President Trump, autonomous vehicles, and digital retailing will be in the driver’s seat for automotive disruption in 2017. The old guards of the industry continue to be challenged by new start-ups with totally bleeding edge business models. Merger and Acquisition activity in the auto space has been white hot according to Frazer McCombs Auto Ventures Summit. In the past 2 years, there have been 47 major equity transactions and investments worth $37M in automotive retail. Consumers have spoken! Hear them loud and clear! They want a more effortless and transparent car buying process. Consumer’s frustration with the traditional purchasing model has spurred new players in the industry like Vroom and Carvana. Even President Trump has jumped into the automotive fray with calling for OEMs like Ford and Toyota to move production back to America, and subtly implying that high tariffs may be an option on foreign automakers producing cars outside the US. One more potential nail in the historical business model’s coffin, may be the impact autonomous technology will have on legislation, infrastructure, and even more innovative utility transportation options.
Uber, Waymo, & Self driving cars
Autonomous vehicle technology has become the belle of the ball for major corporations. A recent CB Insights report showed that over 33 corporations including Apple, Baidu, Intel, and Microsoft are investing heavily in driverless vehicle research and technology. Google was early on the autonomous vehicle wagon and has built a more defined business that it has spun off to its own entity dubbed Waymo. Waymo has been recently rumored to be in discussions with Honda to help develop their autonomous technology. Never one to stand by and watch, Uber is another large company involved in autonomous technology. Last year it was practically unavoidable to spot Uber’s self-driving car being tested by engineers when I was out and about in downtown San Francisco. Recently though, they have moved their autonomous vehicle testing to Arizona and while I don’t see them testing in SF, they have been visible among significant technology acquisitions in autonomous technology including a $686M acquisition of self-driving startup Otto. Andreessen Horowitz partner Frank Chen has outlined a 5 level evolution scale to complete driving autonomy and posed the question on whether autonomous development will be adopted level-by-level or skip levels to complete autonomy. This will be interesting to watch as that progression will be heavily dependent on advancements in R&D over the next 5 years, and on how comfortable the National Transportation Safety Board and state legislatures are with safety.
M&A – Ford and General Motors
The traditional OEMs are making sure they are not being left at the automotive disruption dance by making major investments and acquisitions outside of their traditional business focus. 2016 was a busy year for General Motors as they acquired autonomous software company Cruise Automation to quicken deployment of their self-driving car technology, launched car-sharing company Maven, and also invested $500 million into ride-hailing company Lyft. Ford invested in Chariot which is a crowd sourced commuter shuttle service operating in major metropolitan areas like San Francisco. The majority of OEM’s have also started to build a presence in the San Francisco Bay area whether its venture arms like BMW i-Ventures or Ford’s Palo Alto based research and innovation center. BMW i-Ventures plans to quintuple the size of its fund to $530 million and has already invested in companies like Zendrive and Moovit in its portfolio. I think that it’s safe to predict even more M&A activity in the auto space and exciting strategic investments on the OEM side.
Automotive Ecommerce and Online Marketplaces
Last year was a banner year for automotive ecommerce and marketplace companies like Carvana and Vroom. Together they took the spotlight in 2016 for online retail. Vroom hit over a billion dollars in retail sales and acquired the largest eBay motors online retailer, Texas Direct Auto, in December 2015. Carvana has become a well-known auto ecommerce company with its extensive marketing across 21 markets and ‘viral’ car vending machines. All of the publicity and awareness likely helped Carvana secure $600 million in retail contract financing over the next 12 months from Ally financial. This will allow Carvana to continue to execute and grow its origination volume.
But it hasn’t been all success this year for every automotive ecommerce darling. Beepi was a casualty of 2016 after raising $150 million. It let go of 180 employees and merged with former TrueCar Founder’s new start up, Fair. This stealth startup is tackling flexible leasing and is targeting millennial consumers with budget based fractional leasing.
Trump Administration and US Auto Manufacturing
The Trump administration may have major impacts on the automotive industry, especially for the end consumer if high tariffs are governed on vehicles manufactured outside the United States. Last year, 43% of vehicle sold in the United States were manufactured in other countries including Mexico and Germany. Trump has already forced a change of strategy with Ford, which was initially planning on building a large $1.6B manufacturing facility in San Luis Potosi, Mexico and employing over 3,000 local workers. In light of Trump’s pressure, Ford has shifted gears to making a $700M investment into a Michigan factory instead. OEM’s like Toyota have also followed suit with a $10 billion commitment to the US over the next 5 years. One of Trumps most notable OEM targets is German manufacturer BMW. Trump threatened BMW specifically and was quoted in a German newspaper saying, “I would tell BMW that if you are building a factory in Mexico and plan to sell cars to the USA, without a 35 percent tax, then you can forget that,” which reinforces his initiative to bring back auto manufacturing jobs to the United States. As a consequence, this would have a major impact on foreign manufactured component parts of vehicles thus increasing the average vehicle MSRP (Manufacturer Suggested retail price) for the American consumer. Mexico has over 400 part producing plants and according to US data, $50.5 billion in vehicles and $51 billion in auto parts were shipped to the U.S. from Mexico in 2015. Even Trump’s cabinet will be influencers on the industry with his nominee Elaine Chao as the next Secretary of Transportation. Chao is a proponent for autonomous technology, and her direction on regulation in the space is a “must see” upcoming event.
Traditional Brick and Mortar Dealerships and Tech Savvy Consumers
Traditional brick and mortar dealerships have continued to make business model adjustments over the past couple years with all of the flux within the auto industry. Ecommerce companies like Carvana have put pressure on traditional brick and mortar dealerships to improve or implement digital retailing into their business. No haggle pricing has also come into play as a major driver for consumer transparency. Lexus is even testing a “No-Haggle Pricing” program with select dealerships and seeing success. General Motor’s Cadillac unit recently announced its BOOK service aimed at Gen X and Y consumers. The new hybrid service will charge the consumer $1,500 per month and will not lock them into financing or leasing a vehicle. The consumer can also change vehicles up to 18 times a year from a variety of Cadillac models. This is an interesting move for a company more historically associated with grandparents instead of their tech savvy grand kids!
Even in the face of relentless new competitive business models invading their turf, 2016 was one of the best years for dealership auto and light trucks sales totaling 17.55 million units and surpassing the previous year of 17.47 million units. No matter where a consumer purchases a vehicle, they usually return to their local dealership for service, and traditional brick and mortar dealerships excel at capturing new service customers and developing loyalty even with missed opportunities on the pre-owned sales side. Companies like TrueCar are also assisting dealerships in interfacing with consumers’ online with their new Chase partnership. This allows for a consumer to apply for financing through Chase online and seamlessly receive a haggle-free certified price from a TrueCar dealer so when the consumer arrives at the showroom all they need to do is sign and drive. Moreover, Walmart has announced a pilot program with Car Saver to enter the automotive marketplace. CarSaver’s platform allows buyers to finance and insure a vehicle via its website or on a touch-screen kiosk. Car Saver has partnered with AutoNation and they plan to roll out the Walmart Pilot April 1st in Houston, Dallas, Phoenix and Oklahoma City.
What’s in store for 2017 and beyond?
Change and more of it coming at you faster than ever is on the automotive industry’s 2017 forecast. As General Motors CEO, Mary Bara, said at the 2016 Consumer Electronics show in Las Vegas recently “I have no doubt that the automotive industry will change more in the next five to 10 years than it has in the last 50.” How can it not when George Jetson concepts like autonomous driving and connected vehicles are here already and rapidly moving out of the testing phases and into our digital reality? Stay tuned and let’s see just what 2017 brings for the automotive industry!