Auto-tech startups adjust to delays in autonomous cars

Benjamin Netanyahu in Mobileye car  / Photo: Reuters Abir Sultan, Reuters

Despite the slower progress towards self-driving cars, Hailo and Cortica are Israel's frontrunners for a major exit or IPO, or to become unicorns.

Auto-tech companies, whose revenue model relies on extensive commercial adoption of high level autonomous cars (level 4 or 5), face a problem. Self-driving cars are unlikely to generate substantial revenue until at least 2023, not 2019 and 2020 as previously predicted, and since investors are starting to realize this, such companies will find it difficult to raise additional capital.

However, companies whose technology or IP  are already useful for the car industry, including for cars with low level autonomy, are likely to weather the shift in the market, and could even find unexpected opportunities. This is also true for companies developing technologies that are essential building blocks for the auto industry as a whole, such as cybersecurity, communications components, sensors inside a vehicle, components for an electric vehicle, commercialization of information, etc.

Advanced autonomy companies can survive by downshifting their technology and adapting their products to existing vehicles. This is not easy, however, because the "general" auto market and the market for driver assistance systems with low levels of autonomy are very competitive and aggressive. The prices of the components being sold in it must be in the tens of dollars per unit, or at most a few hundred dollars. A company that has developed sophisticated sensors or a processing unit costing hundreds or thousands of dollars faces a big challenge.

This dilemma is giving not only startups a hard time, but even major companies, such as chip manufacturer Nvidia. It cannot be ruled out that this realization is what made Israeli Lidar sensor developer Oryx Vision announce earlier this week that it is closing down. 

Decline and greater selectivity in investments

Another effect of the delay in the advent of the autonomous car is a gradual decline in the volume of auto-tech investments and greater selectivity by investors. The bottom line is that the post-Mobileye era, in which investors and manufacturers brandished open checkbooks at every auto-tech company chanting "connected," "smart," or "shared" and saying that its product had been tested by the auto industry appears to have ended, at least for now. Investors and customers are still hunting for breakthrough technologies, and financing rounds are still taking place, especially by companies with technologies that are useful now. Many, however, including auto manufacturers and large tier-1 suppliers, are now regarding inflated valuations of young companies with far more skepticism.

Another effect, the results of which are unpredictable, is due to the escalating trade war between China and the US. In the recent past, the Chinese auto market, the world's largest, was considered the Holy Grail of Israeli auto-tech companies. Every contract signed with a Chinese company, even an MOU, garnered headlines, propelled the Israeli company's value for raising capital, and inflamed investors' imaginations. For example, Mobileye was one of the most prominent companies on the Chinese scene.

Today, US authorities are examining any transfer of "multi-purpose" knowledge and technology to the Chinese with a magnifying glass, and most of the auto-tech technologies developed in Israel have less innocent uses. Since the long arm of the US reaches everywhere, Israeli companies with a Chinese position are having to lower their media profile, and sometimes to choose between the Chinese market and a presence in the US, regardless of the pace of autonomous vehicle penetration.

Will Hailo Technologies be sold to a giant company?

The rapid changes in the autonomous vehicle industry's business environment do not mean that there will be no more unicorns and impressive IPOs. On the contrary; the decline in the business environment and the element of uncertainty brought by the global trade war are likely to bolster the motivation for merger and acquisition deals among both sellers and buyers. For example, we will not be surprised if giant Chinese companies make shareholders offers that they cannot refuse in order to further their grip on essential technologies.

We believe that a considerable proportion of first-generation Israeli auto-tech companies are now ripe for IPOs or exits, with the help of signed contracts and even solid revenue from the auto industry. The list contains names like Valens Semiconductor, Autotalks, Otonomo (which has just signed a huge contract with Avis Car Rental), and many others.

If we had to select two companies likely to become something like the next Mobileye, however, or at least a mini-Mobileye in terms of the size of its exit or IPO, we would bet on Hailo Technologies and Cortica.

Hailo first appeared on radar screens less than two years ago with a processor designed for the autonomous vehicle sector, smart consumer products, and artificial intelligence (AI) applications. Where Hailo is concerned, the term "breakthrough is not a cliché, but a fact. Less than a year after beginning to distribute sample chips to customers for trial and assessment, the Hailo 8 is now the benchmark in the sector for processing speed and power consumption. For example, Chinese electronics giant Huawei unveiled its competing chip that it spent the past three years on developing at a cost of billions. The international electronics press proclaimed, "The chip's performance is impressive, but inferior to Hailo's chip." The very fact that a product made by a three year-old Israeli startup managed by people in their 20s that has raised tens of millions of dollars in capital is being compared to a corresponding product made a top-level Fortune 500 communications company with an R&D budget in the billions of dollars is no trivial matter, and hints at how much Hailo is likely to achieve.

Hailo is currently gearing up for mass production of its chip in 2020, which means that it already has substantial orders and customers. If anyone needs further evidence of what the company is aiming at, they should read what Hailo CEO Orr Danon said in an interview that appeared this week in the prestigious "Digital Journal."

Danon said that the vision of a driverless car was still "a decade away," and listed the variety of possible uses for the AI chip in the auto industry and road safety. He added, "In smart home products, such as virtual assistants, chips like Hailo's can process the information on end-user devices, while improving privacy, reliability, and response time." In other words, Hailo's chip could be the missing link in the global combat now taking place among Google, Amazon, Microsoft, Apple, Baidu, and other in the multitrillion-dollar assistants and smart home market. These companies can spend billions of dollars on acquiring companies in this field without batting an eye, with or without connection to bonuses in the autonomous vehicle sector, which they are also interested in. We will not be surprised at all if Hailo is already in their business sights.

Cortica: A palace coup against Mobileye

The second company is Cortica. Like Hailo, Cortica is also harnessing AI to give auto processors a high-speed and effective "machine perception," based on information from sensors in real time. Also like Hailo, Cortica's technology is adaptable to the low levels of autonomy that will prevail in the auto industry in the coming years. Again like Hailo, Cortica's technology has a broad range of applications outside the auto industry, including security, medicine, education, consumer products, and who knows what else.

This, however, is as far as the resemblance goes. Cortica is an algorithms company, not a chip company. It is not attempting to improve prevailing machine learning performance; it is trying to throw the accepted approach to AI out the window by proposing a "light," strong, energy-saving, and transparent alternative in the data processing process. Up until a year or two ago, the industry establishment took Cortica's claims for its technology with a grain of salt. Since that time, however, the company has put its algorithms on a chip, conducted extensive proof of concept with customers, and is in the process of founding subsidiaries to apply its hundreds of patents in various areas, one of which is a special purpose vehicle for the auto industry named Cartica.

In the near future, Cortica is likely to play a key role in the palace coup currently taking place in the auto industry against the global hegemony of Mobileye-Intel's chips. If and when this happens, Cortica is likely to spin off its advanced driver-assistance systems (ADAS) subsidiary and hold an IPO at an incredible valuation, but that is already another story. In any case, we will not be surprised at all if Hailo and Cortica joint the exclusive and prestigious club of the most important companies that have sprouted from the Israel technology industry, and possible the global technology industry, in the past decade.

Published by Globes, Israel business news - en.globes.co.il - on August 28, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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Benjamin Netanyahu in Mobileye car  / Photo: Reuters Abir Sultan, Reuters
Benjamin Netanyahu in Mobileye car / Photo: Reuters Abir Sultan, Reuters
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