For the last 5–10 years we’ve seen the emerging technology of autonomous vehicles (also referred to as driverless, ‘Level 4’ self-driving cars) moving along the Gartner hype cycle. All the way up to the ‘peak of inflated expectations’ and down to the ‘trough of disillusionment’. It can be a disappointing place down there, yet a valuable and necessary turning point. This is when we’ve cut through all the hype around the robotaxi revolution, finally reaching objective and realistic discussions about opportunities and existing limitations. It is only after putting all technical hurdles, business model obstacles and regulatory constraints on the table, that we can evaluate realistic feasibility, at the beginning of the ‘slope of enlightenment’. Getting hit by Covid-19 at this decisive phase will change the course of the autonomous vehicle (AV) industry and its players.
Gartner
When there is crisis there is opportunity
This specific point in time is relevant because it is a critical phase when belief, support and optimistic prospects in the AV technology and its corresponding business models are key to pushing it forward. According to Gartner, this is the time when interest can wane, players shake out or fail and investments only continue if the surviving companies can prove their value.
Now, in this critical phase Covid-19 serves as a catalyst for strategic actions. Start-Ups, Tech Players and OEMs alike are forced to make wide-ranging decisions which might determine who will make a dent in the AV industry, outsmart the competition and prevail in the long run. Transportation network companies like Lyft and Uber, big OEMs like GM, Ford, Volkswagen (including subsidiaries like ArgoAI and Cruise), self-driving vehicle start-ups like Aurora or Zoox as well as tech companies like Alphabet’s Waymo or Tesla will emerge either as a post-coronavirus winner or loser.
Automakers trapped in innovator’s dilemma
Throughout the past years there was no way to miss the acronym ‘ACES’ — representing the four mega trends which are transforming the automotive industry — autonomous, connectivity, electrification, and shared mobility (Daimler didn’t join the poker table and refers to ‘CASE’). R&D expenditures of OEMs have skyrocketed to develop advanced driver assistance and self-driving tech stacks, hybrid and full electric powertrains, new vehicle architectures and connected vehicle services. Likewise, billions of dollars have been invested in new car-sharing or ride-hailing companies (e.g. Volkswagen’s UMI and MOIA, GM’s Maven, BMW and Daimler’s Joint Venture YourNOW).
While individual technologies like new powertrains, connected services or automated parking features add value to existing OEM customers and business models (e.g. selling option packages), the ‘ACES’ trends achieve their full disruptive potential when reinforcing each other and leading to the creation of a totally new mobility market — the “selling autonomous miles” instead of “selling units” business.
Only few cross-industry companies like IBM or Netflix have demonstrated such a transformation in the past. It requires ambidextrous leadership and organization which balances the existing, evolutionary business with revolutionary change. However, new business fields are always considered ‘risky’ with remaining open questions about profitability, and return on invest. It needs short- and long-term liquidity to succeed — something becoming rare with Covid-19 hitting the automotive market.
With the threat of an upcoming recession all big automakers like VW, Toyota, GM, Daimler, BMW, Ford, etc. have to prioritize their investments and keep a strong eye on where to focus resources. By doing so, they find themselves trapped — more than ever — in the “Innovator’s Dilemma” — a concept introduced by Harvard professor Clayton Christensen. In his 1997 book he explained how the very decision-making and resource allocation processes that are key to the success of established companies are the very processes that often reject disruptive technologies when times get tough (and budgets cut). This is when established companies tend to focus on their core business that promise higher profits while making new markets and technologies not a priority. In the long term, this is why they often fail to seize the next wave of innovation in their respective industries.
But what kind of OEM board is now willing to allocate lots of its resources to a futuristic, complex robotaxi vision — a decade away before becoming relevant in market size and not yet proven to be viable? Who is opting for high technological, regulatory and competitive risks — when at the same time being responsible for hundreds of thousands of employees and their respective families? In his book, Clayton Christensen concludes that great, well-managed firms don’t miss out to stay ahead of the game because they made ‘bad’ decisions during crisis, but because making logical decisions may turn out to be the wrong thing to do after all — hence dilemma.
Even being aware of this Covid-19 quandary, it is now harder than ever for OEMs to uphold an ambidextrous business management which not only focuses on the core business but takes into account the long-term transition of the industry. A lot of these tough decisions must be made in the next weeks and months in OEM board rooms. In the context of AVs, they now run the risk of slowing down and waiting until market, technology and regulation are more mature — a strategy that gives way for other players to push them aside.
Virus hits the ride-hailing business hard
The companies having the highest intrinsic motivation and pressure to push driverless technology forward are ride-sharing companies like Uber, Didi, Grab or Lyft. Autonomous vehicles are promising to cut the expenses of the driver (today up to 60% of the costs) and make ride-hailing a profitable business. This is why they not just partner with companies developing autonomous driving tech stacks, but also consistently boost their self-driving programs with in-house development — like Uber with its Advanced Technologies Group.
Covid-19 hit the industry hard and ride volume has gone down by as much as 70% in recent days (in US cities). Ride-hailing companies now have to take a careful look at their cost structure. Lyft already had to lay off nearly 1,000 employees — 17% of its workforce. Likewise, Uber will reportedly lay off 3700 employees, or about 14% of its workforce. Reacting to the sudden stop in their cash flows, the companies are also reallocating budgets to rising businesses like meal, groceries and supply deliveries. Although most western ride-hailing companies were never really close to being profitable — even in times of a booming economy — their flexible cost structure as well as their cash reserves should give them enough flexibility to absorb the cash burn they are seeing right now. However, being in a kind of survival mode, management is doomed to focus on liquidity and day-to-day operations rather than on autonomous vehicles, which may only benefit their business years down the road. It remains to be seen what negative impact Covid-19 will have on ride-hailing services when the crisis is over (and whether customers will prefer virus-free car ownership) but it is highly likely that ride-hailing companies will not be able to keep the level of funding AV efforts as high as in past years.
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