The Next Next Great Car Company

A good friend—knowledgeable about cars and doing research for a new vehicle he wants to buy sometime in the next couple of years—recently wrote this in a Facebook discussion:

It's a question of which company hits my adoption threshold for full EVs [electric vehicles] first. Front-runners are Tesla and Jaguar.

I don't think Jaguar—in its current business form—is capable of producing a truly great EV. But this inability isn't specific to Jaguar as a company; rather, in my opinion, it's an inescapable truth of the nature of their business. This is worth a closer look, which I'll put forward as a series of assertions.

1. A great car company is a company that produces great cars

This seems tautological, but it's still necessary to make it explicit. I define great car companies based on the cars they produce, not their scale.

Prior to its 2009 acquisition by Volkswagen AG (following a failed fish-eats-the-shark bid by Porsche for VAG), Porsche produced relatively tiny numbers of cars, measured on the global stage. In 2008, they sold 98,652 cars worldwide. General Motors sold 30 times this many cars in the US alone. Ford sold five times as many F-150 trucks in the US as Porsche sold cars on the planet. Yet Porsche was—I think most observers would agree—a great car company. Small they may have been, but they produced great cars. The 911 is possibly the most timeless car in history. Any car, the models of which look this similar 49 years apart, and look great in both incarnations, is a staggering work of genius:

I would further argue that—eventually—financial results tend to follow greatness in design and execution. Porsche succumbed to a takeover bid from VAG not because they were unprofitable, but because they were so profitable that their leadership at the time hatched an ill-advised scheme to use that profit to try to swallow a business dozens of times their size. It didn't quite work out that way.

2. A great car is world-class on at least one metric and can be purchased

This is highly subjective, but my personal definition of a great car is:

• A car that is (or was) world-class in at least one respect (and preferably more) and,
• A car that is (or was) generally available for purchase.

A car can be among the best in the world at something yet be a curiosity and nothing more. Quick, what's the fastest production car in the world, measured by its 1/4-mile or 400-meter time? Check your answer here.

Note the production limitations on each of the top five entries on Wikipedia's list:

1. Limited to 30 produced.
2. Limited to 375 produced.
3. Limited to 918 produced.
4. Limited to 499 produced.
5. Limited to 420 produced.

I'm sure there are plenty of car enthusiasts who would argue that a limited-production car can be great. In fact, I'd bet there are more than a few people who would argue that even an unproduced concept car can be great. I disagree.

When we think about the greatest design innovations in modern history, we think about items that reached large-scale production. Remember when phones looked like this?

After the introduction of the iPhone, Apple's competitors didn't remove keyboards and add touchscreens to their phones because it was intuitively obvious that doing so was the right thing. In fact, many observers were skeptical about Apple's design direction, perhaps one person most famously of all:

It doesn't appeal to business customers because it doesn't have a keyboard, which makes it not a very good email machine.

Apple's competitors imitated the iPhone because it sold. It sold and it sold, and then it sold some more. As Steve Jobs is reputed to have said (or perhaps not; it's unclear):

Real artists ship.

3. There will never again be a new great car company based on ICE technology

If you wanted to build the next great car company, what would you need? The first two things on your list would be capital and talent.

Where is the capital for building a new car company based on ICE (internal combustion engine) technology going to come from? Unless you've figured out how to quadruple gas mileage with no tradeoffs, or have discovered some secret manufacturing technique to be able to produce cars for a quarter of the price—both of which are so unlikely as to be ludicrous on their face—you're not going to be able to attract the funding you'll need, which will be in the many billions of dollars. Tesla, for example, has raised $5.27 billion to date across 17 rounds of funding. (Less than 100% of this total raise was destined for Tesla's auto business—some of it has gone to energy storage, energy generation, and other efforts—but certainly the vast majority has undoubtedly been used for vehicle development.)

And even if you had some unobtainium-like breakthrough for ICE vehicles, you'd still face potential investors who would ask what the lifespan of your business would be. If the world is on a rapid path to decarbonization, how long of a run will you have for your investors to recoup their money and make their desired 10x or 100x returns? Keep in mind that it's going to take you years to design your cars, build factories, launch a dealer network, and bring your offerings to market.

Talent is a more solvable problem, but it's still going to be a challenge for you. Yes, there are still good schools turning out engineering graduates ready to work in the ICE industry. But it's a slowly dying field, many (to be fair, not all) of the best and the brightest siphoned off to electrical engineering, software engineering, and other, sexier fields. Perhaps you can turn this to your advantage and pitch investors that you'll get the best of the best for a fraction of the price you'd pay for autonomous systems software engineers. Except you're going to need them, too; the price of entry into the automotive market is soon going to include Level 3 autonomy, and Level 4 or 5 not long thereafter.

Talent for new ICE-based car companies will be difficult to find. Capital will be virtually non-existent.

4. For the foreseeable future, new great car companies can only be based on EV technology

Only three possible automobile powertrain technologies have any shot of viability in the foreseeable future: ICE (the incumbent), EVs (the challenger), and fuel cells (the long-shot).

If ICE technology doesn't make sense for the next great car company, and if EV does (see the next point), what about fuel cells?

Fuel cells are always five years away from being viable. I'm inevitably suspicious of technologies that are coming any day now, we promise, they'll be here soon.

In a 2015 article, Tony Seba does a fine job of explaining why fuel cells won't catch on. His argument breaks down as follows:

1. Hydrogen isn't an energy source.
2. EVs are at least three times more energy-efficient than hydrogen fuel cell vehicles. [1]
3. A multi-trillion dollar hydrogen delivery infrastructure would be required.
4. Hydrogen isn't clean (this point and the next are nuanced arguments; I recommend going to the source for more detail).
5. Hydrogen isn't renewable.
6. Hydrogen fuel cell vehicles can't compete with EVs (this is really a recap of points 1–5).

Seba's summary is good, but misses what is to me perhaps the most important point: The more solid state a system, the faster it can be improved at speeds approaching Moore's law. Macro-scale moving parts are subject to the limitations of the visible physical world; the more of them a system contains, the more difficult it is to improve it the way we improve solid state parts (like microprocessors) and software. A typical EV has a fraction of the number of moving parts of an ICE car. Making everything electronic or electro-mechanical enables an EV manufacturer to rapidly improve performance, taking advantage of the Moore's law pace of the semiconductor industry. [2]

It's true that hydrogen fuel cell vehicles don't necessarily have many more moving parts than EVs, since the fuel cells generate electricity that is used to power electric motors. However, the infrastructure for a hydrogen fuel cell transportation system would be massively mechanical. Refineries to convert natural gas to hydrogen (or, someday, generate it from water). Pipelines and tanker trucks to transport the hydrogen. Underground tanks to store it and pumps to move it into vehicles. Once built, it's built.

5. The next great car company is already here

The next great car company has already arrived. It's Tesla.

Tesla produces cars that are inarguably world-class on at least two metrics:

1. Tesla makes the most advanced EV powertrains in the world right now. A simple metric for this is range. A Tesla Model S gets up to 335 miles on a single charge; a Model X up to 295 miles. The Model S and Model X are the two longest-range EVs available today. The car in third place, the Chevrolet Bolt, gets 238 miles. In other words, a Model S has nearly 41% longer range than a Bolt. Fourth place, by the way, is the Volkswagen e-Golf, with 126 miles.
2. Tesla has the most advanced autonomy system in a car you can actually buy today. "Autopilot-killer" is a simple, lazy, clickbait-style story premise, so of course there exists no shortage of such stories. Not a fortnight goes by that I don't read an article or watch a video showing the latest autonomous system that's supposedly better than Tesla's. None of these autonomous systems are currently available, and (to the best of my knowledge) none of their manufacturers will commit to specific models incorporating such systems, when precisely they'll be available for purchase, or how much they'll add to the price of a car.

Tesla makes cars that are clearly world-class on at least two metrics, and you can purchase these cars today. Therefore, Tesla produces great cars, and so is a great car company.

6. No great EV will be produced by a company focused on ICE cars

This is Chevrolet's EV, the Bolt:

In May of this year, Chevrolet had their best month of Bolt sales ever: 1,566 cars sold, at a starting price of $36,620. In the second quarter of the year, Tesla had what was a disappointing quarter for them, selling 14,402 vehicles, or 4,800 vehicles/month, at a starting price (as of this writing) of $69,500 (Model S) or $82,500 (Model X).

My point here isn't that Tesla is selling about three times the units and at least six times the dollar value of the Bolt, though both are true. My point is that for Tesla's vehicle division, this represents the vast majority of its revenue. For General Motors, the sales of the Bolt are de minimus, not materially affecting the mother ship one way or the other. If Bolt sales dropped to zero tomorrow, it would be an annoyance for GM, and a slight embarrassment, but nothing more. For Tesla, a failure to sell its EVs would be an existential crisis.

At the risk of being seen as picking on the Bolt—which is an important step forward for GM—ask yourself this: If the company's entire future was riding on it, if it were make-or-break, if-this-fails-we're-all-out-of-work, do you think it would look like it does? Okay, design is subjective. I get it. How about this: Do you think GM would have shipped it without the equivalent of Tesla's Supercharger network, enabling people to travel virtually anywhere in the country knowing they're within range of a fast charging station?

Let's leave GM alone and move to BMW. They announced their "BMW i" EV brand to great fanfare in 2011 and began production in 2013. (As you read this, keep in mind that Tesla announced the Model S in 2009 and began deliveries in 2012, so BMW knew exactly what the bar was.) To date, BMW i has delivered two cars: the i3 and the i8. First, the i3:

The i3 was available at launch in a pure EV variant with an EPA range (as opposed to the more lenient European equivalent, NEDC) of 81 miles or with an optional ICE range extender that provided 150 miles' driving distance, at a US price of $42,275. (These figures have since been upgraded to 114 miles and 180 miles, respectively.)

Next, BMW i's supercar, the i8:

The i8 is only available as a plug-in hybrid with an electric-only EPA range of 15 miles. At its 2014 launch, pricing started at $135,925.

In other words, when BMW launched its electric vehicle division, one of its models wasn't actually an EV, but was rather a plug-in hybrid supercar. The other vehicle was available as what amounted to a range-extended plug-in hybrid with 150 miles of range, or as a pure EV that could go 81 miles on a charge. Of this car, in the US at least, the ICE range extended version outsold the pure EV by a 3:1 ratio.

Again, if BMW's future had been riding on the success of the BMW i brand, do you think these are the two cars they would have delivered? Do you think the i3 would have had 81 miles of range as an EV and looked the way it did? Do you think they would have used much of their attention on an (admittedly beautiful) vanity supercar project? Do you think they would have launched without an answer to Supercharging? I don't.

7. This leaves three possible sources for the next next great car company

If the next next great car company won't be an ICE-focused company, what will it be? I can think of three possible sources:

A new, EV-only startup auto manufacturer. It's tremendously difficult to start a new car company. Returning to a previous point, talent is straightforward (if expensive), but the capital requirements remain as large for EVs as they would for a hypothetical ICE startup. Lucid Motors announced its Lucid Air in December 2016, with deliveries to begin in 2018:

Just seven months later, Recode is reporting, "Electric car startup Lucid Motors is short of cash and weighing its options." This is after raising $131 million across three rounds of funding.

Meanwhile, startup Faraday Future announced its FF 91 in January of this year, with deliveries also to start in 2018 (it seems to be a popular year):

It hadn't been a month since the FF 91 rollout and Business Insider was reporting, "Faraday Future, once seen as a 'Tesla-killer,' is said to be in shambles as cash runs low and executives flee".

I don't mean to imply any criticism of these firms. For a variety of reasons, I hope both of them are successful. My point here is that starting a new car company from scratch is difficult and expensive. Tesla pulled it off, but if investors had realized at the beginning how much additional cash it was going to need, would they have helped it get off the ground? Whatever the answer to that question, it seems clear that many investors now understand how must it costs to build such a firm—and the amounts are staggering.

An existing firm not in the auto business that starts an EV-only automobile division. Ah, Apple, the great formerly-rainbow-hued hope. Are they or aren't they? No one who knows is talking. But certainly it's well within their capabilities. As noted above, Tesla has raised $5.27 billion to date. For a startup, that's a staggering sum. As of April of this year, Apple had $67.1 billion in cash, cash equivalents, and short-term marketable securities.

Of course, it's not just Apple. Alphabet has spun out Waymo, its autonomous driving technology firm. (I call it a "technology firm" because it's not clear to me that Waymo intends to ever build and sell its own vehicles.) How much did Google–Alphabet sink into Waymo before the spin-out? It's unknown, but certainly they've had access to very deep pockets.

What about Microsoft, if they chose to develop a car? As of March, they had $126.0 billion in cash, cash equivalents, and short-term investments. Amazon? $26.0 billion in cash, cash equivalents, and marketable securities as of March. Facebook? $32.3 billion in cash, cash equivalents, and marketable securities as of March.

The point here is that it's certainly possible for one of these firms—strong in software technology, including the AI that will run throughout the cars of the future, and flush with cash—to start an EV-only division from scratch. And as the user of a MacBook Pro, iPad Air, and iPhone, I confess to being curious to see what kind of car Apple would make. But I refer back to the difference between "annoyance" and "existential crisis". It's a rare organizational talent when a highly successful firm in one field is able to take on new product categories in different fields and dominate them.

An existing ICE firm that makes a 100% switch to EVs. This, to me, is the most likely source of the next next great car company: an existing car company that pushes all its chips into the EV pot.

For this to work, the transition can't be too far out in the future. Ten years is too long; that's distant enough that many employees can and will ignore it for now. Five years is perhaps too soon; there are vehicles to design, technologies to develop, factories to convert, supplier relationships to end, dealers to train. Short-term memory is seven plus or minus two, so let's say seven years. The firm could create a seven-year plan, with a major milestone for each year, and given buy-in from all levels of management, employees could remember exactly what the seven-year plan is, year by year.

It's not enough to partly switch to EVs, but a number of major auto manufacturers have been announcing just such a strategy in recent weeks.

Volvo

First up, Volvo president and chief executive Hakan Samuelsson:

This is about the customer. People increasingly demand electrified cars and we want to respond to our customers’ current and future needs. You can now pick and choose whichever electrified Volvo you wish.

By this, Samuelsson means that by 2019, every new Volvo launched will be an EV, a plug-in hybrid, or a "mild" (i.e., non-plug-in) hybrid. In other words, "electrified" ≠ "EV". In the case of Volvo, "electrified" = "has an electric motor".

Note as well the specific phrasing: "pick and choose whichever electrified Volvo you wish". In other words, Volvo seems to be saying, having the option of an electric motor is like having the option of a larger engine. Some people will want it; others won't care. Some people will be willing to pay for it; others won't.

BMW

Next we have the aforementioned BMW, taking a new crack at an electrification strategy. This is from a press release issued just this week:

Electrification is one of the central pillars of the BMW Group's corporate strategy NUMBER ONE > NEXT and the company has announced that all brands and model series can be electrified, with a full-electric or plug-in hybrid drivetrain being offered in addition to the combustion engine option. Additional electrified models will be brought to market in the coming years and beyond 2020, the company's next generation vehicle architecture will enable further fully-electric vehicles.

Let me translate that for you:

• Electrification is one of the central pillars of the BMW Group’s corporate strategy → 'Our stakeholders are demanding that we take action on EVs and BMW i isn't getting it done'.
• NUMBER ONE > NEXT → ?
• and the company has announced that all brands and model series can be electrified → Well, that was easy! They can all be electrified! (I'm reminded of a former boss of mine, a person who was a rare combination of highly skilled software engineer and whip-smart entrepreneur. I mentioned something about "portable software" to him one day, and he replied, "There's no such thing as portable software; only software that has been ported.")
• with a full-electric or plug-in hybrid drivetrain being offered in addition to the combustion engine option → Here's where the rubber meets the road. They can add a plug-in hybrid drivetrain to any of their cars. Given that they ship a plug-in hybrid version of the large X5, this shouldn't come as a surprise to anyone. How many of their existing models will be offered with a full EV drivetrain? Who can say? So far, they've only committed to a MINI EV in 2019 and an X3 EV in 2020.
• Additional electrified models will be brought to market in the coming years and beyond 2020, the company’s next generation vehicle architecture will enable further fully-electric vehicles. → 'That concludes this press conference.'

Porsche (VAG)

And we return to the company with which we started, Porsche. In 2015, Porsche unveiled the Mission E concept EV:

The reaction to the Mission E was—understandably, given the beauty of its design—so positive that Porsche announced it would begin manufacturing it in 2019.

More recently, not to be left out of the electrification announcement party being thrown by Volvo, BMW, and others, Porsche went further, announcing a crossover coupe EV in 2020–2021 and a Macan EV in 2022. And then:

Schon 2023 könnte jeder zweite verkaufte Porsche einen Elektroantrieb haben. (By 2023, every second Porsche sold could have an electric drivetrain.)

The Mission E is a striking car and Porsche will certainly sell a fair number of them, at least by Porsche standards. How much will it cost? If you need to ask, you can't afford it. How fast will it be? Not as fast as a Model S P100D. How much range will it have? "More than 300 miles", but depending on how that's calculated, and by what amount it's exceeded, it could be less than some versions of the Model S and Model X. Porsche is claiming 80% charge in 15 minutes; where will you fast-charge it? That's not clear. In other words, a drop-dead gorgeous vehicle, both inside and out—but compromised.

As for the rest of Porsche's strategy, it's good that they're committing to having three EVs in production by 2022. But könnte is a weasel word. Will half the cars rolling off their lines actually be EVs? Who can say? My personal guess is no, given that their only existing model for which they've announced EV plans is the Macan. That leaves the 718, the 911, the Panamera, and the Cayenne untouched.

Again, not a bet-your-company strategy.

Final thoughts

I don't know where the next next great car company is going to come from. All I can do—all any of us can do—is make informed guesses.

Perhaps Lucid Motors or Faraday Future will solve their financing problems and actually go into production, or another startup will come along with access to ultra-deep pockets and great talent.

Perhaps Apple or another major technology firm will actually jump into the auto industry with both feet, as opposed to simply licensing their technologies to those who build autos.

If I had to guess, though, my guess would be that the next next great car company will be an existing auto manufacturer. Sooner or later, one of them is going to take a great leap and announce that they're going all-in—not with plug-in hybrids, not just for some of their models, and not in ten or twenty years, but with EVs only, across every model they make, and in less than a decade.

We choose to go to the moon. We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win, and the others, too.

Somewhere out there, perhaps, the spirit of John F. Kennedy lives on in the heart of a CEO.

Footnotes

1. For the more technical version of this argument, see this 2006 paper by Ulf Bossel of the European Fuel Cell Forum. Skip to the last paragraph and you'll read Bossel's kill shot:

The title question "Does a hydrogen economy make sense?" must be answered with a definite "Never".

And here's his graphical explanation. An EV with regenerative braking converts 69% of AC electricity to useful transport energy. The best a fuel cell vehicle can manage is 23%.

2. For example, if a car has a mechanical linkage between the accelerator pedal and the engine, between the brake pedal and the brakes, or between the steering wheel and the axles, those behaviors can never be changed after the car leaves the factory—not in any meaningful way. If those linkages are broken, and the pedals and wheel are simply used as inputs into a system that then determines how the car should respond, then virtually any aspect of their behaviors can be changed at any time.