Driving change

Can carmakers survive the age of Uber?

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You could say that Bob Lutz has gasoline in his blood. For decades, the 85-year-old American worked in top positions for major automakers General Motors, Ford, Chrysler and BMW. This hard-earned experience helped to explain why his guest article in November for the American trade magazine Automotive News caused such a stir. The piece, entitled “Kiss the good times goodbye,” was nothing less than a wake-up call for the automotive industry.

In his article, Mr. Lutz dared to make predictions that are likely to scare many auto executives: The last journey on American roads by a human-driven car will happen within 15 to 20 years’ time; drivers will by then be a risk that no legislator will tolerate; and performance will not play a role in the new world of cars. “This is the death bell for companies like BMW, Mercedes-Benz and Audi,” Mr. Lutz wrote.

With self-driving cars, it is no longer the ownership but the use of a car that will be decisive. In the future, we will no longer pay for the car, but for the journey. In the end, this will also eliminate the need for car dealerships. “It makes me sad to say this, but we are reaching the end of the automotive age,” concluded the industry expert.

By 2050, mobility services will account for $7 trillion in annual sales.

One could dismiss these gloomy predictions as the radical opinion of one individual. But in his article, Mr. Lutz only describes what most car manufacturers already suspect. The days when it was enough to build and sell cars seem to be over.

The mood in the sector was already tense. Although automakers are selling more cars than ever before, with most manufacturers making billions in profits, 2017 marked a year of change. You could say the car industry currently resembles a group of surfers in the water waiting for a huge wave. It is still unclear who will be surfing on it and who will go down.

The greatest threat to the industry is not bans on diesel vehicles or climate protection laws, but technological progress. With artificial intelligence, cars will be capable of driving autonomously, and thus accident-free, within a few decades. This radically changes the business model. Cars without drivers, which can also be shared, make individual mobility much cheaper, efficient and more flexible than in the past.

Self-driving vehicles will not only transport people, but also parcels and food, making mobility a far larger market than cars. By 2050, mobility services will account for $7 trillion in annual sales, chip maker Intel predicted in a recent study. Many people already want to secure a share of this turnover. $111 billion has been invested in mobility companies since 2010 alone, according to calculations by the McKinsey management consulting firm.

Only 6 percent of investments in new mobility services come from car manufacturers or suppliers. The largest investors are venture capitalists (50 percent), hardware manufacturers (25 percent) and software companies (19 percent). All of them are targeting the mobility market, which is currently dominated by the car manufacturers.

A war has long since broken out in Silicon Valley over the multi-billion-dollar business. For example, Google took Uber to court in 2017, claiming that the ride-hailing service had illegally obtained access to crucial technologies for the self-driving car. Now Uber, which would benefit hugely by being able to offer self-driving cars, is threatened with fines of $1.86 billion (€1.54 billion).

In addition to giants like Uber and Google, hundreds of startups are also involved in the battle over innovation. Those who hope to survive in this shark tank need a lot of money, because rapid growth and market share are so expensive that even car manufacturers are hesitant to take any major steps. In the third quarter of 2017, Uber alone reported a loss of $1.46 billion, compared to $1.06 billion in the previous quarter. Its value has plummeted from $68 billion to $48 billion within the year.

But investment in mobility services continues at a rapid pace. Uber rival Lyft, which has considerable market share in the US, is constantly attracting new capital, for example. Google parent company Alphabet now has a $1.5 billion stake through its investment company CapitalG, valuing Lyft at $11.5 billion. While the value of classic car manufacturers is stagnating, mobility services are gaining in value.

Such moves are causing unease in Detroit. US car makers know that they must adapt to survive. The radical change in the day-to-day business has been visible for some time. General Motors CEO Mary Barra justified the sale of German subsidiary Opel and the de facto withdrawal from Europe by stating that she wanted to focus more radically on the future business. Ford CEO Mark Fields was forced to resign in response to pressure from investors, and his successor James Hackett has announced a radical strategic shift. “We have to accept that the virtues that brought us success in the last century are no guarantee for future success,” he said on taking office.

The US auto giants know that they cannot take on Silicon Valley head on. While technology companies deal with billions of dollars in venture capital, car companies have to be more conservative. This sometimes means that compromises have to be made. GM founded its own car-sharing service, Maven, made a $500-million investment in Lyft and offers drivers vehicles at a discounted price. Ford and Uber are jointly testing autonomous vehicles in Pittsburgh, but Ford also cooperates with Lyft. As yet, it seems that the auto giants are unsure of the role they will play in the new world.

Europeans, on the other hand, are hoping that change will not be as radical than in the United States. The European Union’s policy, which sets clear limits for new mobility services, is of particular help to car manufacturers – mainly because mobility is regulated by national legislation. This makes Europe an extremely difficult market for new services, despite its purchasing power. Local public transport is well developed and regulatory hurdles are high.

In a recent ruling by the European Court of Justice, Uber was categorized as a taxi service, forcing the expansion-minded firm to develop a legally watertight business model in each member state. Taxi companies cheered while the startup industry was perplexed. The court has also made it impossible for any European mobility service on the domestic market to quickly grow to an international level.

Didi operates the world’s largest fleet of electric cars and boasts 450 million users in 400 Chinese cities.

Thanks to the support of politicians, it is easier for European auto giants to defend their home market. There are hardly any internationally relevant startups. Only the French Blablacar auto-sharing service is large enough to be defined as a “unicorn,” with a valuation of more than $1 billion.

But French car manufacturers PSA and Renault are also investing in mobility services, albeit on a small scale. PSA is focusing on the future market with its mobility brand Free2Move, for example. In addition, the private car rental company Drivy also comes from France and dominates its segment.

Things are not nearly as rosy in Germany. According to McKinsey consultants, of the $111 billion invested in mobility services since 2010, only $1.1 billion have been invested in Germany. Even Singapore and India were able to raise more.

Many mobility services in Germany are provided by major car manufacturers or suppliers. The best-known are the taxi broker MyTaxi (Daimler) and the car-sharing services Car2Go (Daimler) and DriveNow (BMW). But there are persistent rumors that the latter two could be merged due to constant losses.

There are good reasons for the lack of action. German car manufacturers benefit hugely from the support of lawmakers. Legislation hampers international services such as UberPool, while only German carmakers are given special permits to start their own transport services. In Hamburg, VW intends to put up to 1,000 electric vans on the streets in the next few years under the mobility brand Moia, which will account for 1 percent of traffic in the city. In Stuttgart and Berlin, Daimler cooperates with local public transportation providers to bring its own transport services onto the road.

The Germans are buying most of their technology from abroad. BMW is involved in a joint venture with Intel and Israeli sensor manufacturer Mobileye to develop self-driving cars. Daimler is currently on a major shopping spree. In addition to the French chauffeur service Chauffeur Privé, it recently acquired US technology company Via. Automakers BMW, Daimler and Audi have also jointly acquired the digital mapping company Here. Intel, Pioneer, and — if antitrust authorities give the nod — Bosch and Continental are also getting on board with Here as well.

But the Germans have a lot to learn when it comes to financial adventures. In mid-2016, for example, VW invested around €300 million in Israeli Uber rival Gett. In the latest round of financing, which Gett wanted to use to expand internationally, VW backed out. And contrary to initial announcements, VW is also not planning to turn the Moia mobility division into its 13th group brand. The fear of sinking billions in a bad investment is palpable.

There are no such fears in China. Shortly before the end of last year, Chinese Uber rival Didi Chuxing announced that it had raised $4 billion for international expansion, valuing it at an estimated $50 billion – about half as much as BMW. It operates the world’s largest fleet of electric cars and boasts 450 million users in 400 Chinese cities.

In addition to Chinese tech giants Tencent and Alibaba, Didi’s investors include American corporation Apple. The total cash reserves of the five-year-old mobility service are estimated at $12 billion. With this war chest, the company has already ousted Uber from the domestic market, and now they want to scare the competition worldwide. “The domestic market for Didi is already consolidated and relatively mature. That’s why they now have to expand internationally,” said Will Tao of the market research company iResearch.

Didi has already invested in other international mobility platforms. In 2015, it acquired stakes in Lyft and Indian car-sharing service Ola. In 2016, a stake was taken in the Southeast Asian service Grab. The Chinese have also invested in the Estonian company Taxify and the Brazilian service 99. Mr. Tao says that while Didi has some catching up to do in the development of the self-driving car, it’s taking action: the firm recently opened a research laboratory in Mountain View, California.

It is no coincidence that Didi focuses primarily on neighboring growth markets. In the largely unregulated markets of South Asia, it can pursue growth more radically. There is no shortage of money. This year alone, Ola raised $1.1 billion from the Chinese technology company Tencent and the Japanese telecommunications group Softbank. Discussions are still ongoing on a financing round that could provide the company with another €1 billion.

Meanwhile, Indonesian competitor Go-Jek, worth about $3 billion, completed a financing round of around $1.2 billion this year. The Chinese Internet companies JD.com and Tencent were among those involved. Go-Jek wants to use the money for its first foreign expansion.

However, all of these companies are still far from profitability. But they think that the fact the mobility market will include much more than just passenger transport will change that. Only this week, for example, Ola snatched up the food delivery service Foodpanda, a subsidiary of German e-commerce company Delivery Hero. With the deal, Ola committed to investing $200 million. Uber also sells food deliveries in India and Southeast Asia.

The automakers don’t have much time to catch up. If 2017 was the year that the wave of change in the mobility industry first surfaced, 2032 could be the year it crashes on to the beach, delivering only those who chose to surf it. And if, as Mr. Lutz predicts, classic automakers are little more than hardware suppliers by then, they’ll be left far out at sea.

Handelsblatt journalists Lukas Bay, in Düsseldorf, Sha Hua, in Beijing, Frederic Spohr, in Bangkok, and Britta Weddeling, in San Francisco, all contributed to this article. To contact the authors: bay@handelsblatt.com, f.spohr@vhb.de, weddeling@handelsblatt.com

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