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(e.g., touchscreen or any device enabling continuous communication between driver/passengers and the car/outside world85), and vehicle services (e.g., safety and vehicle management services, over-the- air software updates).86 As cars became more connected, R&D investment by OEMs was expected to move from hardware (the car itself) to software solutions integrated into the vehicle, a shift that would require automakers to hire more software engineers.87 A McKinsey & Company report estimated that the United States alone would require up to 100,000 additional software engineers to work in its automotive industry.88 The profits automakers reaped in the future would depend on the type of connectivity “packages” that OEMs sold with their cars.89 The CEO of LeEco, a Chinese conglomerate, noted in an interview that he would eventually be able to offer his company’s electric car, the LeSEE, for free, earning money from the myriad services the company sold to customers.90 How OEMs would profit from connected cars, and whether they would try to do so by building, buying, or partnering, was not clear. As PwC put it, “The risk is that they [OEMs] will become mere manufacturers of increasingly commoditized vehicles – dumb pipes on wheels – through which the truly valuable connected and mobility services pass.”91 Connected car revenue was expected to surge from $53 billion in 2017 to $156 billion by 2022 (Exhibit 12). In 2017, premium models captured nearly two-thirds of the connected car revenue. But a shift was expected to take place and by 2022 the mass-market vehicles, such as the Ford Focus and Honda Accord, were expected to account for 50% of revenue. Seventy-five percent of connected car packages would be sold as part of smaller, less expensive cars, and the prices for the packages would be lower.92 Prices and services included in connected car packages varied considerably among OEMs as did the level of price transparency. GM’s OnStar Safety and Security Plan, which included automatic crash response, stolen vehicle assistance, and navigation, was $24.99 a month after a six-month free trial.93 Toyota’s Safety Connect – a standard feature on all models that provided emergency assistance, stolen vehicle locator, and crash notification – was $8 a month after a three-year free trial. Navigation services were sold separately with the basic service costing $24.99 a year after a free trial.94 Alternatives to Private Car Ownership Some industry observers believed that electrification, autonomous driving, and connectivity would alter, but not fundamentally change, the traditional business model of selling cars that OEMs had pursued for decades. Others argued that consumers’ views of transportation were fundamentally shifting. Owning cars would give way to a “mobility-as-a- service” model, whereby consumers would purchase the mobility they needed, when they needed it. In this scenario, consumers would buy miles rather than vehicles.95 A 2017 transportation study by a Stanford University economist predicted that by 2030, 95% of U.S. passenger miles could be served by on-demand autonomous electric vehicles and that there would be an 80% drop in private car ownership in the United States by the same year.96




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The shift to mobility-as-a-service was expected to be most pronounced for consumers living in cities, while private car ownership would remain the preferred means of mobility in rural areas.97 Private car ownership would become less important than the flexibility to choose the best transportation solution for a given purpose.98 In the future, through a mobile app, someone in need of transportation might be able to “order” a small car to commute to work, an SUV to take the family and dog hiking on the weekends, and a van to transport multiple kids to a soccer game. PwC predicted there would be 22% fewer vehicles on U.S. roads by 2030 and those that were in use would drive more miles and have shorter lifecycles. As an industry analyst from McKinsey & Company put it: “The bad news is that the traditional business models and the traditional technologies have peaked. The good news is that for players who are able to move successfully into this new world, there is a whole new world of revenues and profit pools.”99 The shift away from private car ownership was already being seen in certain cities.100 Between 2015 and 2016, the number of households without a car in Chicago rose from 26.5% to 27.5% and in Atlanta from 15.2% to 16.4%.101 Many people in urban areas were opting to get from point A to point B via public transportation, car-sharing services, and bike (including electric bikes) and electric scooter (e- scooter) sharing. Investors were betting that these alternative modes of transportation would continue to grow. In May 2018, e-scooter startup Bird, founded in mid-2017, raised $300 million at a $2 billion valuation.102 Bird charged riders $1 to unlock a scooter and $0.15 a minute to ride. Bike and scooter rental operator Lime, founded in January 2017 and also valued at $2 billion,103 charged $1 ($0.50 for students) to rent a pedal bicycle for half an hour, and their e-bikes and e-scooters cost $1 to unlock and $0.15 a minute to ride. Both Bird and Lime faced operational setbacks in the spring and summer of 2018 when they received cease and desist orders from the City of San Francisco and clashed with officials in smaller urban centers like Denver and Nashville after they started operating without obtaining the proper permits.104 A number of OEMs were acquiring or working with entities that catered to consumers who did not want to buy a car. GM acquired a 9% share in Lyft with its $500 million investment in January 2016 in hopes of creating an autonomous, on-demand vehicle network. Toyota was collaborating with Uber to create new leasing options for Uber drivers.105 Meanwhile, Alphabet and Uber were both investors in Lime’s latest round of funding,106 and in late June 2018, Lyft acquired Motivate, operator of New York’s City Bike, Boston’s Blue Bikes, among others, for an undisclosed sum.107

Tesla Enters the Automotive Industry Engineering entrepreneurs Martin Eberhard and Marc Tarpenning founded Tesla in 2003 in Palo Alto, California. Elon Musk, who had earned $165 million from the sale of his stake in PayPal in October 2002, led the Series A round of funding of $7.5 million in 2003 and became chairman of the board in 2004. None of the company’s original leadership team had a background in the automotive industry. In 2007, Tesla experienced cost overruns on its first EV, the Roadster, and by the end of the year had had three CEOs, including co-founder Eberhard. Musk, who by that point had invested $55 million in Tesla,




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