Commercially viable autonomous vehicle (AV) technology is proving more difficult to develop than many expected at earlier stages
in the hype cycle. This week, media outlets reported that both
Alphabet Inc (NASDAQ: GOOGL) and
Uber are seeking outside capital to help fund the companies' respective AV projects. Silicon Valley's The Information scooped
Waymo's funding negotiations on March 11, while Axios broke the news of Uber's talks with SoftBank and Toyota this morning.
Google and Uber are two companies at different levels of maturity, but in each case the decision to seek external financing for
AV technology speaks to how expensive and risky it is to invest in those sorts of projects. Google has more cash on hand than
almost any other company on earth, ending 2018 with $109.14 billion in dry powder. According to The Information, it's thought that
Waymo costs Google about $1 billion per year. (Google generates approximately $20 billion in cash per year.)
The fact that one of the largest, most well-capitalized technology companies in the world wants help limiting its exposure to
research and development costs speaks volumes. Waymo began as the Google Self-Driving Car Project in 2009. Ten years later, it
appears that the prospects for near-term commercial opportunities have dimmed appreciably; Google needs to extend Waymo's runway
but is less willing to bet its own money on the project.
Uber, on the other hand, is a cash flow-negative startup in the process of preparing for an initial public offering (IPO) of its
stock. Although it is not typical for companies at this stage in the IPO process to significantly alter capital structure, Axios
said that Uber is now in talks with the SoftBank Vision Fund and Toyota to raise approximately $1 billion for its self-driving
division. SoftBank has already provided Uber with billions of dollars in funding.
Normally, companies readying themselves for public markets want stability so that investors can reach a plausible consensus on
valuation. One could infer from Uber's potential new raise that management perceives the self-driving project as one of the weaker
links in the company and that public investors would feel better about buying shares if the autonomous project could be supported
in a way that did not negatively impact earnings. Furthermore, the raise suggests that the equity Uber will sell in its IPO –
whatever amount that turns out to be – will not bring in enough cash to fund self-driving cars' runway to profitability.
The trend toward joint ventures and risk-sharing makes sense – it's what Moody's said would likely happen to the autonomous
space in an
October 2018 white paper FreightWaves reported on. The orchestration of technology suites including environment sensors,
computing, external connectivity and vehicle control is exceedingly complex, and the nature of autonomous tech itself makes
achieving commercial viability more difficult than typical technology products.
Typical technology product releases follow an 'S' curve, according to Christensen's The Innovator's Dilemma – a
minimally viable product is initially released, with subsequent versions making only incremental improvements. Then a wave of rapid
improvement and development follows (this is the steep part of the 'S') as the product gains traction. Eventually the technology
matures and further releases represent only marginal improvements as the S curve flattens back out – this is where the iPhone is
now, for example. Most new tech products gain visibility in the steep part of the curve, and their competitors imitate them but
cannot catch up.
This model may not apply with autonomous vehicle technology, partly because AV companies cannot release a "minimally viable
product" into the market before the technology is mature; autonomous technology needs to be nearly perfected before it
goes to market. Therefore AV firms cannot use revenue generated by early releases to fund further development; the majority of
development must be completed before release. That makes joint ventures and risk-sharing arrangements much more attractive, a point
Moody's highlighted as the ratings firm discussed the AV joint venture between Honda and General Motors' Cruise Automation project,
into which SoftBank also plowed $2.25 billion.
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