Who’s Shaping Who? Tech + Automotive in the 2020s

In a new column for Forbes, PVMI Director John Paul MacDuffie will scrutinize vehicle and mobility innovations with a global lens, from the perspective he has gained studying the automotive industry for more than three decades. His debut piece covered Apple’s moves in vehicle development, Tesla’s business model, the dynamics between tech and automotive companies, and more. Follow MacDuffie’s Forbes column here. This article originally appeared here.

Guess you believed the world
Played by your rules
Here stands an experienced firm
Nobody’s fool
– in tribute to “Who’s Zoomin’ Who?” by Aretha Franklin (1985)

For my debut column in Forbes, I want to address the relationships between technology and automotive companies that are a daily feature of the news about the future of mobility. What does it mean when two such different industries interact, compete, and work together with increasing frequency and intensity, motivated more by necessity than preference?

My perspective is that of a scholar who has spent 30+ years studying the global automotive industry, often in comparison with the IT industry. I hope to offer a useful counterpoint to the prevailing approach among technology strategy scholars and analysts — namely, assuming that the transformations we have seen in the digital realm (whether IT hardware or software services or platforms) will repeat themselves in industry after industry, following the same “disruption” playbook.

Assuming that all competitive situations — in all industries, worldwide — will be governed by this playbook is wrong-headed, in my view. Hence my question “who’s shaping who?” — and the stanza borrowed from Aretha’s great song. Tech is shaping automotive and automotive is shaping tech — but to what end, to what extent, and with what consequences?

Could Apple vehicle development lead to some form of partnership with Nissan?

To start, let’s plunge into Apple’s recent reveals about its commitment to developing a vehicle (inevitably “AppleCar” or “iCar”) and its rumored talks with large automakers (aka Original Equipment Manufacturers or OEMs) ranging from Hyundai/Kia to Nissan. Is some automaker destined to become the Foxconn contract manufacturer that simply executes an Apple design under tight control and with low margins? Heightening the interest in this question is the recent announcement that Foxconn has itself entered into an agreement with electric sports car startup Fisker to manufacture its newest design, potentially in the U.S. Will Foxconn itself displace the auto OEMs?

I predict not. Automotive manufacturing, including system integration of a complex design and coordination of a global supply chain, is incredibly difficult, capital-intensive, and relatively low-margin. Tesla, whose market valuation now vastly exceeds even the largest auto OEMs, has learned this the hard way – by mastering all the capabilities needed to become an OEM itself. Tesla, taken as a tech disruptor, has certainly shaped all future competition for electric vehicles (EVs). But learning to be an automaker has also shaped Tesla profoundly. If Tesla had not learned to become an OEM — and had followed the digital playbook that many predicted (and which Fisker and Foxconn say they will follow) — it would not have achieved its current high valuations.

While Tesla mostly went it alone (albeit after hiring automotive talent from around the world), most tech companies wanting a big role in mobility will not become OEMs. It’s a long, expensive, and difficult path, with profits far off in the future. Alliances between tech and automotive — formal and informal, short-term and long-term, and potentially taking the form of M&A — is a more likely path to generating value as these two industries shape each other en route to a new mobility future.

Perhaps tech and automotive will start by collaborating and complementing each other’s capabilities but then one or the other will move to displace their partner, turning complementor “friends” into rivals. After all, we’ve seen Netflix, initially reliant on the stock of content licensed by movie and TV studios, become a masterful generator of original content — and Amazon, which for years relied on USPS and UPS to deliver its packages, is increasingly doing package delivery on its own.

I agree that the dynamics between tech and automotive companies will be fraught and fluid; alliances will shift; and each may launch new products and services independently that undermine earlier collaborations. This is in the nature of competition in the age of digital platforms where software is more important than hardware and control of data is a key source of power, differentiation, and value generation.

But easy digital control of the physical realm is far from guaranteed. Indeed, deep knowledge and mastery of the physical realm is vital for digital controls to be effective and safe. And nowhere is that more true than mobility.

A fundamental fact about the automobile is that it is a large, fast-moving object that operates entirely in public space and can do immense damage via accidents that kill and injure people and destroy property. Not to mention emissions that cause air pollution and affect climate change, among other externalities that affect human society negatively.

Even a firm like Apple that excels at hardware/software integration has not dealt with the vast range of operating conditions and strict rules that apply to automobiles.

As a result, the automobile has been the focus of societal rules — laws and regulations — since early in its history. Each country whose level of motorization (automobiles per capita) rises with economic development enacts such laws and regulations. Automotive OEMs are responsible, under these rules, for ensuring a certain level of safety and quality (which they largely self-validate) and they are legally liable when failures or violations occur.

Being the guarantor that the automobile reaches societally-determined levels of safety, quality, emissions, fuel economy, and so forth is fundamental to the OEM’s system integration role. Designing vehicles to provide what consumers want and need in functional performance as well as emotional appeal via “look and feel” — and then the added task of meeting regulatory requirements — is a high-wire act. For OEMs, designing and manufacturing today’s vehicles is akin to solving millions of simultaneous equations involving complex trade-offs.

OEMs bring their knowledge and capabilities from mastering this central role to the table when discussions between tech and automotive companies take place. Not all the power will reside with the rich tech firms whose digital capabilities do not extend to the physical realm. Even a firm like Apple that excels at hardware/software integration has not dealt with the vast range of operating conditions and strict rules that apply to automobiles. What is more, as noted, there are few incentives for a firm like Apple to follow Tesla’s lead and learn to become an OEM on its own. Hence Apple’s search for an OEM partner – one that is clearly taking some time.

In future columns, I will explore more deeply the reasons why Apple is talking with automotive OEMs and why the division of labor between tech and automotive is tricky to sort out. I’ll also address why contract manufacturing, so prevalent for electronics, has not caught on to any significant degree for the auto industry — and very likely won’t — notwithstanding the recent Fisker-Foxconn announcement.

I’ll highlight the different strategy chosen by Waymo, the mobility spinoff from Google, which has already said it will only provide the software “driver” (let’s call it Vehicle OS) installed in the physical vehicles made by auto OEMs rather than doing manufacturing itself. Indeed, if the prospect of working together is too difficult for Apple and various auto OEMs to overcome, I see Apple being more likely to step back from having its own iCar in favor of competing in the same Vehicle OS space as Waymo — echoing the duopolistic rivalry between iOS and Android.

To return to my opening question “who’s shaping who?,” expect to hear from me all the ways that tech and automotive firms will mutually shape each other. The world of future mobility won’t play strictly by the rules of the digital playbook. The physics, chemistry, and biology of the weighty physical world will insist on being paid heed. And while “digital disruption” will be one element in the competitive dynamics, I anticipate that the automotive firms, rather than being obsolete incumbents consigned to the dustbin of history, won’t be fools but will be able to walk the tightrope and assert their continued relevance and centrality to that future.