“Globes” spoke recently with a manager at an international venture capital fund who was at the annual Consumer Electronics Show (CES) in Las Vegas. “You should see what goes on here,” he said, “It’s like the Israeli entrepreneurs are taking over every inch of the high-tech for vehicles space.”
It should not be a surprise. The Israeli high-tech industry has always known how to identify the hottest trend early, or to initiate them even earlier. And now it is difficult to find a global tech trend that is more popular or more connected or, at the very least, one that inspires the imagination of investors then the next generation of “smart” vehicles.
The headlines are hard to ignore. Google, Apple, Microsoft, Samsung, and others are battling for a foothold in the content and data environments that will enter hundreds of millions of cars in the future. Meanwhile, they are also developing autonomous and electric vehicles.
Companies which cooperate on the initiatives garner surreal valuation in the market, as do companies that develop hardware and software for road safety and in-car IT security, among other advanced features. But all of these developments are merely the preamble for the direct involvement of the automakers in the sector through the acquisition of companies and investment in the sector.
Automakers’ hurdles
Until recently, the automotive industry procured advanced technologies using the traditional model of secondary suppliers. Because of ever-present need to cut costs, most automakers chose to focus on research and development of generic vehicle tech in order to minimize the R&D expenses on the “little building blocks” like the electronic and electromechanical components, the safety systems, and applications.
These items were bought from, or jointly developed with, specialty suppliers and not always on an exclusive basis.
The business model is simple: the automaker is the “landlord” and any company that wants a foothold in its closed ecosystem those millions of vehicles it builds every year is required to pay high “entry fees” in the form of stringent and costly quality assurance demands, aggressive timetables, and the agreement to harsh contracts that lower the per unit profit for the secondary supplier to a minimum.
But today the traditional model has been undergoing fundamental change in several spots. The first is the stock market, a center of continuing distress for the automotive industry in the past two decades. Global automakers, which are generally traded on world markets, are part of an innovative tech sector in every aspect but their valuation in the market as a “heavy industry”.
As such, their share prices narrowly move according to their profitability from auto sales while every turn for the worse in the conditions of the larger economy can wipe out billions off their market value overnight.
On the other hand, some of the independent secondary suppliers, which hold patents for developments in electronics and IT, currently benefit from “fantasy pricing” on the market and yield massive fortunes for their stockholders even before the official listing.
Green is in
Another center of change for the industry, also related to the stock market, is the willingness of investors to provide “fantasy pricing” to company in social and green transportation companies and startups.
The billion dollars raised by Better Place at the time was a preview of the volume of “green money” available around the world that is actively seeking avenues for investment.
The amazing valuations of Tesla ($36 billion at its peak) and Uber ($50 billion according to its last round of funding) provide two living, breathing examples of investors’ green hysteria.
It should be noted that even though the overwhelming mass of vehicle owners and public transportation users have yet to be significantly exposed to the “hype” of green auto ventures, much of the business potential in such companies can be unleashed by regulators around the world, that can “force” the public to consume these technologies and jumpstart their initial adoption.
Ventures focusing on reducing accidents, establishing social and autonomous public transport, promoting electric vehicles, and emission reduction in urban environments are on the agendas of regulators across the world and are garnering much of the investments and public subsidies.
One local example recently seen in headlines is the decision by the Israeli Ministry of Transportation to subsidize the installation of millions of early-warning vehicle systems like Mobileye in current cars.
Danger is opportunity
Contrary to popular opinion, the real danger for automakers from the changing business model does not stem from the public plans of IT giants to manufacture autonomous and electric vehicles. The big automakers know better than anyone that developing and manufacturing electric vehicles is a losing proposition, and how hard it is convince hordes of clients to change their daily commuting habits.
The immediate threat is the invasion of IT giants into the “closed ecosystem” of automotive entertainment, information, and marketing a market with significant revenue potential in the coming years.
Already many of the automakers’ cars have become “passive carriers” of apps and external data, streamed into the vehicle using cellular airwaves and WiFi signals. The companies making fortunes riding their coattails are the service providers, the system developers, and the programmers. The best known example is Waze its navigation module comes standard in many new cars sold in Israel.
The automakers have employed a variety of strategies to save a piece of the potential pie for themselves; the advanced Israeli initiatives show up on their “shopping lists”, as expected.
Some of the manufacturers are “cooperating with the enemy” by signing agreements with Google, Microsoft, and other software giants to jointly develop operating systems for vehicles, to be exclusively loaded into the built-in ecosystem of the cars.
The benefits offered by these systems to end-users and to the auto industry is in their direct communication with the vehicle, which will allow for the provision of specialized apps and services based on the driving habits of the driver, their location, and other variables.
The Israeli contribution to the field, aside from the accelerated development of the vehicle OS which is undertaken by the local R&D centers of the global IT giants is in the specialized car apps. Recently, several automakers, like Ford and Toyota, have been seen searching the “the next big thing” in the sector.
Other manufacturers, like GM, take the expensive, complex, and long-term path by building an independent research and development center in Israel funded and controlled by the automaker. In the past, similar such business models were considered by Fiat, Renault, and others.
But the most interesting strategy currently taking shape is the direct investment through acquisition or the purchase of significant stakes in Israeli high-tech companies focusing on the auto sector part of a worldwide trend in the industry.
BMW, for example, recently acquired an independent European navigation company for hundreds of millions; General Motors announced a $500 million investment in a social transport company; and Toyota allocated a billion dollars to the quick implementation of advanced technologies.
As part of the trend, legions of “acquisition opportunity finders” are secretively working on behalf of the auto industry, some independently and others cooperating with domestic vehicle importers. An industry insider told “Globes” the environment was changing.
“In the past, we had to undertake a long courtship of the global automakers, just to get them to agree to look at our technology. Now the inquiries come to us, sometimes from several car manufacturers at the same time and they are talking about investing right from the start,” he said.
The bottom line: it would not be surprising if we heard about new Israeli “exits” in the automotive tech sector. Of course, cynics and experienced analysts who watched the global hype around Better Place can once again say capital is chasing after fantasies and another global tech bubble is forming.
After all, we are talking about vehicle technology, and the demand for it among end-users those masses that purchase vehicles with their hard-earned cash is practically non-existent.
But as one Better Place executive once told us, “Fantasy or not the money is very real.”
Published by Globes [online], Israel business news - www.globes-online.com - on January 20, 2016
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