Silicon Valley poised to be hotbed of automotive innovation; Tesla Motors is at the vanguard

Many of the most important, impressive car brands today come out of Germany. In the luxury car segment, Mercedes, BMW, and Audi have ruled the roost. Looking back, Japanese carmakers (Toyota, Nissan, and Honda) also gained in popularity back in the 70's after the oil crisis. And, before that, in its muscle car heyday, the American auto industry was a worldwide force under the Big Three (GM, Ford, and Chrysler) in Detroit. News flash: things are changing. It appears the tide could shifting back to America again, but, the new "locale" for automotive innovation isn't Detroit. An intriguing piece in Capital Market Laboratories* (CML) touches on a seismic shift repositioning the industry to California's tech stronghold, Silicon Valley. Furthermore, the business opportunity in the automotive sector could be absolutely massive in the coming years.

Twitter: @IgorBeuker 

CML explains, "The tiny, two seater golf-cart-like electric cars we remember cringing at over a decade ago are gone. Those over-hyped, early prototypes fell into the 'chasm'. Now version 2.0 of the future of the automotive industry has spanned the divide into the mainstream. Everything is about to change... The scale of the coming transformation can only be compared to the most revolutionary technologies of the modern era: the combustion engine, the plane, the phone, the computer, the internet. And the stakes are huge." 

How huge? The article notes: "The entire automotive market is up for grabs, and it doesn’t stop there. In the US alone, the total sales of vehicles in 2014 was $1.1 trillion dollars (source: thedetroitbureau.com). That doesn’t include Europe, China, or Japan. Put in perspective:

“New vehicle revenue alone will surpass the value of new single family homes in the U.S. nearly three times.” - Truecar

CML elaborates: "Already in 2012 the [plug-in] electric vehicle market alone exceeded $80 billion and is projected to hit greater than $270 billion by 2019 [see graph below]... The biggest and most successful technology companies in the world are pouring resources into this field... To understand the trend, we must understand the players."

Source: CML via Statista

So which Silicon Valley tech companies are taking an interest in the automotive space? "Apple is sitting atop the technology throne [with]... $53 billion in yearly profits - more than twice as much as any other company. More than Google, Microsoft, and Intel put together... [and] the rate at which Apple is investing is accelerating [most recently to] $2.4 billion dollars per quarter. Annualized, Apple will be investing more into R&D than the entire economic output of 60 different countries."

Source: CML

"The Apple Car effort, known as Project Titan, now employs over a thousand engineers, according to multiple sources. They’ve poached so many leading engineers from so many companies, that firms like battery maker A123 are suing Apple. And that’s just the beginning. Forbes reports that CEO Tim Cook toured BMW's i3 electric vehicle floor, and CNN tells us that a van filled with sensors has been driving around San Francisco suburbs is leased to Apple. More still, Apple has over 2100 patents granted since 2010 with the word 'car' in them."

Above: design concept rendering (Source: CML)

The other massive Silicon Valley company getting into this space is: "Google [which has] grasped the future of the industry early on, beginning their self-driving efforts in 2009. The team has ramped up to 270 engineers, and CNBC reports another 40 job postings for its Autonomous Vehicle project. The Google self-driving cars have clocked more than 1.1 million miles since 2009 on 9 different prototype vehicles they’ve built, as well as in their modified Lexus SUVs... Google’s cars aren’t just self-driving, they’re self-learning."

Above: Google car learning from the behavior of trick-or-treaters wearing costumes that could obscure the fact that a person is hidden within. (Source: CML via Road and Track)

Yet the established automotive player in Silicon Valley remains: "Tesla [which has] has been absolutely pioneering in the field of electric vehicles, brilliantly defining its brand through releasing an elite sports car [the Tesla Roadster] as their introduction to the world... Then it went further, demonstrating with the Model S and X that the company can credibly scale up to be a [potentially] huge player in the global auto industry."

Above: Tesla Model S (Source: Tesla Motors)

Furthermore, CML elaborates, "Tesla’s success goes far beyond its high performance electric power and control systems. Tesla has also simultaneously pioneered in industrial fabrication techniques and autonomous driving capabilities. Their 'gigafactory' has the potential to not only serve Tesla’s growing demand for lithium-ion batteries, but also to be a major source for the entire electric car and off-the-grid power industries."

Above: Tesla Gigafactory (Source: CML)

But how is this Silicon Valley company really at a unique advantage? "Tesla is also a leader in the critical self-driving segment, having already released 'auto pilot' features for its Model S. Further, it is making advances in the critical machine learning technology trend, making use of sensor data from its entire Model S fleet. All told, Tesla is making major advances in electric vehicle technology, power storage, advanced fabrication, autonomous driving, and machine learning. If pre-orders of the coming Model 3 are strong, Tesla’s valuation could rocket upward, and for good reason."

Above: Tesla Model S (Source: Tesla Motors)

And, as the lead graphic in this piece suggests, Silicon Valley's Uber may also become a major player in this space. Yet, rumors have swirled regarding Tesla Motors getting into the car sharing space that Uber currently dominates. We'll see. In any event, it's clear that the locus of automotive innovation is moving (quickly) to Silicon Valley. And as McKinsey & Company noted in its recent report on the automotive industry's future, Tesla owns a distinct advantage in connected-car software, self-driving capabilities, and its all-electric vehicle strategy.

At this stage, the end-to-end solution Tesla has pioneered may lead to a significant first-mover advantage. How will this all play out? Always at the vanguard, it's reasonable to conclude that Tesla's upcoming launch of the lower-priced Tesla Model 3 (at the end of the month) will bring Silicon Valley's automotive innovation to the masses. And it's likely "Made in California" will begin to have relevance (and status) among future generations of car buyers.

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*Source: Capital Market Laboratories