Category Archives: Developments

Why Volvo Is My New Favorite Automaker

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Courtesy of volvofinancialservices.com

As I sit here owning a much-beloved VW Touareg and have great respect for all of Bavaria’s expertise in constructing some of the most fantastic cars of all time, this damn company in Scandinavia keeps peaking my interest. It all started the moment I saw the new XC90, and ever since, I’ve been closely following what this company is up to because although they may not have the pomp and fanfare of Tesla, Audi, and others, these sheepish Swedes certainly have a lot going on behind the curtain.

Reason 1: They’re arguably as far if not farther along the path towards an actual autonomous vehicle. By ‘actual’, I mean they actually have a realistic strategy for testing rather than just buying a vacant airstrip and congratulating themselves when the car doesn’t fly off the 20-lane-wide piece of concrete. They’re piloting the cars with actual families around Sweden, which will show Volvo how the cars might actually be used by normal people. Smart.

Reason 2: Their slim but potent product portfolio is the dream of any established automaker, or really even Tesla for that matter. They started with the XC90, the same car that went through an almost-unheard-of 2 full product cycles and still managed to keep sales up. (2 product cycles equals around 14 years of production. The XC90 went into production in 2001 and went virtually unchanged until 2015.) That’s called good design, and if the XC90 and S90 flagships are any indications, Volvo still has an uncanny knack for designing cars so brilliantly that they rarely need updating. Also, because the cars are so tailored to what their customers want, they don’t need to make a huge array of products to satisfy them. Subaru is the poster child for this, and also the poster child for how to make money selling cars for double digit profits.

Reason 3: They accomplished all of this under some of the most outrageous corporate leadership of all time. As alluded to in a previous post, Ford singlehandedly drove a number of brands to the brink of collapse, Volvo included. (Jaguar-Land Rover and Aston Martin are both still recovering.) In 2010, when Ford mercifully handed the abused company over to Geely (a Chinese auto company), Volvo was living on the fumes of the XC90 and their station wagons that had long gone out of style. In comes Hakan Samuelsson, a Scania and MAN truck industry exec, and a powerful team backed by a powerful Geely has become a force to be reckoned with.

Reason 4: Due to their familial ties to China, this positions Volvo for an extremely lucrative future. Few carmakers are having luck tapping into that market, for both cultural and political reasons. On the cultural side, wealthier Chinese are not as flamboyant as they once were. This is good news for the stealthy luxury of Volvos. Politically, being owned (at the moment) by a Chinese-based firm provides huge advantages in being able to operate and sell cars profitably in the heavily-regulated country.

Finally, the real reason I finally dedicated a personal ode to Volvo is that there have been clear signs pointing to an impending IPO in the near future. The company has issued preference shares to institutional investors, has issued quarterly reports for several quarters, and is currently seeking to raise additional capital. This is fantastic news for a well-run company ahead of the game in terms of technology and design, and well positioned to be the Subaru of the mid-to-upper end market for years to come.

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De-Clawed Digital Disruptors: Why Samsung’s Acquisition of Harman is a Relief to Carmakers

This article comes on the heels of Samsung’s disclosure of its acquisition of Harman International Industries, referenced here.

The automotive OEMs’ business model, at its core, revolves around simply selling physical cars to people every 7-10 years, and hasn’t changed (or needed to change) since the car was originally invented. Enter the smartphone in the late 2000s, and within a few years the most important features on every car shopper’s must-have list involved some type of smartphone connectivity, which was about the time when carmakers started getting nervous. If what people care most about in a car (besides the basic standard that it moves when told to) is no longer what the carmaker controls or owns the development of, then theoretically it should be fairly simple for an Apple or Google to produce their own smartphone-centered cars, or at least reduce Ford and GM to simple low-margin hardware suppliers.

So why hasn’t the sky fallen on the OEMs yet?  If the latest move by Samsung, another one of the big smartphone players, offers any indication, there’s hope for them yet. Even within the last year, there were rumors swirling of Apple developing a secretive Titan connected car project that was to spell doom for the mainstays, while Google’s autonomous teletubby cars garnered tons of media buzz as they spun around the streets of Palo Alto. Today, however, Google has decided to pursue a more modest partnership strategy with its autonomous driving software, project Titan has been shuttered indefinitely, and now Samsung is entering the fray with a more-muted strategy in line with that of its digital brothers.

If you’re a Mary Barra or a Carlos Ghosn, this is at least a temporary sigh of relief. It’s another example of a so-called ‘digital disruptor’ finding it harder than anticipated to adapt its software/service business model to a hardware-heavy industry, opting instead for a less-risky, less-predatory entrance. It also confirms at least in the short-run that the creation of the automobile itself remains securely in automakers’ hands, while the connectivity and software aspects of the car will remain a hodgepodge effort of Detroit-Silicon Valley partnerships, internal development, and a plethora of tier 1 suppliers and startups.

At this point in the connected car race, both carmakers and external players find themselves sitting across from the same hairy dilemma: how do we leverage these new connectivity capabilities between the car and its surrounding devices to bring value to drivers? So far, they’ve come up with mainly three unsatisfying answers: car-sharing services, telematics/informatics services, and V2X (vehicle-to-something) communication. As all parties involved have found, not even a combination of these business models yields the fruit they had expected yet.

Perhaps the real meaty value of the connected car lies in its unique role as the central device that physically connects us to our world, much in the same way that our smartphones are the focal points of our digital lives.

Tesla and SolarCity Set Course for Common Energy Platform

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Photo from csddaily.wordpress.com

 

The Tesla and SolarCity merger is not just a smart business bundle of achieving one-time corporate synergies. It’s arguably the beginning of a future where regardless of how the energy is gathered or utilized, it can be shared.

 

This may seem obvious or like not a big deal, but when we start talking about the future of modular transportation where a group of “modules” (cars) together can power a train more efficiently and with less traffic, these cars need to be able to pool their energy repositories together to create one large pool for the train of cars to pull from.

Short side note: this is where fossil fuel vehicles hit a bigger roadblock than a herd of angry Greenpeace activists. Fossil fuels produce energy, but they have to be turned into electricity via combustion prior to being able to be shared. I can’t pour gas into my iPhone and expect it to work, ever again.

We take for granted all the things that we simply plug into the wall. This is how the future of transportation needs to work from the standpoint of universality of the energy being used, but we need to go a step further. Being able to charge your iPhone and iPad from your computer’s energy source is fantastically useful, but it doesn’t make the USE of that energy any more efficient – if anything it makes it less because my iPhone dies every fourth email whereas my computer can handle a few hundred before dying.

With transportation, though, there are real benefits from being able to allocate energy correctly, and only if the energy can be easily allocated in different ways can these tangible benefits materialize.

For example, say there are two 18-wheel trucks, one directly behind the other, driving on an interstate for several hundred miles. Both are carrying their own payloads, and both are using their own engine power to move their respective payloads across the country. However, the guy driving behind the first truck is expending much less energy than his friend in front because he doesn’t have to deal with as much headwind hitting the front of his truck. This is a fairly common occurrence among truckers, and it’s called drafting. The problem with drafting, is that someone is always having to take the brunt of the wind, while the others simply coast behind.

But what if there were a way in a line of interstate trucks for the trailing trucks to push energy from their engines forward to the trucks bearing the brunt of the headwind? Then you’d have the energy where it’s needed most and where the other trucks can simply coast along. It’s a similar thought process as a train on train tracks. Each car does not individually have its own power supply, but rather is attached to the power in the front.

Granted, trucks on a highway are not going to connect directly to reach other necessarily, but the value of having the front truck bear the brunt of the headwinds while everyone that’s trailing pushes some of their own energy forward makes everyone more efficient and channels energy directly to where it’s needed.
That same hallmark of directing energy where it’s most needed is apparent in the Tesla/SolarCity deal. The solar system stores the energy in the battery packs, which then can be used where it’s most needed. Whether that’s charging the person’s car to go somewhere or heating their home or profiting from selling the energy in excess back to the grid, the person’s energy ecosystem is allocating energy where it’s most needed and where it’s most efficient.

In developing a common energy platform where energy can be targeted to where it’s most needed and most efficient, the Tesla/SolarCity deal is way more than just good old fashioned corporate synergies.

Car Batteries Are Still Toddlers, Don’t Stunt Their Growth

I recently finished The Powerhouse by Steve Levine, which tells the tale of the lithium ion battery and its evolving application to electric cars. What I was somewhat shocked to learn was that although lithium ion technology has existed for decades, the lithium ion batteries that are going into the Teslas and Volts was developed in my lifetime, and for the newer generation models, within the last five years. (I had a similar reaction when I learned that the Internet was developed just a couple years before I was born, #millennial.) 

What also occurred to me is that we’re a long ways off from creating the ultimate battery. In much the same way engines have continually improved over the last 100 years, so too will a better battery come to fruition every couple years. 

Having more than a passing interest in batteries yet no technical background to speak of, it seems to me that there are a couple standout issues with the current lithium ion batteries that will keep scientists scratching their heads to fix:  recharge time, voltage fade, and capacity. 

None of these are easy things to fix (apparently), and it seems that the current trajectory is incremental improvements on the existing lithium ion technology – a few more cycles before voltage starts to fade, a little more capacity, a little faster recharge time. Sound familiar? It’s the same place combustion engines are at – a little more of this, a little better that. But engines have had the luxury to be refined and perfected over more than ten decades. Lithium ion and car batteries in general are still in their first decade. 

If we’re hitting this incremental-only ceiling this early in the game, it begs the question if we’re looking in the right places for the next breakthrough in battery technology. And if I were the person in charge of setting the course towards the next battery innovation, I’d look for types of batteries that solve the issues that lithium ion seems to be stuck with. 

My first stop would be to flow cell batteries – essentially batteries that are recharged by draining the spent liquid and refilling it with new liquid. To the consumer, essentially the same time and process of refilling a combustion engine. Oh and they don’t degrade over time. There are several types of flow cell batteries, but the only one that gets talked about is the hydrogen fuel cell, which has its own issues. 

What looks most promising from my non-technical end of the table is the vanadium redox flow cell battery. Like lithium ion, the modern form of the battery was discovered decades ago, but has not really been improved upon since. The issue with these batteries currently is that you’d need a whole bunch of electrolyte to produce enough energy to power the car. So much so that it would be impractical to fit into a car. But there is progress on this end, though slow due to so little interest. The Pacific Northwest National Laboratory has created the closest thing to a plausible flow cell battery, but at the moment they don’t talk about it having automotive applications. 

In addition, organic flow cell batteries are emerging as potentially the safest and most sustainable type of flow cell battery. This stuff has only been thought up in the last seven years. The advantage over inorganic redox batteries is a huge reduction in cost and more environmentally-friendly materials. Again the PNNL is about the only ones working on this, though the California-based ARPA-E has also looked into it, again from stationary energy storage perspectives. 

While I’m not an expert in battery chemistry, it seems that people are so enamored with lithium ion that we haven’t given credence to other battery technologies that may be able to solve a lot of the pain points that exist with lithium ion. Flow cell and organic flow cells are just a couple ideas, and may absolutely not be feasible, but I think it’d behoove the entire energy and electric vehicle industries if we didn’t tell the current batteries they’re great just the way they are – talk about a recipe for parental disaster. 

New Car Dealerships Are Starting To Write Their Own History

The iconic American car dealership, with its glistening lots of new cars and flashy showroom halls on expensive real estate, is one of the few remaining relics of a pre-information era. The idea of a dealership originally came about as a way for unknowledgeable consumers to feel comfortable about purchasing such an expensive item – one they knew little about and relied on the reputation of the dealer to deliver a quality product. 

Dealers have made their living through being able to charge consumers a price without the buyer knowing if he was paying more than someone in another town; in other words, relying on information asymmetry. They also relied on their reputation as a dealer of quality products to retain customer loyalty and expand market share. TrueCar, AutoTrader, and the Internet in general has done a decent job at slashing nationwide pricing information asymmetry, leaving margins for dealers shrinking to a measly 2% in 2014 (NADA DATA 2014 Report). What’s more, consumers don’t associate reliability of a new car to a specific dealer, but rather to the manufacturer (used cars are a slightly different story, so I’ll stick to new cars for now.)

So what value do new car dealerships add to the automotive buyer’s purchasing process and overall product satisfaction? I’m not sure. And if the latest investments by CarMax and AutoNation, the nation’s two biggest dealer networks, are any indication, the dealers themselves can’t come up with an answer either. Which is why AutoNation specifically has invested over $300 million in a new online selling platform that boasts the fact that your time at the dealership will be limited to 30 minutes. Mike Jackson, AutoNation’s president, almost brags at the fact that this platform will solve the one part of the automotive customer life cycle that everyone collectively hates – the dealership experience. 

If the president of AutoNation sees that the best long-term solution to customers hating dealerships is to reduce the time customers spend at dealerships, then the obvious winner of this strategic plan is the dealer who eventually gets rid of the dealership experience altogether. Not a particularly phenomenal long-term plan.

If you think it a bit premature to call for the death of dealerships, that people still value “kicking the tires” and “looking the dealer straight in the eye and shaking his hand” and test driving 10 different cars before finding the perfect one, you either haven’t bought a car in the last 3-5 years and/or your generation’s letter comes before Y. Customers purchasing cars today do most of the research online before they show up to the dealership, and once there, they test drive an average of 1.6 cars before purchasing. Often, the car that customers test drive is not the eventual one they purchase, especially for special factory and pre-ordered cars, and manufacturers are including more all-inclusive maintenance warranties on new cars that ensure the car is quality.

To bring this seemingly far-fetched downfall of American dealerships a bit closer to home, consider Johan de Nysschen’s (head of Cadillac) latest move to convert 400 of the smallest Caddy dealerships into purely virtual showrooms that provide home test drives and delivery services while drawing inventory from existing regional distribution hubs. Customers will be able to conduct almost the entire purchase process online, from selection to purchase and financing, and then have their new car delivered to their home without leaving it.

Does the dealership of today potentially have any role in the car-buying process of tomorrow? Probably, and for the next 5-10 years, the dealership of today will probably remain unscathed. But as more selling moves online and the value that dealers used to provide to customers no longer is appreciated, there will eventually be many fewer dealers operating more as distribution centers than salesmen. The biggest players, like AutoNation and CarMax, will probably be the ones tapped to run these distribution centers, leaving the thousands of smaller dealers to pack up and head elsewhere. But at the margins that dealers are getting today, would being bought out be such a bad thing?

This article comes on the heels of the following article appearing in Automotive News: http://www.autonews.com/article/20160222/OEM/302229958/cadillacs-de-nysschen-pitches-virtual-stores.

Upping The Ante: Why Toyota’s Push for ‘Intelligent’ Over ‘Autonomous’ Cars Just Might Work

Last week, the New York Times’ John Markoff explored the new investment by Toyota in intelligent car research through partnerships with Stanford and MIT lab researchers. See the full story here.

My first blog post ever was written about how Toyota firmly believed in the driver having the final say in a car’s decisionmaking, a stark divergence from the autonomous crowd that started with Google and now Apple and has bandwaggoned even the most performance-leaning carmakers.

Toyota is thinking much differently, and as the world’s largest automaker, people should be taking notice when the frontrunner goes against the grain of the rest of the industry on such a pivotal area of the business. Toyota has a history of making bold decisions that end up confounding industry experts and other companies. The most prevalent being the Toyota Prius legacy that launched the hybrid drivetrain revolution by bringing eco-friendly cars within reach of the middle class. More recently, Toyota has rebuffed Apple and Google’s intrusion into the car by heavily investing in their own user interface and infotainment centers rather than concede defeat. And the next frontier they will do battle is in the autonomous car age.

How Mr. Marchionne Can Be So Right And Yet So Wrong about the State of the Auto Industry

I can only dream of being remotely close to the caliber of businessman and leader that Sergio Marchionne has been to FCA, but to me, I find his constant condemnation of the automotive industry’s state of affairs annoyingly obvious, and his solution more than a bit misdirected.

In short, Marchionne believes that there are too many companies producing too many similar-enough products for it to not make sense to consolidate, citing the industry’s poor average return on invested capital in relation to other industries.

“Consolidate!” he screams to anyone who will listen. The only way to achieve better margins is through combining more existing brands into conglomerates, like VW has done with their 13 brands. For each brand to have its own manufacturing and supply chain operation is wasteful and costly. Fair enough, and any business class would tell you that’s usually a safe bet in achieving better economies of scale and reducing manufacturing overhead and downtime. But we aren’t talking about what the class would tell you, we’re talking about an industry and a product that in many ways is as cultural and emotional as it is mechanical. And economies of scale and ROIC are merely two tools to assess an industry. Granted, they’re super important ones, but they still only tell a portion of the story.

Which brings me to my next point: people have agendas, and when you figure out why people are choosing to say the things they are, the picture is usually less opaque. Despite how right Marchionne is on the state of the industry, any business undergrad could have (and has) pointed out the same low ROIC of the industry as rationale for a lot of things, consolidation included. It’s not rocket science, and he’s not the first person to think something needs to change in the industry. Not to mention the similar industries also plagued by low ROIC – airlines and industrial equipment typically have lower returns on average than most carmakers.

While creating a splash in headlines, Marchionne’s intended audience is pretty much any carmaker willing to talk about consolidating with FCA, as well as any activist investor itching to get more out of their auto stock holdings. As background, Marchionne joined Fiat in the early 2000s, and returned Fiat to profitability while simultaneously completing the merger with Chrysler in the depths of the recession to emerge as a top ten global auto player. He’s technically a law graduate, but he’s a finance guy, and that’s the lens through which he views the industry. And he’s not done yet. He still sees his empire as not quite big enough (see Ferdinand Piech’s wiki page). To get to be bigger, he sees another mega-merger on the horizon. And time is running out – he gives up the CEO chair in 2018. Hence the immediacy in his tone.

“Why GM?” is the first question I will ask Marchionne if ever I get the chance. (Marchionne’s golden goose in his consolidation rant and search for a mega-merger partner is General Motors. He’s been courting them harder than a senior in high school who forgot that prom is tomorrow and there’s only one not-asked girl still available.) It doesn’t matter how many beautiful reports and facts you have about the gains and synergies that could be realized with the hypothetical merger of FCA and GM. God himself could bless the move and it still wouldn’t happen, for a reason more obvious than the blatant fact that the automotive industry has poor returns – GM is still healing from the last time someone thought it’d be a good idea to have a lot of brands under one roof.

While Mr. Marchionne was busy bailing out Chrysler, the U.S. government was busy bailing out GM. You know how GM got themselves back together again? They got rid of Pontiac and Oldsmobile and Hummer and Saab and Saturn. You know what Ford did? They sold Jaguar, Land Rover, Aston Martin, and Volvo. When crisis hit, the answer was to split brands up, not pull them together, except in Chrysler’s special case. Yes, economies of scale go down in some instances, but often times they’re more than made up for with a focused product line free of beareaucratic conglomerates trying to “create synergies” and “share knowledge capital” across brands. And if you look at the success of GM’s slimmer portfolio as well as Jaguar-Land Rover, Aston Martin and Volvo compared with Chrysler’s performance under the FCA umbrella, it’s not a stretch of an assertion.

Mr. Marchionne’s second point in his consolidation pitch is his view that customers no longer care about what platform and engine is in their car, and he believes that cars could all be built on shared platforms and engines as a result of consolidating carmakers. No one in the industry would argue, and guess what: it already happens on a fairly regular basis.

But the problem for GM back in 2008 was that they were so obsessed with synergies and sharing parts between the brands that customers forgot what differentiated the brands at all. This isn’t a big issue when the economy is running full-steam, except when it isn’t. When the economy contracts, customers put their money with the brands and products that deliver the most value to them, and if you are caught with a host a homogeneous cars within undifferentiated brands that are trying to be everything to everyone, customers will take their business to someone who understands them better. GM learned that the hard way. VW does the conglomerate thing much better – they share platforms and tech but the brands are wholly distinct and follow an obvious pecking order. This works for them. But that is by no means saying they’re a case study for why FCAGM should exist or any other amalgamation of acronyms.

Final point: saying everyone should consolidate is painting the brush way too broadly. Are there some OEMs that could use it? Sure. Could others be hindered by it? Of course. VW has done well with 13 brands, but so has Toyota and Ford and Subaru, who combined have fewer brands than FCA, but sell way more cars at a better margin. Subaru is the poster child for customer targeting, and it’s worth mentioning that Subaru has the highest margins of all the automotive companies.

So yes, Mr. Marchionne is right that the automotive industry could be allocating capital and resources better, but consolidation is just one way to go, and plenty of carmakers have already tried and gotten burned by it. And let’s not forget that although FCA has done well since the recession, many other global players are performing much better, leaving many to wonder why they would want a less-than-stellar company to tie up with. Jeep and Dodge have basically kept FCA afloat due to their intense focus on the specific traits of their customers, Chrysler and Fiat and Alfa Romeo have barely moved anywhere, and the only reason Maserati is doing well is because they made a cheaper version. Let’s check the log(s) in FCA’s eye before we start talking about the stick in everyone else’s.