Podcast Transcript
Brian Kenny: In 2012 the World Health Organization reported that an average of 1.3 million people were killed in auto accidents, a number projected to climb to 1.8 million by 2020. The cause of 90 percent of those accidents: driver error. Today we'll hear from Professor David Yoffie about his case entitled “Mobileye, The Future of Driverless Cars.” I'm your host Brian Kenny and you're listening to Cold Call.
Professor Yoffie teaches in Harvard's MBA, doctoral and executive education programs. His research focus is on competitive strategy, technology and international competition, all of which relate to this case. David, welcome.
David Yoffie: Thank you for having me.
BK: So I wanted to ask you to start just by setting up the case for us.
DY: Sure. The CEO of the company is man named Ziv Aviram, who was a Russian immigrant who immigrated to Israel when he was 12 years old. And he was in a class of mine in India and we had dinner one night and he started talking about this company I'd never heard of called Mobileye. And the more he talked, the more I got interested and about a year later I sent him a note and said, “How about if I do a case?” And he said he'd be delighted. Now that was a year before their IPO so we had no idea that they were going to go IPO with a $10 billion valuation on the first couple of days.
BK: Amazing.
DY: So it turned out to be very fortuitous.
BK: I'll speak for myself but I think others would agree that when you think about driverless cars, Google is the first thing that comes to mind because they've certainly been out and about with their driverless technology. But I was really surprised in this case to see that the technology that Mobileye's been working on dates back over a decade at this point.
DY: This technology's been around for a long time and Google has done a wonderful job at becoming the poster child for driverless cars. But in fact DARPA started a competition on driverless cars more than a decade ago and there've been many, many companies, organizations, even universities who've put together the driverless car efforts.
BK: And driverless cars, I think that also has one connotation but really the technology spans across safety features. Can you describe the kinds of things that Mobileye was doing as they got started in this space?
DY: You have to remember driverless cars are still a dream.
BK: Yeah.
DY: Anybody can actually make a driverless car if you're willing to spend a couple of hundred thousand dollars in extra equipment above and beyond the price of the car. For today, however, what people are trying to do is make cars safer. And the Mobileye vision from day one was: how can we use vision systems, basically a third eye, in order to make cars avoid hazards, avoid collisions, and ensure that you could potentially save lives within the existing technology that we have? And eventually move towards a system where you could create the driverless car and the truly safe environment.
BK: Things like the radar that senses how far a car might be in front of you was one example that you've got in the case. The rearview mirrors that show that there's a car in the other lane or the lane sensor technology, those kinds of things, many of which are deployed in cars today.
DY: So there are many different technologies used for assisted driving today. You mentioned two of them. One is radar. Second is Lidar, which is for lasers, that's what Google is using. A third is sonar which uses sound waves. And then the fourth is vision. It's a camera system. And Mobileye decided on day one that they were going to do what was called the monocular camera. That means a single camera that would enable the car to see in front of it and identify obstacles and anything that might potentially cause an accident. That was the magic that Mobileye brought to the party. Everybody else assumed that radar was the answer but radar has a problem. Radar actually doesn't work in certain conditions and what Mobileye was hoping was that this was actually a better solution, and much cheaper, so it could be deployed much more broadly.
BK: Let's go back to the case for a second because as the case opens up our protagonists are getting ready for a meeting with Google. What's the question that's on the table for them?
DY: They have a couple of questions that we try to address in the case. One is the second founder of the company is a man named Amnon Shashua. He was a computer scientist who has a PhD from MIT and was a professor at Hebrew University. He was the brains behind the operation in terms of the underlying technology. And Google has asked him to come and speak to the company and the question obviously is what should he speak about? How open should he be about what he's doing? Should he try to partner with Google? Should he try to make Google into a customer? Or does he keep Google at arm’s length?
The second big question that we raise in the case is that this has been a technology so far that's only been used in high-end cars, very expensive cars. But because it's clearly something that has got mass appeal, the big car companies want to now deploy it in low-end cars and, therefore, they want a lower price. And the question for Mobileye is do they discount or do they hold their pricing in order to try and maintain their margins of their valuation?
BK: How big is the market for this? Is this going to be commonplace technology in all make and model of cars?
DY: Mobileye believes that by 2018 you should have roughly 50 million cars that will have this technology and it could be as many as 80 million. And certainly by 2025 we're talking about probably closer to 90 or 95% of the market which would be well over a 100 to 120 million cars.
BK: So it's huge, huge market.
DY: Huge.
BK: A huge upside and that explains a little bit about when they came out on the market why they had such success. They chose some specific path to funding though. Can you describe the choices they made there and why?
DY: The CEO, Ziv, did not like venture capital, never liked venture capital. So he decided that he was going to always have plenty of funding. He knew this was going to be a long haul, and in fact it did take more than 14 years to get the company to a public market. So the view was: be very conservative, start out with angel investors. His original hope was to get investors who only put $5,000 each and he would raise a million dollars. In the end he got 14 angels to give him a million dollars and stayed away from venture the entire time. It wasn't until almost ten years into the company when he got Goldman Sachs to make a big investment in the company, which really gave him the resources to expand very aggressively.
BK: And so let's go now to some of the choices that they've made about where they sit in the supply chain. And it would be helpful maybe to explain what the value chain in the automotive space looks like and where they are.
DY: So they made a very distinctive choice when they figured out what they wanted to do. You can think about the supply chain in the auto industry as having three parts. There are OEMs and those are the companies we all know, Mercedes, BMW, Ford, General Motors, and so forth. Then there are tier one companies which are their direct suppliers and they provide all the sub systems, whether it be brakes or steering or transmissions and so forth. And then there are tier two companies. And tier two companies provide sub systems to the tier one companies and the tier one companies then sell it to an OEM. The big question for Mobileye was do they become a tier one company or do they stay a tier two company? And in their case they decided it was better to be tier two. Now that meant that they were going to have a narrow range of products. But it also gave them the flexibility to potentially have many tier one companies who could integrate their technology and provide a wide range of solutions to all the OEMs on the market.
BK: And in the automotive space if you're an OEM do you care that you're buying the technology from the same company as one of your competitors?
DY: No, not today. In the future they may change but each tier one company has a different way of integrating the technology into an OEM. So for example, at a company like BMW, when Mobileye says that you're going to hit a car, one of the things it might do is it might vibrate the steering wheel. At another company it doesn't vibrate the steering wheel, it literally slams on the brakes or would send you a beeping warning to tell you that you're going to hit something.
So then in other words there are different ways in which the technology gets manifested in the actual car. But it's the same Mobileye technology.
BK: In each place. So you've discussed this case in class?
DY: We've taught it to executives and to MBAs now.
BK: Any surprises? What's the reaction been as students discuss it?
DY: The really interesting question is this company is still very small. When I wrote the case they were only about 50, 60 million in revenue. They're expecting to be about 250 million in revenue this year. As I said their valuation is $10 billion and the big question is do they think it's really worth $10 billion? This is the hottest space in the automotive industry and the assumption is going to be there's going be huge amounts of competition. But of course, at this point in time, Mobileye has 23 of the top 26 OEMs in the world and the real question is can they hold it? Many people think that they built a really strong position and many people think that it's just far too important and it's going to be much more competitive.
BK: Is there a parallel in another industry that you've come across where you think either Mobileye can learn from them or they can learn from Mobileye?
DY: Well this is a case I think that can be broadly applied in a wide range of contexts. One of the real strengths of Mobileye is that they built very big barriers to entry in their business. And the ways in which they've done it over a long period of time can help other companies think about what you can do, even when you're small, to build big barriers.
Second, they are dealing with some of the biggest, most powerful buyers in the world. And so, how you manage that relationship with the buyer is also something that is a potential learning experience for many, many different types of companies and different industries.
A third thing that I think you can learn from Mobileye is that they're dealing with a lot of substitute technologies. No one believed that a single camera could be the solution for assisted driving or driverless cars. People all thought it was going to be radar or lasers. And yet they've managed to somehow drive a single camera into the vast majority of cars that have this capability today. So there are many, many things I think that are quite general beyond just the specifics of this industry.
BK: But you're saying we won't be stepping into a car without a steering wheel and an accelerator anytime soon.
DY: The Mobileye view is that it's at least a decade and maybe a decade and a half away. The legal and regulatory issues are extreme. The biggest problem you have is there are a billion cars already on the road that don't have these capabilities. So if you really want to do this you've got to get at the least the majority of the cars on the road to have similar capabilities. Plus there's a lot of technology that's still yet to be developed that you have to be able to deliver before this can really be truly driverless.
BK: Right. Oh, and the policy issues that you get at in the case are also real, like who’s the driver? And in the case of an accident when neither car has a driver.
DY: Who’s at fault? Who’s responsible? Who has liability? There are a million policy questions. If you're speeding, who’s responsible? What's the standards for who can drive? Can a ten year old drive in one of these cars? Who is going to have a license in the future?
BK: Yeah. All great questions but I still look forward to the day when I don't have to do anything but get in the car and sit down and punch in my coordinates.
DY: It will happen but don't expect it in the next year or two.
BK: David, thank you for joining us.
DY: Thank you for having me.
BK: You can find this case along with thousands of others in the Harvard Business School case collection at HBR.org. I'm Brian Kenny. Thanks for listening to Cold Call, the official pod cast of Harvard Business School.