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Automakers jump on venture capital bandwagon to plug technology gap


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Automakers jump on venture capital bandwagon to plug technology gap

Car companies are chartering the unfamiliar waters of venture capital investment to gain access to the technologies that are revolutionizing their industry as a do-or-die race ensues to incorporate connectivity, launch mobility services and teach cars to drive themselves.

A century of improvements to internal combustion engines has mostly been achieved in-house at the major carmakers. But the intense competition to offer "digital devices on wheels," as Volkswagen AG recently described the cars of the future, is shifting the industry's technological epicenter away from automotive manufacturers' core areas of expertise toward batteries, visual odometry and data processing.

The vast sums raised and valuations enjoyed by the likes of Uber Technologies Inc., Lyft Inc. and GM Cruise LLC demonstrate the strong demand within the investment community for new automotive technologies. Automakers are now seeking to join the action and are channeling increasing amounts of money to the most promising among them, not only for the hope of a return on their investments but also in accessing coveted technologies.

Data from S&P Global Market Intelligence shows equity investments by automotive companies is accelerating, growing to more than $5 billion in 2018 from less than $1 billion in 2014.

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"What automakers and their suppliers are finding is that it is easier to partner with rapidly moving startups who can develop solutions faster and cheaper than to try to build internal expertise," said Alexei Andreev, managing director at AutoTech Ventures, a specialist venture capital firm that has invested $200 million in more than 20 companies developing technology within transportation, including Lyft. Autotech's investors include BorgWarner Inc., Autoliv Inc., DENSO Corp., MAHLE Aftermarket Inc. and Murata Manufacturing Co. Ltd., among others.

"The way automakers are interacting with those startups is through proof of concepts. They give them some money to get to the next milestone, so it's outsourced R&D. If they can reach those milestones then automakers will acquire them," Andreev said.

Goliath seeks David

One of the most notable subjects of automotive venture capital investment is Cruise, the autonomous car developer that was acquired in 2016 by General Motors Co. in a deal media reports have estimated at between $500 million and $1 billion. GM has allowed Cruise significant independence, and the startup has since received further external investment, including an additional $750 million from GM rival Honda Motor Co. Ltd. in October 2018 for a 5.7% stake, plus a further $2 billion to be paid over the next 12 years. The latter contribution will entitle the Japanese company to the exclusive rights to develop a market for Cruise's self-driving technology outside the U.S., according to GM's website.

Automakers that have set up venture capital units in-house include the trio of Renault SA, Nissan Motor Co. Ltd. and Mitsubishi Corp. with their Alliance Ventures unit. It announced in May plans to partner with Chinese start-up incubator Plug & Play, which seeks to pair startups with potential industrial end-users of their products. It has also invested in digital platforms and apps covering public transport route planning, car trading and autonomous driving technology, as well as pumping cash into computer chips and lithium-ion battery technology.

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Germany's premium automakers are also prominent players in the venture capital field. BMW i Ventures, created in 2017 and based in California's Silicon Valley, has a budget of €500 million and lists on its website 37 companies it has funded so far under the supervision of its managing partner Ulrich Quay, a trained lawyer whose career has focused on investment and early strategic guidance for start-ups.

"There is a lot of money in the market and you have to be fast in order to get your spot around the table at these companies. The good companies are not waiting for someone to do their homework. You have to be fast and ensure that you can take decisions quickly, which is really necessary to be involved in the best deals," Quay said in an interview.

While BMW i Ventures operates somewhat separately from the head office back in Germany, it liaises closely with specialists within the company, particularly when considering an investment in "deep tech" startups.

"If you do it well, it doesn't cost you a thing. It is a profit driver," Quay said, adding that the unit's investments include five companies that have gone on to achieve unicorn status, or a valuation of $1 billion or more.

Though lower in profile, parts suppliers Continental AG, Bosch and ZF Friedrichshafen AG are all prominent in venture capital as the producers of a large number of components found under the hood and in the cabin.

"This is the new normal. I see more, not less of this over the next 10-12 years," said David Riemenschneider, head of the automotive practice at M&A and corporate finance adviser Hampleton Partners, which has worked on seven auto tech deals in the last two years totaling in excess of $500 million.

"The technological change that's taking place, that has taken place over the last three to four years, that will take place over the next four to five years, is so much bigger than anything else in my entire history of working in this industry," said Riemenschneider, who has worked in or with the automotive industry for three decades.

"They spray their money around in a lot of different places knowing that many of these companies are going to fail, but they just need one or two hits to make a lot," Riemenschneider said.

Automakers have also displayed a certain pragmatism when it comes to cooperating on new technologies. Bayerische Motoren Werke AG and Daimler AG initially invested in their own mobility service companies to compete with the likes of Uber and Lyft but announced in February that they would combine their efforts through a joint venture.

Volkswagen, meanwhile, is reported to be considering an investment in Ford Motor Co.'s autonomous car unit Argo AI LLC. But the German carmaker is also seeking to bolster its internal resources. The company has announced plans to build a 5,000-strong team of "digital experts" developing technology in-house by 2025.

"We will make software the core competency in our company," said Christian Senger, head of digital car and services.

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Playrooms and shisha pipes

Steeped in industrial tradition and corporate formality, automakers have had to learn to grant leeway to the often young and footloose teams within the startups they acquire as the millennial generation shows an aversion to time-honored working structures.

"No one wants to throw a wet blanket on the fire that's burning in these guys to develop really cool ideas," Riemenschneider said. "Typically they are left alone or given some really cool offices with food and foosball. I sold a company into a big supplier and I went back and saw them six months later and they had a playroom and shisha pipes everywhere because that was what they wanted."

Those concessions and shifts in work culture seem a small price to pay for automakers, who have little choice but to join the fast-moving technology innovators.

"Our traditional suppliers are not going to be able to help us lead in innovation," Ford Chairman Bill Ford said at a mobility conference in Tel Aviv on June 11, Automotive News Europe reported.

"We're going to need lots and lots of partnerships. One thing I'm really insisting upon is that our management doesn't act like we're the center of the universe, because we're not."