Howes: Next Detroit challenge? Silicon Valley's cash
Leave it to former General Motors Co. CEO Dan Akerson to dampen fervor about the maker of everything 'i' – as in phones, pads and pods – getting into the car business.
"If I were an Apple shareholder, I wouldn't be very happy," the vice chairman of the Carlyle Group told Bloomberg News. "I would be highly suspect of the long-term prospect of getting into a low-margin, heavy-manufacturing" business. "A lot of people who don't ever operate in it don't understand and have a tendency to underestimate."
That's certainly true. Just ask Henrik Fisker. Or Elon Musk, the Tesla Motors Inc. savant chasing his electric-car maker's first dollar of profitability. Or even a couple of generations of GM and Ford Motor Co. executives, whose chronic mismanagement nearly killed the Detroit-based industry.
Designing, engineering, building and selling cars and trucks in volume and at a profit is not easy. The capital demands are high; the margin for error is low; the regulatory burden only gets heavier and more expensive; and profits, even for the most successful, are a fraction of Apple's lofty numbers.
The business is proving even harder in emerging sectors whose promise outstrips demand. Vehicles powered by advanced propulsion systems — gas-electric hybrids or the electrics Apple is said to favor — appeal more to early adopters and the environmentally aware than average folks.
For now, anyway. As small as the market is for alternative-fuel vehicles, especially amid cheap gas prices, models are proliferating among industry players that have concluded it's smart business to be all things to all people.
Still, the arc of the global auto industry, thanks more to government regulation than customer demand, is bending inexorably in the direction of technology companies and their knack for developing infinitely customizable products.
Plus, the likes of Google Inc. and Apple Co. are swimming in cash —$242 billion combined, according to the latest numbers. That can woo a lot of automotive talent to Silicon Valley, fund product development mistakes or finance a partnership with an established automotive player.
Cash like that would buy a lot of lobbying power in state capitals to change franchise laws that heavily favor traditional car dealers, not tech companies wanting to sell directly to customers. It could finance forays outside their technical comfort zones and right into the heart of a global auto industry whose advanced technical development hardly is standing still.
Just because Akerson, a private equity hand-turned-Detroit CEO, found the capital demands to fund GM's business onerous, and its profit margins less than impressive, doesn't mean that alleged pretenders from Silicon Valley would, too.
Nearly a quarter of a trillion dollars, and a long string of business success, can breed a lot of arrogance, institutionalize a sense of invincibility, and level a playing field that favors the likes of GM and Ford, Toyota Motor Corp. and BMW AG.
The prospect of beating Detroit, Munich and Aichi Prefecture at their own game, however, assumes the automotive knuckle-draggers are just that: too slow, too dull, too disconnected from a technological edge that nonetheless defines the hearts of their new products.
History is littered with the names of former automakers — Hudson and Nash, Studebaker and Packard, Saab and American Motors — whose leaders could not muster the cash or scale to compete against Detroit's three automakers or their most powerful foreign rivals.
The innovative culture and financial heft of Silicon Valley is something very different, a battle for leadership in the next-generation of personal mobility — so long as its investors, to Akerson's point, support the move with their capital.
Detroit sees the threat; word of an Apple "iCar" just underscores it. In the Mulally years, Ford used the influential Consumer Electronics Show to build a reputation for high-tech savvy. It is expanding its Research and Innovation Center Palo Alto, a beachhead for the Blue Oval in Silicon Valley.
The unambiguous competitive challenge from the Left Coast is an opportunity wrapped inside a warning for the auto industry: the people who turned ideas into global tools (Google) and global brands (iPhone, etc.) move quickly, correct mistakes, spend big and play to win.
If Detroit's leaders need more motivation to drive innovation and recast their companies as high-tech players in their own right, Silicon Valley is providing it — and may for years to come.
Daniel Howes' column runs Tuesdays, Thursdays and Fridays and can be found at http://detroitnews.com/staff/27151.