Why Silicon Valley Should Take Over the Auto Industry

President Obama is trying to save General Motors (GM) and Chrysler as part of his plan to reindustrialize America. But this is missing the point in the same way that the Treasury and Federal Reserve are trying to recreate the shadow banking system. China has recognized that both the automotive and financial worlds have changed; what are we waiting for?

China’s banking system has largely avoided the complexity of financial innovation and sees no need to catch the history it missed. So too is China ready to jump past the high complexity of sophisticated internal combustion engines and zillion speed automatic transmissions. As far as I know Toyota’s (TM) hybrids and Lexus’ 8 speed auto-trans are leading or beating the Germans in the useless complexity wars. China is bold enough to say that with all-electric cars, complexity is reduced to such an extent that there are no longer any barriers to entry in the world automotive scene.

What will be differentiating factors between vehicles if China is right? Electric motors and batteries will become available off the shelf, and complex transmissions will no longer be needed. Most steering and suspension parts along with digital and analogue computerized controllers, will become more standardized and also be available off the shelf. Of course branding, quality of fit and finishes, and quickly adapting to the fashion of the moment will continue to be important. But the key differentiating factor will be each brand’s software controlling how the standardized parts feel in unison to the driver.

We are already seeing hints of this today. Most auto companies have shared the development of the new breed of 6+ speed auto-trans hardware. But from the driver’s perspective, some shift harsher or much too often. The difference is the software. Drivers would have no idea their cars share the same transmission hardware.

Now take it to the next level where there becomes virtually no hardware differentiation between vehicles. And the complexity becomes balancing power consumption and recovery, and battery life. Performance is now driven by the sophistication of the controlling software, thus software is the new horsepower.

Do we have to retain the assemblers for America to be dominant player in the world automotive industry? Is that not the same as saying Dell (DELL) contributes more to the American and world economies than Intel (INTC) and Microsoft (MSFT)? The answer to both questions is obvious. And that does not even consider the risk that assemblers such as GM and Dell face in managing changes in consumer preferences.

Readers could argue that auto parts makers have been squeezed hard by the assemblers, and many are already bankrupt. It can also be said the disk drive and memory manufacturers have lower margins than the box makers. But that misses the point that America does not have to focus on the commodity parts business in any industry. There is plenty of value adding profit to be made in the new auto electric motors, electronic controllers and most of all software.

Historically, America has been a nation of innovators, positioned in the most value adding parts of the food chain. We need to be less concerned about the low value adding assemblers and more focused on designing and building high value parts and very high value software. We do not need Ford (F), GM and Chrysler for America to make a lot of money and create a lot of high paying jobs in the auto industry.

Don’t be surprised to see “Intel Inside” on Chevy’s trunk lid.

Disclosure: Author is long INTC and MSFT.

Comments

[robinjoe:]

I designed a hybrid car 25 years ago and it was ridiculously simple. Hybrids should be LESS expensive not more. The reason they are more is because the car makers are trying to recoup some of their investment and utilize their expertise unnecessarily. The engine should not have a drive train. It should connect only to the generator and only operate in an on-off fashion. It should run at its peak SFC only, which only reacquires a ventury carburetor with no butterfly. When the battery is low it comes on. When charged it should be off. Simple and ridiculously cheap and ridiculously efficient. 100mpg no problem.

May 31 06:54 AM

[bluegreengirl:]

A few hudnred research and development jobs are not going to replace thousands of auto assembly jobs. A comparatively few people will get rich on their innovations and inflated sense of worth to the economy, while blue collar workers will continue to be marginalized by such people who look down on manual labor. Not everybody wants to sit at a desk all day or keep their noses in computer screens all day. That doesn't mean they have less value to the economy than the computer geeks.

May 31 10:53 AM

[Mad Hedge F...:]

great idea. If the money wqsted on GM were spent there we would have the answer to all our problems.

May 31 12:22 PM

[User 317038:]

Every industry has a point of punctuated equilibrium, often times not due to new technology but because of unsustainable environment to support it.

The migration of people from rural to urban megacomplexes around the world dictates rethinking how people move about. The role of a car in places such as Mumbai, Bejing, New York, London, Rio becomes less useful over time. Owning a car in such urban areas makes little sense if alternatives exist.

The idea of car-sharing like the zipcar or more efficient mass transportation models require that car manufacturers rethink the dynamics of their markets.

I foresee a situation where every driver has access to a non-fossil fuel local area mobile unit, perhaps electric or in the future, magnetic or thermoelectric power. These small "podcars" are the only vehicles allowed in an urban area, apart from vehicles that transport and distributed goods.

When you want to travel to other areas, you drive your podcar to a rental lot where you have access to another long range vehicle for that longer trip.

This model is less disruptive and more efficient than plowing money into rail or bus based transportation networks which are effective in peak periods but costly to run during offhours.

The challenge is to convince people that owning a car that costs a lot of money, which travels less than 25 miles a day on average and tends to sit unused 80 percent of the time, is not the right way to ensure freedom of movement.

I suspect that this experiment will find its birth in China and over sufficient time will transform their nascent auto industry into some mix of mentioned transportation models. Losing GM tomorrow is like losing the carriage industry when vehicles with engines replaced horse drawn carts. Things change and new ways appear.

Goodbye GM, Chrysler, OPEL, Fiat et al. It was a good run but now we have to "move on".

May 31 01:44 PM

[wondergirl:]

The way you are talking, there will be no middle class. If no one is working in factories making cars/car parts, (and paying taxes) how do you plan to pay for everything? The Military? Social Security? Healthcare?

Silicon Valley doesn't make anything in America. It is all made in China. And have you had to call Dell or MSN support lately?....you are talking to someone in India.

A few brainiacs in San Jose will have to pay for all the baby boomers' social security and the country's healthcare. All the blue collar workers won't be middle class, they will be part of the "poor class."

The battery companies (in Spain, China, Asia) that make the new car batteries will be very busy.....but not Americans.

What will all the people who work for OSHA do if we are all driving around in golf carts?

By the way, where is all this electricity going to come from? As we stop buying oil/gasoline, don't you think that electricity will be the new way to "gouge" Americans? You will have to decide, "do I want my refrigeratior run...or my furnace....or re-charge my car."

About social security....isn't it just a big Ponzi scheme??....it's already in big trouble, but with no one paying into it, how is anyone going to get anything out of it? If no one can collect, then what do you plan to do with the people? To the ovens?

Last, maybe your idea will solve the problem with the illegals. They will have to return to Mexico because no one will have any money (except a few thousand in Silicon Valley.....who will be replaced as soon as someone can figure out how to "outsource their jobs.)

Be careful what you wish for. You just might get it.

May 31 04:34 PM

[MrZack888:]

not everybody is going to be in IT. every nation needs people in manufacturing jobs. a nation cannot be great unless it physically produces products.

May 31 05:30 PM

[TradingHelp...:]

I agree with MrZack888, but you can't throw endless tax-payers money at fundamentally flawed businesses. GM needs to be a lot smaller, and financially agile than it is now, and if that can only be achieved through the bankruptcy process then so be it.

May 31 05:44 PM

[imnotadoofus:]

Buick, GMC and Chev will be the smaller, meaner and more efficient GM.

May 31 06:35 PM

[Danny Furman:]

Great article Mr. Steinberg, any chance you just watched "Who Killed the Electric Car?" People don't realize how advanced and efficient electric vehicle engineering is, I sure didn't until recently. Cost and energy savings would shortly compensate for the GDP hit by many multiples. The jig is up anyways, what contributions will our car companies make in their current state? The jobs have been lost, it's time to grow up.

May 31 08:48 PM

[weargue:]

Yes, silicon valley should, they did such a great job with dot com stocks, networking stocks and biotech stocks.

silicon valley is just a technical version of wall street excess.

May 31 08:58 PM

[Teutonic Kn...:]

Mr. Steinberg -

Yours is an interesting article. But I would have to take an exception of your main thesis. It won't work because if in the long run we outsourced all the bolts and nuts to India and China, the end result is that they will in the end, at critical times, exercise their leverage by simply refusing to ship those manufactured goods to us. We will then be in big trouble. Remember, we can't eat IT!

Some commenters raised good questions about the effects of free trade, and the related aspects of fair trade. While I would not indulge in this topic leaving it to the expert economists, I have to say I have a lot of respect for Dick Gephhardt when he voted no to the NAFTA. The politicians railroaded in so many so-called free trade agreements and we are seeing the impacts just now. I recall Dick pleaded passionately on the House Floor: "...I can't endorse this bill...because it is not RIGHT...and if it is not RIGHT...I won't do it...". History will prove that Dick had guts.

Remember, there is no such thing as a free lunch, as there is no such thing as FREE TRADE. The United States is a different country with its own institutions and standards of living. The same old evil came to my mind:- "Campaign Financing".

Teutonic

May 31 09:46 PM

[rick12345:]

I wonder if they'll produce a fully customisable Linux version? Nahh, it'll probably be another crappy Microsoft product.

Jun 01 04:31 AM

[Spook:]

I wrote a comment couple weeks ago, American automotive industries should borrow a page from high technology outsourcing business model, you can either;
- design the car and sub contract this where is can be built cheap,
- you can get the same car in different chassis from the supplier but with your brand, or
- you can have the supplier design the car to your specifications, and the suppliers also build it for you under your brand name.

Any of the above model will bring back the competitiveness and profitability of the automotive industries, lower cost and better margin.

Jun 01 09:05 AM

[Jose3543:]

I've heard this argument before as I work in the Valley and am around enough marketing blowhards that still think the whole world should be run by Valley types. Once upon a time there was a similar mentality on Wall Street and look where that took us?

The author argues that the model is similar to that of Dell and Microsoft. This just in: Dell is in Texas ans Microsoft is in Washington state. Yes, Intel is in the Valley. The one thing that you have to really remember is that the Valley is about constant innovation and .... churn and turnover. Intel and HP make up a very short list of lasting companies that were born and bred in the Valley. Otherwise, there's a paucity of those true institutions that I believe is necessary to run the new GM (or fill in the blank for a big 3 US car company). The Valley mentality works at the speed of Moore's Law -- not on a 5 year development and production cycle for a single car.

Jun 01 10:08 AM

[User 357705:]

If Americans are such innovators why did an American businessman have to go to Europe for 2.2m Euros to expand his research for his hybrid electric propulsion system for boats?

www.electricmarineprop...

Oh, and if the "Valley" is so great at innovation why did it nearly crash the economy not a decade ago?

Jun 01 01:10 PM

[Willy Walnuts:]

You want people to share?

No way, my friend. People want power. They want a car with a mirror finish that can go 180 mph, traverse a rocky 25% grade, tow a boat, and can seat 8... so they can sit alone in traffic on their way to work every day.

Guilt doesn't sell... imagined power does. Whose gonna be first in line to buy a Dodge Ram with a Fiat engine? Gimme a Hemi...

I've been seeing the Teslas on the road lately... 0-60 in 3.4 sec... no gas. They are manufactured and programmed in Silicon Valley.

Make the alternative better than the original, that's the key.

Silicon Valley used to be a manufacturing center. The problem with manufacturing in the US is with environmental restrictions more than the labor. The rest of the world needs to catch up to our environmental standards to level the playing field.

The big hurdle with all electric cars is how to charge one of these in the time it takes to fill up a tank of gas. Or, the batteries have to be small enough to swap out quickly and easily at a roadside service station.

On May 31 01:44 PM User 317038 wrote:

> Every industry has a point of punctuated equilibrium, often times
> not due to new technology but because of unsustainable environment
> to support it.
>
> The migration of people from rural to urban megacomplexes around
> the world dictates rethinking how people move about. The role of
> a car in places such as Mumbai, Bejing, New York, London, Rio becomes
> less useful over time. Owning a car in such urban areas makes little
> sense if alternatives exist.
>
> The idea of car-sharing like the zipcar or more efficient mass transportation
> models require that car manufacturers rethink the dynamics of their
> markets.
>
> I foresee a situation where every driver has access to a non-fossil
> fuel local area mobile unit, perhaps electric or in the future, magnetic
> or thermoelectric power. These small "podcars" are the only vehicles
> allowed in an urban area, apart from vehicles that transport and
> distributed goods.
>
> When you want to travel to other areas, you drive your podcar to
> a rental lot where you have access to another long range vehicle
> for that longer trip.
>
> This model is less disruptive and more efficient than plowing money
> into rail or bus based transportation networks which are effective
> in peak periods but costly to run during offhours.
>
> The challenge is to convince people that owning a car that costs
> a lot of money, which travels less than 25 miles a day on average
> and tends to sit unused 80 percent of the time, is not the right
> way to ensure freedom of movement.
>
> I suspect that this experiment will find its birth in China and over
> sufficient time will transform their nascent auto industry into some
> mix of mentioned transportation models. Losing GM tomorrow is like
> losing the carriage industry when vehicles with engines replaced
> horse drawn carts. Things change and new ways appear.
>
> Goodbye GM, Chrysler, OPEL, Fiat et al. It was a good run but now
> we have to "move on".

Jun 02 02:34 AM

[PhillyDan:]

Great insight into how to revive the auto industry. I agree with your vision of how we can use good ol' American innovation and common sense to transform our auto industry. You need to get the ear of someone in the Obama administration on the "Auto Task Force" to share your ideas and vision.

Jun 02 04:13 PM

[Henrietta:]

This is a wonderful idea! John Donohoe can be lured to Detroit at an enormous rate of remuneration to disruptively innovate there instead of at eBay. Then all the resulting unemployed can make a living on eBay. Win : win situation. Maybe we could ship Meg over there too, she can pull levers every quarter and schmooze the analysts.

Jun 04 06:04 PM