Travel is meant to broaden the mind and when Daimler Chief Executive Dieter Zetsche took senior managers on a trip to California’s Silicon Valley this summer, they certainly learned something.
The top 110 Daimler executives spent July in intensive talks with representatives from Apple, Google, Uber, venture capitalists and entrepreneurs.
“It is impressive how quickly, but also how confidently and successfully the hundreds of start-ups there are moving along.” Mr. Zetsche told Handelsblatt.
The Daimler team came away with a clearer understanding of the digital revolution transforming the car industry. When the International Motor Show opens its doors on Thursday in Frankfurt, networking will be the central theme.
There is a buzz around this year’s show, which will host some 1,103 exhibitors from 39 countries. Such numbers have not been seen since the 2009 financial crisis.
The big tech companies like Apple and Google will be on the fringes of the trade fair, but they are in fact central to the future of mobility. The products made by these tech companies are already in every pocket and soon could be in every glove box. Furthermore, they can afford to buy and develop what they need.
“The financial resources of Google and Apple are enormous,” says BMW’s chief financial officer Friedrich Eichiner. BMW, along with Volkswagen are looking for a way to respond to these new competitors who are edging their way into the car industry.
“We do not want our cars to be run by external operating systems.”
“Automakers cannot manage the networking of cars alone; they need partnerships,” says Axel Schmidt, managing director of automotives at the consulting firm Accenture.
Daimler joined forces with rivals Audi and BMW in acquiring the digital map provider Nokia Here precisely to stay competitive in the tech era.
But who controls these partnerships is still up for discussion. Mr. Zetsche is willing to cooperate with Silicon Valley, but insists that Daimler must play a key role in developing and owning the in-car technology.
“We do not want our cars to be run by external operating systems,” he said. He is determined to make sure Daimler is not relegated, like many cell phone providers, to the role of hardware manufacturer.
He also does not want to let tech companies too deep into the inner workings of the vehicle. Mercedes will keep all information on the interface between driver and car internal for now. Systems are less likely to be hacked, as Apple has shown, if a system is closed and privacy is important for most people who drive a Mercedes Benz.
Daimler is meeting many of the prerequisites to excel as an automaker in the digital age, but it must still be measured against its traditional competitors. The Stuttgart-based company is currently growing faster than rivals and in August, for the first time in years, surpassed the VW subsidiary Audi in sales.
But it is clear that Daimler and other automotive giants must also work with and compete both with the technology giants but also with a new generation of companies, like Crocodile, Parkpocket or Blabla Car. These are part of the “New Mobility World,” segment in the IAA: a new area in the fair where the companies that design the apps and algorithms that run on smartphones and increasingly control traffic can display their wares.
Google is well aware of this growing segment. It has not decided to bring prototypes of its own self driving car over to the IAA show, but has sent representatives to take part in a panel discussions about what the future holds.
It is clear to established car makers such as Daimler that they will come under attack from Silicon Valley soon enough. For months, Apple, Google and Uber have been recruiting experts from the automotive industry. Apple recently poached the chief developer of Mercedes-Benz in the U.S., while Google and Apple have built test cars to trial their technology. There are rumous that these test cars will soon be sold on the open market. With their billions in cash and their eagerness to shake the industry up with fresh ideas, they have the tools for a successful market entry.
It was to understand these new competitors that Mr. Zetsche took his team to Silicon Valley in the summer. Over the course of three days, the managers visited Silicon Valley operations including not only Google, Uber and Apple, but also Netflix and smaller startups. They returned deeply impressed by the start-ups’ determination.
The auto industry managers know they must take the ambitions of Google and others seriously: just one look at Tesla’s success shows that Silicon Valley companies should not be underestimated.
A competitor does not have to build cars itself to be a threat – it’s enough to network them. For prophets from Silicon Valley, one thing is clear: connecting cars with the Internet is the “next big thing.” In the future, cars will be part of a system that increasingly turns drivers into passengers who generate data that can then be used to steer them into just the right shop or restaurant.
One way to make money could be through a “Pay as you drive” program. A constant flow of data will make it easy to get an exact picture of anyone’s driving behavior, making it easy to generate exact maintenance, leasing and insurance rates. Any company that knows the daily commute of a given driver could provide special offers from gas stations or shops as he or she drives by them.
It is clear that any companies that want to take part in this new automobile era need to step up to the plate now.
“Everyone is currently fighting over the platforms and data within the automobile: manufacturers, insurers, telecom service providers, credit card companies and of course the big tech companies like Apple and Google,” said Mr. Schmidt, Accenture’s automotive expert.
Making cars does not automatically earn you a seat at the table when talking about the digital platforms around the car, he added.
Mercedes’ self-driving car, the F 015.
Carmakers are now at a turning point and have to rethink their industry. Mr. Zetsche has already said he wants Daimler to become faster, and get more used to outsourcing parts of its production.
China, which for years has provided easy growth for Germany’s car makers, can no longer be relied on. Demand for top of the range, fully equipped cars is falling. The drivers who still want German cars look for more modest models, or SUVs, which are not German car makers forte.
Volkswagen boss Martin Winterkorn, like his colleagues at other car firms, accepts that the industry is on the eve of an “historic upheaval.”
“The digitization and electromobility put our established business model into question,” he said recently to other executives.
Volkswagen is also working on its own strategy to respond to the advance of the tech companies. While Mr. Winterkorn emphasized the dangers for the car-makers, Mr. Zetsche sees opportunities.
Ultimately, though, both men recognize that companies from Silicon Valley understand more about digitization than car companies and know they need to get on board.
Sven Afhüppe is co-editor in chief of Handelsblatt. Markus Fasse is a Handelsblatt editor specialized in the aviation and automobile industry. Martin Murphy specializes in the automotive, defence and steel industries.To contact the authors: firstname.lastname@example.org, email@example.com and firstname.lastname@example.org