Consolidation is coming for the self-driving vehicle industry. Will only three firms reach the finish line?

In 2017, operators ride inside one of Uber's self-driving SUVs along Penn Avenue in the Strip District. (Stephanie Strasburg/Pittsburgh Post-Gazette)

Argo AI’s big money partnerships with Ford and Volkswagen are only part of a complicated and growing road map of relationships

Courtney Linder
clinder@post-gazette.com

August 12, 2019

In 2016, nobody knew what Argo AI was.

It was a scrappy artificial intelligence startup with lofty goals and industry veterans ready to jump ship from other self-driving firms, eager to try a new approach of making robot cars.

Reinventing the wheel was not exactly on CEO Bryan Salesky’s agenda.

The heart of Argo’s business model was — and is — quintessentially anti-Silicon Valley: Snuggle up with industry titans that have deep pockets and make them investor-partners. To this day, the startup has funding from only two firms, keeping the rest of the equity for employees.

“We always thought that would be a compelling business model because it’s a capital-intensive thing,” said Mr. Salesky, a Pittsburgh native. “That’s not foreign to a large manufacturing company. They need the help because those companies don’t typically build software well.”

Truth is, no company trying to crack the autonomous vehicle code is moving anywhere quickly without help. A complicated web of partnerships and acquisitions has formed, helping firms create economies of scale to become more efficient.

Even companies working together to leverage one another’s expertise haven’t dropped their guard. Mr. Salesky believes that when the winning self-driving companies do emerge, he’ll be able to count them on one hand.

In evidence of the growing number of partnerships in the industry, this 2017 photo shows a group of Argo AI and Ford officials getting together. From left, Peter Rander, Argo AI COO; Ken Washington, Ford vice president of research and advanced engineering; Mark Fields, former Ford president and CEO; Bryan Salesky, Argo AI CEO; Raj Nair, former Ford executive vice president, product development, and chief technical officer; and Laura Merling, former Ford Smart Mobility LLC vice president of autonomous vehicle solutions. (Image courtesy of Argo AI)

But it’s still worth partnering up. Companies that work together will find success more quickly than larger firms keeping to themselves, if the parties can put ego aside, he said.

Three years after its founding, Argo has wooed two of the industry’s major auto manufacturers, Ford and Volkswagen, into investing billions of dollars into the business, which hit a $7 billion valuation in mid-July.

“Automobile companies realize that if they don’t partner, they’ll be left behind,” said Timothy Derdenger, associate professor of marketing and strategy at Carnegie Mellon University’s Tepper School of Business in Oakland.

“They don’t have the technical capabilities to really go alone at it, or if they did have the technical capabilities, they’re so bogged down by the slow pace of their industry.”

Winners and losers

An Aurora Innovation autonomous vehicle cruises over the Fort Pitt Bridge. (Image courtesy of Aurora Innovation)

Sprite. Unito. Wolfe. Angus. Empire. Not exactly household names.

These early car companies are just some of the thousands that existed more than a century ago, when the horseless carriage started thrilling the world.

Companies like Ford, General Motors and Chrysler emerged as the winners — and they’re now competing in the fledgling self-driving market.

In a 2016 photo, one of Uber’s autonomous Volvos makes a turn onto Seventh Avenue from Grant Street during the morning rush. (Darrell Sapp/Post-Gazette)

Many small auto manufacturers that fizzled out began in the late 1890s or early 1900s. That graveyard isn’t particularly unusual.

Most industries face a “consolidation curve,” according to a 2002 analysis in the Harvard Business Review, a business journal associated with the Cambridge, Mass.-based university. That contraction, which consists of four phases, is happening more quickly than in the past.

“Today, we predict, an industry will take on average 25 years to progress through all four stages; in the past it took somewhat longer, and in the future we expect it to be even quicker,” the authors wrote. “But, our research suggests, every company in every industry will go through these four stages — or disappear.”

Differentiation is partly what leads some companies to success, Mr. Derdenger said.

“You see this in every industry … competition plays out and then you start to see the cream of the crop rise to the top and everyone else goes away,” he said.

This is similar to the auto industry at the turn of the century, Mr. Derdenger pointed out.

“You saw a bunch of entry, competition and the best rose to the top. And the reason Ford rose to the top is Henry Ford and his knowledge of the assembly line to reduce costs and scale,” he said.

The Autonomous melting pot

In 2017, an Aptiv vehicle with autonomous technology in Las Vegas, Nevada. (Photo by John F. Martin for Aptiv)

Sterling Anderson, Chris Urmson and Drew Bagnell are the three founders of Aurora Innovation, a Lawrenceville-based company that creates software for self-driving cars. (Image courtesy of Aurora Innovation)

Some competitors in the autonomous vehicles race raise money to fuel their development by seeking rounds of venture capital. It’s a common system across industries that allows founders to trade equity in their companies for cash.

In February, Aurora Innovation, based in Lawrenceville, took $530 million in Series B venture capital funding from Seattle-based Amazon and investment company Sequoia Partners, based in Menlo Park, Calif.

Meanwhile, Aptiv, a self-driving firm based in O’Hara, has been working with ride-hailing service, Lyft, since May 2018, offering riders trips in the company’s autonomous vehicles in Las Vegas as part of a bid to collect data on miles driven.

Lyft itself is not a one-partner kind of company. It’s also cozy with General Motors and Waymo, the self-driving outfit spun out of Google’s parent company, Alphabet.

Mapping the self-driving web Every week, it seems there’s a new partnership, acquisition or investment in companies developing self-driving vehicles. From artificial intelligence startups to automobile manufacturers, hardware and software companies, to even rental car agencies, the web is spinning tighter and tighter. We mapped the relationships between these companies for you to better understand the autonomous vehicles race. Click or tap on the chart below to begin exploring company relationships.

Despite all of the partnerships, most entities have retained their own unique brand. Argo struggled with that early on.

In 2017, after Ford invested $1 billion into the Pittsburgh startup, it turned heads. What is Argo AI? Is it a subsidiary of the Michigan automaker?

“Just because we gave them some equity in the company doesn’t mean that they control our every existence,” Mr. Salesky said. “The whole point was to partner with the [auto companies] in such a way that we had access to their manufacturing capability and scale and the ability to take us into lots of different markets.”

Pete Rander, president of Argo AI, emphasizes the company is not some sort of department at Ford. Argo is an independent company that will eventually go public, he told the Post-Gazette last September.

With the infusion of another $2.6 billion from Volkswagen last month, Argo’s profile became clearer. It is its own firm, with its own vision, its own employees, its own patents. It just happens to reel in big customers.

“You can’t build stuff like this just within the four walls of an [original equipment manufacturer]. It takes a different culture, a different type of company that can move fast,” Mr. Salesky said.

Foes becoming friends

In a March 2019 press conference announcing that self-driving companies were working with the city of Pittsburgh on testing guidelines, several industry representatives stood by their technology. From left, Pete Rander, president of Argo AI; Khobi Brooklyn, vice president of communications of Aurora; Raj Rajkumar, co-director of the General Motors-Carnegie Mellon Vehicular Information Technology Collaborative Research Lab; Junqing Wei, vice president of engineering of Aptiv; and Eric Meyhofer, head of Advanced Technologies Group of Uber. (Lake Fong/Post-Gazette)

It usually takes millions of dollars per year to develop and test self-driving cars, so spreading the costs among partner companies makes sense.

Uber spent $97 million on autonomous vehicles research at its Advanced Technologies Group in the Strip District during the second quarter alone, according to a filing this year with the Securities and Exchange Commission. That’s down from $117 million during the same period in 2018.

Those figures also include expenses related to other programs that Uber defines as “next-generation technologies.”

Aurora Innovation — after having severed ties with Volkswagen just before the German automaker jumped ship for Argo — partnered with Fiat Chrysler, a U.K.-based automaker, to deploy vehicles with autonomous capabilities.

Fiat Chrysler will manufacture the autonomous-enabled cars, with Aurora building out the brains of the operation. All the more reason to partner — it allows companies to lean on others’ expertise rather than starting from scratch.

That’s always been one of Argo AI’s strategies, Mr. Salesky said.

“We think that those who are going to have success … are tooling around with technology and creating a platform,” he said. “Because why reinvent the wheel on something that’s so hard to begin with?”

Jim Hackett, president and CEO of Ford, said in the company’s second-quarter earnings call last month that he’s pleased with Volkwagen’s decision to invest in Argo AI.

Ford’s investment in what it calls its “mobility segment” has increased from $181 million in the second quarter of 2018 to $264 million during the same period this year, according to company filings. This is mostly cash for Argo AI operations — the $1 billion investment in 2017 is spread out over the course of five years.

Ford and Volkswagen will pool valuable data, expertise and, naturally, development costs.

“Ford and VW, of course, will remain vigorous competitors … with each of us designing and delivering unique experiences for our customers,” he said.

Four stages of consolidation

Earlier this year, self-driving firm Aurora Innovation announced a $530 million investment. (Image courtesy of Aurora Innovation)

The consolidation curve consists of four stages.

First is the “opening stage,” which usually begins with a few private startups or a monopoly created by deregulation, like utilities.

Soon, competitors will begin to crop up, so early entrants — like Waymo in Mountain View, Calif. — look for ways to create barriers for entry. Technological advancements in the form of trade secrets and patents are essential, as well as spending to create scale.

Mr. Derdenger doesn’t think the self-driving industry is on the consolidation chart yet. These companies may just be entering phase one. Mr. Salesky thinks some companies could be in the first phase.

The other stages are “scale”; “focus,” which is when the playing field starts to tighten and remaining firms really start to focus on profitability; and “balance and alliance,” which is where the top three or so companies claim as much as 70% to 90% of the market.

The consolidation curve There’s been research on how new industries form and then eventually consolidate into key players. Here’s the life cycle as determined by a study of more than 1,300 large mergers.

Sources: Harvard Business Review, 2002 article by Graeme K. Deans, Fritz Kroeger and Stefan Zeisel of A.T. Kearney and authors of book, “Winning the Merger Endgame: A Playbook for Profiting from Industry Consolidation.” | Post-Gazette

A ‘complex business’

An aerial view of Hazelwood Green along the Monongahela River with the city skyline in the background in 2018. In the foreground is the Uber test track. (Darrell Sapp/Post-Gazette)

Companies don’t leave the fourth stage of consolidation. They stay there and try to maintain their position at the top. Industries like tobacco and soft drink beverage companies have famously made it to this point.

Mr. Derdenger said when smaller tech startups start leaving the industry, licensing their intellectual property to larger firms, it’s a signal the winning companies may be getting close to stage four.

In the self-driving industry, it may also mean they are approaching level four of autonomy, a standard wherein cars no longer need humans to operate the vehicle.

Mr. Salesky ultimately believes that there’s room for only three firms to win. “I want the companies who are doing it right to be successful, even if they’re competitive with us.”

Courtney Linder: clinder@post-gazette.com or 412-263-1707. Twitter: @linderrama.