The Auto Industry Will Never Be the Same

Expensive acquisitions of innovative, disruptive startups by old-school legacy incumbents usually don’t end well.

This is especially true for acquisitions used to signal a new direction… or a new go-to market strategy that will shed the old way of doing things and put the stodgy old company back on a path of accelerated growth.

Don’t believe it.

The 2016 acquisition of Cruise – an emerging autonomous driving technology company – by General Motors (GM) is a perfect example.

Source: Cruise

GM’s stock had been in a funk for the two years prior, moving lower over time. It was trading for around a $41 billion dollar valuation, profitable, and generating $8.2 billion in free cash flow that year… and yet, its valuation was just 0.27 of its annual sales.

Then there was Tesla (TSLA), which was producing a fraction of the number of cars that GM was manufacturing. Its valuation was trading at almost the same level at $39.4 billion.

However, Tesla was losing money hand over fist with a negative $725 million in net loss that year, with a negative $1.4 billion in free cash flow.

But Tesla’s enterprise value to sales multiple was 5.62 compared to GM’s 0.27.

Just imagine the discussions around the boardroom table…

“We both manufacture cars!”

“We’re in the same exact business!”

“If we had Tesla’s valuation multiple, we would be trading at a $838 billion valuation… almost $1 trillion!!”

“It’s not fair!”… “We should be valued as a tech company, not a car company!”… “We need to change our image!”

And that’s exactly where the $1 billion acquisition of Cruise originated.

We can guess what happened next.

“Look, Ma, No Hands!”

The Cruise acquisition was an attempt to reframe Wall Street’s perspective on GM. GM wanted to show that now the company was more of an innovative tech company – no longer an old stodgy car manufacturer stuck in its ways.

The fact that the acquisition failed was not surprising.

The fact that it lasted as long as it did was…

A week ago, GM announced that it was shutting down the self-driving Cruise division and would no longer be funding the development of a robotaxi service based on Cruise’s technology.

Of course, the corporate messaging was different in an effort to mask the failure:

General Motors plans to realign its autonomous driving strategy and prioritize development of advanced driver assistance systems on a path to fully autonomous personal vehicles.

GM will build on the progress of Super Cruise, the company’s hands-off, eyes-on driving feature, now offered on more than 20 GM vehicle models and currently logging over 10 million miles per month.

The positioning of Super Cruise, GM’s advanced driver assistance system (ADAS), didn’t come as a surprise, especially given the odd marketing stunt GM pulled off in November.

GM announced a history-making “world first.” It drove one vehicle from each of its 20 different models – set on Super Cruise – across the Bay Bridge, linking San Francisco and Oakland, CA in a long caravan.

It was a “record-breaking hands-free caravan,” – the “largest of its kind in history.” You’ve got to be kidding me.

Source: General Motors

I can only chuckle. That’s all GM has to show for spending $10 billion on Cruise over the last eight years. A record-setting, hands-free caravan on cruise control.

For comparison, Tesla released its version 13 full self-driving software (FSD) on November 30th and has been systematically rolling out the software on millions of Teslas.

I have version 13.2 on my own Tesla… and all I have to say is that I no longer drive my Tesla. It drives me.

While GM boasts about its 10 million “hands-free, eyes-on” miles a month on highways, Teslas are driving more than 1 billion miles on FSD on any road, any place, every 65 days or so.

By next year, Teslas will hit 1 billion hands-free miles a month.

Ironically, there were some things that GM did right with the acquisition, which is why it lasted as long as it did.

A Buncha Dummies

GM allowed Cruise to be an independent subsidiary and even accepted outside investment from players like Honda in 2018, Softbank in 2019, and Walmart in 2021.

Investment from Honda was interesting, as Honda could have become a licensing customer of GM’s Cruise autonomous technology, and Walmart could have used the autonomous technology for logistics and delivery trucks, potentially reducing logistics costs and improving efficiencies using autonomous technology.

But the future for Cruise turned dark in 2023 when a freak accident occurred.

A human-driven car hit a pedestrian in San Francisco and knocked the pedestrian into the path of a Cruise self-driving robotaxi, which sadly dragged the pedestrian 20 feet before stopping. It actually wasn’t Cruise’s fault.

Fortunately, the pedestrian survived, but the incident resulted in the suspension of all Cruise operations, the resignation (it was a firing) of Cruise founder and CEO Kyle Vogt, and a full safety review of Cruise’s technology.

This was unfortunate. The team at Cruise had made some impressive progress, and the reality is that back in 2016, Cruise was arguably the leader in self-driving technology, ahead of both Google and Tesla at the time.

After $10 billion in investment and building incredible technology, demonstrating material progress, it just doesn’t make sense for GM to shut it down, a technology group that could potentially become its most strategic asset…

GM intends to combine the majority-owned Cruise LLC and GM technical teams into a signal effort to advance autonomous and assisted driving.

Eight years in and $10 billion invested, and now this colossal mistake.

GM is removing the autonomy of its Cruise autonomous driving division and folding what’s left of the team into the legacy GM technical team.

Kyle Vogt certainly agrees with my assessment:

What I can say with certainty is that anyone left at Cruise with any real talent will be leaving soon… if they haven’t already.

A Real Pickle

Tesla just released fully autonomous driving software, and Google’s Waymo division is planning on being operational “robustly” in 10 cities in 2025.

The autonomous industry is thriving right now, and there is opportunity everywhere with companies that are doing some incredible things. I can’t imagine a more exciting time to be working on autonomous technology.

Meanwhile, GM is in trouble. Its stock is down about 15% since late November, it is heavily indebted, its revenues will drop next year, its electric vehicle lineup is a joke, and all it really has is Super Cruise.

Compare that to Tesla which just released the equivalent of level 5 autonomous driving software that can work on more than 7 million production Teslas. Its stock is up 41% since late November and 225% since April lows. It has no net debt, is profitable, and will generate more than $6 billion in free cash flow next year.

Oh, and Tesla trades at an enterprise value to sales metric of almost 15. Nuts.

Cruise was literally one of the top three contenders for autonomous driving technology – competing with Alphabet’s (Google’s) Waymo division and Tesla. Cruise became an even more important player in the industry after Ford and Volkswagen threw in the towel in 2022 when they gave up on Ford’s $1 billion acquisition in 2017 of autonomous tech company ArgoAI.

Now the legacy automotive industry is in a real pickle. GM could have eventually licensed out its Cruise autonomous driving technology to other major automotive players and actually sold the technology as a business.

Now the industry is left with Google, an advertising company that has developed autonomous driving technology (Waymo). Or Tesla, one of the world’s most successful artificial intelligence companies and the world leader in autonomous technology.

If you were Ford, General Motors, Stellantis, Honda, Toyota, or Volkswagen, who would you rather license your technology from? Google or Tesla?

To make the question even more pointed: Would you rather license from an advertising company that will mine data and surveil your customers who buy your cars and trucks… allowing Google to make billions doing so? Or from the most dangerous competitor of the entire automotive industry… Tesla?

Which would you choose to say relevant and have an autonomous technology offering on your electric vehicles?

Once Tesla receives its “unsupervised” approvals from some state regulators next year, the industry will never be the same again.

Any car company without a clear path toward autonomy will be faced with an ugly future ahead… and a falling share price.

Which partner is the lesser of two evils?

Which autonomous tech will get you to market faster?

Who will win in the end?

Regards,

Jeff