By Madison McKinley
Madison McKinley is an undergraduate student majoring in Marketing in the Eli Broad School of Business at Michigan State University.
Google Introduces Waymo
Google (SYMBOL: GOOG) has always been a progressive and innovative technology company. True to their purpose, Google decided to expand their technologies into the transportation industry in 2009 by being the first to develop a self-driving car. Google's aim was to create a completely self-driving car with no steering wheel, and to make those cars themselves.
The value to the consumer would be that mobility would be made easier and it would reduce the risk of accidents. Google's self-driving car project is now called Waymo, meaning a new way forward in mobility, and is under Google's parent company Alphabet.
Google led the way in the development of this huge opportunity. According to the Trefis Team, a contributor to Forbes (21 February 2016), "we can assume land transportation to be a $2 trillion market in the U.S. alone and affects a huge proportion of the economy."
Due to the opportunity and the market size, others have been aggressively pursuing it. These companies, like General Motors (SYMBOL: GM) and Uber (private), create a competitive threat because they are good at making the body and parts of the vehicle. Competitors in the self-driving car industry made it difficult for Google to find the right way to enter the market, causing Google to rethink its strategy.
The estimated growth of cars with self-driving features in them can be demonstrated in Figure 1 below, which shows promising returns in the self-driving car industry.
Source: Estimated from a chart published at BI Intelligence, 2015
The Future of Waymo
To be profitable, Google decided to focus more on the software and technology because that's what they know how to do best. Instead of manufacturing the cars themselves, they are collaborating with specific car companies such as Chrysler by Fiat Chrysler (SYMBOL: FCAU), Lexus by Toyota (ADR Symbol: TM), and Honda (ADR Symbol: HMC). This will reduce research costs and the money that would've been invested into facilities to make their own cars.
Instead, car companies will use the software and technology that Google has created inside of their vehicles. This is a similar strategy to what they did with the Android OS platform. By doing this, Google will also be able to use some of their other technologies in the car, like Google Assistant and Google Play movies. This allows Google to leverage their other technologies in the car industry as well as their self-driving capabilities. As William McKinney at Edgy Labs wrote (22 December 2016),
"With Google's Assistant being present in so many cars, the company could dominate the advertisement, app monetization, and audio streaming departments."
Google will be able to make a lot of money from the technology that is going inside of the cars, and save money by not making the cars themselves.
An example of how well they can produce technology is what they did with Lidar. Billions of dollars have been spent on Google's self-driving car project. The test cars cost about $150,000 in equipment. Lidar, a detection system, goes into making the sensors that are on top of the car which shoot out lasers to create a map of its surroundings.
Originally, it would cost $75,000 for a single unit of Lidar. Google was able to bring the cost down by 90%, making it about $7,500 for each sensor. They are now engineering Lidar in-house instead of outsourcing it. This price drop will help to reach their aspiration of making self-driving cars available to millions of people. This solidifies that Google's biggest strength is producing software.
Another reason that it is crucial for Google to focus on the software and not the making of the vehicle is shown below in Figure 2. Figure 2 shows that the profit margin of Alphabet is currently 20.46% and that the profit margin of General Motors is currently 4.18%. If Google tried to get into the automotive industry, a profit margin closer to General Motors could be expected.
By staying true to the companies capabilities and focusing on the software, Google is expected to maintain a profit margin of close to 20.46%. This creates a better return, which is closer to what the company is accustomed to. Instead of making money on building the car itself, Google can now make money in apps and advertisements within the car as a result of the implementation of their software, which should reflect a much more attractive profit margin.
Source: Profit Margin Data from YCharts, 2016
By doing what Google does best and partnering with carmakers who do what they do best, Google is able to enter the market with a greater chance of being profitable and providing a greater return.
If Google had continued down the path of making a whole vehicle alone, it would have been a bad financial decision because it is not their skill set. By following the new strategy and providing the tools inside the car and the self-driving technology, they are more likely to be successful in this market.
Alphabet Profit Margin (Quarterly). (2016, December 31). In YCharts. Retrieved February 9, 2017, from https://ycharts.com/companies/GOOG/profit_margin
BI Intelligence. (2016, June 15). 10 million self-driving cars will be on the road by 2020. In Business Insider. Retrieved February 9, 2017, from http://www.businessinsider.com/report-10-million-self-driving-cars-will-be-on-the-road-by-2020-2015-5-6
Davies, A. (2016, December 13). Google's Self-Driving Car Company Is Finally Here. In Wired. Retrieved February 9, 2017, from https://www.wired.com/2016/12/google-self-driving-car-waymo/
General Motors Profit Margin (Quarterly). (2016, December 31). In YCharts. Retrieved February 9, 2017, from https://ycharts.com/companies/GM/profit_margin
McKinney, W. (2016, December 22). Google's Secret Strategy for Self-Driving Vehicle Research. In Edgy Labs. Retrieved February 9, 2017, from https://edgylabs.com/2016/12/22/google-self-driving-vehicle-strategy/
Muoio, D. (2017, January 8). Google just made a big move to bring down the cost of self-driving cars. In Business Insider. Retrieved February 9, 2017, from http://www.businessinsider.com/googles-waymo-reduces-lidar-cost-90-in-effort-to-scale-self-driving-cars-2017-1
Priddle, A., & Woodyard, C. (2012, June 14). Google discloses costs of its driverless car tests. In USA Today. Retrieved February 9, 2017, from http://content.usatoday.com/communities/driveon/post/2012/06/google-discloses-costs-of-its-driverless-car-tests/1#.WJymX_krI2x
Trefis Team. (2016, September 21). Self-Driving Cars, Part 2: Size of Opportunity Involved. In Forbes. Retrieved February 9, 2017, from http://www.forbes.com/sites/greatspeculations/2016/09/21/self-driving-cars-part-2-size-of-opportunity-involved/#54513011d085
Waymo. (2017). In Waymo. Retrieved from https://waymo.com/