Ed Wallace

You’re the Automotive Commodity

By Ed Wallace

Last week David Welch, formerly of the Star-Telegram and now Detroit Bureau Chief for Bloomberg BusinessWeek, called to tell me he’d just gotten back from San Francisco, where he’d gotten to drive around in a Zoox self-driving car. His comment was that Zoox is light years ahead of General Motors; that’s fascinating, since GM is promising to deliver its first autonomous products later this year. However, I quickly turned the conversation to how Wall Street investors are increasingly asking why the auto industry is spending untold billions of dollars for a truly self-driving vehicle, when it may not exist for decades.

To make matters worse, the head of Volkswagen came out last week with a gloomy prognostication. He says that Level 5 autonomous cars, the Grail of these investments, will never happen worldwide because infrastructure and weather will never be perfect enough for these vehicles to perform up to their potential.

Left unsaid in all such stories to this point is why so many automakers would love to have a world of self-driving cars — the kind that you can’t necessarily buy at a dealership, but are owned by third-party operators such as Uber or Lyft, or possibly even by the automakers themselves.

Don’t Look Behind the Curtain

Remember, up to now the biggest selling point for this utopian automotive future is that it will end congestion and traffic fatalities. But keep in mind, at least on the fatalities part, automakers often fight the National Highway Traffic Safety Administration over being forced to add relatively low-cost safety devices which have already been perfected and appear on many vehicles already. Typically, when NHTSA wants to issue a mandate for a safety device, the automakers scream about the cost. Yet these same automakers have no problem spending those untold billions of dollars on a fully self-driving car, knowing full well that there’s zero public demand for that. At least, as of now.

A more likely explanation for these massive investments in something that may or may not ever happen is the profit yield that those vehicles could potentially bring the automakers. After all, if one day this pipedream becomes a reality, the automakers will no longer need a dealer body to sell their products; theoretically, you won’t be buying. Instead you will summon them using an app on your smart phone — then pay by the mile each and every time you use that service.

But here’s how that changes things. First, automakers won’t need as many car designers, engineers, or even factories because they won’t be building nearly as many styles of cars as they have in the past. To paraphrase renowned car guy Bob Lutz, who cares about design for a self-driving car you don’t own?

Second, when individuals no longer buy cars, automakers won’t have to pay rebates or dealer incentives to move vehicles off retail lots when sales volumes slow. No, instead that one car they build that they or a third party owns delivers a constant yield of profit each and every month it’s on the road. More important, it’s a business owned asset they can depreciate on federal corporate taxes. On paper it’s brilliant, because you not only continuously make profits on a car already built, but those profits you earn may very well be tax free.

Before you think that’s out of the question, General Electric Capital used to be a heavy player in the automotive leasing business. It seemed that whether the leasing end made money or not, the tax credits GE Capital accrued from depreciation on all those vehicles they leased helped offset their overall corporate taxes. Once the losses in their leasing operations exceeded those credits, starting with bad Chrysler leases in the late nineties, GE Capital Automobile Leasing started ceasing to exist.

Be Our (Paying) Guest

This is all a continuation of the OnStar syndrome. When GM launched that service back in the late Nineties, it was the automaker’s first major foray into the high-tech world in which customers would continue to pay each month for that one GM service. GM claimed that the OnStar part of its business delivered a 25 percent operating profit, which is huge in an industry known for earning far less than a 10 percent return on working capital. Toyota, which is a world-class large scale manufacturer of expensive consumer items, is working with 8.2 percent margins at the moment, while Nissan’s are about half of that. No wonder GM and other manufacturers are now wanting to sell WiFi cellular systems in your current vehicles: Again, it’s a high margin return item that pays out forever.

But automakers have long noticed that companies like Facebook or Google and others make a tidy profit on the gathering, consolidation, and sale of users’ personal data online. The best part is that nobody seems to be concerned about signing away their privacy rights while using Facebook to look up an old high school girlfriend or doing a Google search for items like, why do I have to sign away my privacy rights online?

Even now GM is adding its Marketplace app to many car lines; you can order your Starbucks coffee while driving to work in the morning, though it does nothing to alleviate the long line at the drive-through once you get there. But once you add enough vendors, particularly gasoline stations for owners low on fuel, GM starts getting a cut of the action on each sale. Or at least that’s the theory. It doesn’t seem to be generating a great deal of income just yet, but in time the numbers could shift rapidly. What it also does well is create a buying preference database file on its drivers, and theoretically that too can be commoditized and sold.

Imagine the future: Vehicles have a combination of WiFi, a charge for “vehicle-to-vehicle” communications, maybe combined with an OnStar-like service; if, added to those, the auto manufacturer gets a cut of every fast food order and gasoline purchase in America, they might one day net an extra $25 a month out of each driver’s mobility. With 240 million vehicles on the road, that’s around $72 billion a year in extra profits when the nation’s fleet is completely tech equipped.

Is It The Matrix Yet?

Of course that too is a pipedream, as it’s highly doubtful that all cars and trucks will have this technology, ever. Nor is it likely to be a big seller out in the most rural areas of the country. But in two decades, even if you cut all those numbers in half, the auxiliary income from a connected car future where the owners are the commodity could be more profits than GM, Ford, and Chrysler combined now make in the best of years.

Now, put that same system on steroids by removing car ownership from the equation and charging individuals for every time they use that service and every mile driven.

Of course, that’s where it all falls apart. In most regions of the country the average person’s vehicles are driven 15,000 miles per year. So the cost per mile to use a self-driving car would have to be far less than the cost of owning and insuring a personal vehicle. That’s not likely; the cost to produce a Level 5 autonomous vehicle is outrageously high and again, as VW pointed out last week, without flawless infrastructure, constantly updated computer mapping, and near perfect weather, it’s not happening. Still, one can see where corporate economists and accountants could pencil whip themselves into a frenzy on billing customers by the mile and taking a cut of every transaction made in their cars instead of merely producing them and enduring the hassles of retail.

Therefore, given all the facts, the concept of a world of self-driving cars that no one owns but are smart phone-connected private taxis, the only way to go to work or shopping, seems a bit farfetched. Economic history shows that in order to completely shift a mobility paradigm, either one has to bring out something that is far more convenient and cost-effective than what is currently being used, or it’s a non-starter. No pun intended.

But the other part of our automotive future is already happening. You can buy OnStar in a GM product, or in many of its vehicles use the Marketplace app, or even pay by the month to use WiFi in your car. Other manufacturers to varying degrees are starting to do the same — and studying how to add more profit centers into the vehicles you will own. Not to mention the data created about how often and where you buy gasoline and where or how many times you pull into a McDonald’s during the week.

And when that transformation is complete, the car will no longer be the commodity that you purchase. You, the owner, will be the automaker’s commodity. At that point it’s a question of who really owns who.

Then again, at some point retailers may realize having these purchasing apps inside of automobiles isn’t actually selling more of the product, just cutting the automakers in on the action. Or maybe they won’t.

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, bestowed by the Anderson School of Business at UCLA, and hosts the top-rated talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. Email: edwallace570@gmail.com