mobileye||Cruise||Waymo, Baidu, Nutonomy|
|UX Platform||Waymo||Baidu, NIO||BMW, (Zendrive)||Lyft||Lyft|
|Fleet Service & Maintenance||AutoNation||TBD||TBD||TBD||TBD|
|Big Data & AI||Waymo||Baidu||TBD||OnStar||Lyft|
Table 3: Examples of how various incumbents work across the ACE mobility services value chain
Even though I maintain a large database of all the relevant companies, their acquisitions, partnerships, and investments, the information in Table 3 is not meant to be exhaustive. For example, companies like Daimler, Delphi, and several others have not been included even though they are active in this value chain. Nonetheless, we can draw several conclusions:
- Between the information presented in the previous post and the information presented here, one can see how incumbents are experimenting with both next-generation vehicles and next-generation mobility as they are trying to determine the role they want to have in the driverless future. It is also clear that not every incumbent automaker, Tier 1 supplier, large TNC or Internet company would want to have a leadership role across the entire mobility value chain, e.g., Nissan, Honda.
- Large companies are willing to experiment with startups but also with other large companies. For example, BMW has invested in and working/experimenting with several startups, e.g., Zendrive. Many of these experiments will remain small scale and will not be followed by larger deployments, even if they receive oversized publicity; a fact that startups should keep in mind as they consider business relations with large corporations.
- Large corporations have not figured out all aspects of this value chain, as demonstrated by the TBD entries in the table.
- During this period of intense experimentation we will continue to see ambivalence leading to hedging, as demonstrated by what GM is doing regarding mobility services with Lyft as well as on its own , what Lyft is doing regarding Operating Platform (Waymo, Nutonomy), and Baidu is doing about vehicle design and manufacturing (Chery, SAIC, BYD, BAIC, Ford).
The pace of activity around the new fleet-based on-demand personal mobility value chain will remain high for the foreseeable future as ACE vehicles move from experimentation, to larger scale trials, and ultimately to commercial deployment. Companies, including startups, which want to be part of this value chain, must clearly understand where their expertise and Intellectual Property will provide them with the best possible and enduring advantage. In the process they will need to establish a clear strategy about where to invest, what amounts and at what pace, who to partner with, and which company to acquire or be acquired by. The establishment of the right strategy will be particularly critical for companies that want to become market leaders in next-generation mobility. Many of the areas that today witness an investment frenzy will take longer to mature requiring more capital than originally expected, while others may ultimately not prove as strategic as initially envisioned. Yet others may emerge as more strategic and critical than thought of today. During this early period, the larger corporations will continue to experiment with as many alternative strategies, technologies, and business models as possible. Startups and their investors will need to keep this in mind as experimentation should not be confused with scaled deployment.