E GM's Self-Driving Car Strategy: Vertical Integration, But No Production Fleet Learning

Self-driving cars could generate trillions of dollars of revenue beginning in the 2020s. GM (GM) is one of the companies pushing most aggressively to seize this opportunity. GM aims to deploy fully autonomous cars for a ride-hailing service in 2019.

GM is vertically integrating the three layers of self-driving cars: vehicle hardware, the self-driving software, and the ride-hailing service. This differentiates it from its competitor Waymo (GOOG, GOOGL), which has no announced plans for vertical integration.

However, GM is not using production fleet learning: the collection of neural network training data from its fleet of production cars. This could be the disadvantage that causes GM to deploy self-driving cars less quickly, less widely, and at a lower level of capability than Tesla (TSLA), which is using production fleet learning.

Why vertically integrate?

Vertical integration makes sense for two reasons. The first reason is technical: it allows for a tighter coupling between vehicle hardware and self-driving software. The second reason is financial: controlling all three layers means that a company will capture all of the revenue from an Uber-like autonomous ride-hailing service.

In the above graph, ARK Invest estimates the breakdown of revenue between the manufacturer of the vehicle hardware, the developer of the self-driving software platform, and the operator of the ride-hailing service. By vertically integrating these three layers, a company can capture all the revenue.

Software/service integration

My observation is that self-driving software developers are strongly incentivized to operate their own ride-hailing services in order to capture that much larger share of revenue. Operating a ride-hailing service is by far the easiest of the three layers. Why give away that revenue to some company with an app? Just develop your own app. If you can get self-driving cars to work, you can certainly do that.

So, I don’t think there will be any distinction between the self-driving software developer and the ride-hailing service operator. Waymo, a self-driving software developer, is testing an autonomous ride-hailing service. Uber, a non-autonomous ride-hailing service operator, is attempting to develop its own self-driving software in-house. The self-driving software and the ride-hailing service will be vertically integrated.

Hardware/software integration

Vehicle manufacturers are also disincentivized to partner with a company like Waymo — since that means helping their competition — unless the manufacturer is cut in on the revenue that comes from operating a ride-hailing service. Even so, any deal will have a finite duration. It’s in the interests of a vehicle manufacturer to acquire one of the many startups working on self-driving car software. Otherwise, when the deal ends, Waymo may simply play that manufacturer out of the game.

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Disclosure: I am long TSLA. 

Disclaimer: This is not investment advice.

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Duke Peters 2 weeks ago Member's comment

Any updates on this article?