Weekly Brief: Digital Companies Remain Biggest Threat to Carmakers

Cars are the ultimate mobile device.

They allow us to move about, connect socially and professionally, make phone calls, take pictures of pretty sunsets and play music with the windows down and the wind blowing in our hair. No wonder smartphone makers have their eyes trained on the market. Word leaked last week that Xiaomi, the third largest smartphone maker in the world behind Huawei and Samsung, plans to make and sell electric vehicles under its own brand. Xiaomi will reportedly partner with Chinese automaker, Great Wall Motor, to manufacture the EVs. A formal announcement is expected in the next several weeks.

Apple’s desire to enter the EV market with a self-driving iCar is one of the worst kept secrets in Silicon Valley. Search engine giant Alphabet has Waymo, by far the most advanced self-driving car company in the world, while search engine giant Baidu – aka the Google of China – is creating a standalone EV company with Chinese automaker Geely. Huawei is in talks with Changan Automobile to make an EV as well.

It may take three or more years for any of these cars to hit the mainstream market but make no mistake – they’re coming and when they arrive they will represent a new approach to the automobile, as a technology platform first that can be commercialized in whole new ways. Think about your smartphone. The hardware matters to a certain extent but the real value lies in the range of applications and virtual experiences that exist within the broader smartphone ecosystem. Music, photos, cloud storage, internet connectivity and customized apps. The list goes on. Now imagine your car through the same lens, where the physical vehicle becomes secondary to a host of experiences, connective services and applications that make Apple Carplay and Android Auto seem as old-fashioned and quaint as a transistor radio.

This is the way smartphone makers and tech companies are approaching automobiles. They see how ripe the sector is for disruption. There’s the possibility to usher in a whole new paradigm and value proposition. In some respects, there’s little that legacy automakers can do. They are big old companies operating in a complex industry and beholden to a quagmire of Tier 1, Tier 2 and Tier 3 suppliers. To arrive at a streamlined, radically reimagined approach to the automobile would require burning many of the relationships that make these companies successful today.

That’s one of the appeals of Tesla. It’s new and unburdened by relationships that predate the tech revolution and is led by a tech-savvy maverick who may be reckless at times but he’s also clear-eyed when it comes to the potential of the connected automotive ecosystem. That’s why Tesla’s digital interface is arguably the most advanced on the market. That’s also why Musk is a pioneer in integrating over-the-air updates, which continuously keep his cars relevant and up to speed, much like smartphones.

Last week Musk announced that customers can start buying Tesla cars in the US with bitcoin. Customers in Europe should be able to do the same in the coming months. This follows a $1.5Bn Tesla investment in bitcoin last month. I’d wager that half the legacy automaker CEOs out there don’t even know how bitcoin works, let alone are they thinking about their companies accepting it for payment. There’s good reason to think that Tesla’s bitcoin gambit is not the best idea right now. Look no further than the extreme volatility of the bitcoin currency within a given day to see why. Then again, it’s a reminder of just how different Tesla is from every other carmaker out there today.

It’s safe to say that Xiaomi, which has a cryptocurrency of its own, will be cut from a similar cloth as Tesla. Same goes for Apple, Baidu, Waymo, Huawei and any other tech firm that follows in their footsteps. Legacy automakers are so focused on electrification right now as their biggest existential threat, even though customers haven’t shown much interest in embracing EVs at the expense of internal combustion engines. What they have shown interest in is smartphones and connected, intuitive digital interfaces. If automakers can’t satisfy them, smartphone makers may soon take their place.

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