The Israeli auto industry cauldron is bubbling and boiling. This does not refer to the local car market, which is still lively, even after January's unprecedented wave of deliveries. The real action is in smart car technology companies and ventures. No month passes without new business and technology announcements in Israel and worldwide. The volume of venture capital now flowing into Israel in search of automotive technology instruments - even at the seed stage - is something that has not been seen here since the Internet bubble days in 2000. The hunger is being fed by the dizzying rate at which established Israeli auto-tech companies are penetrating the global auto industry.
Even though the "Israeli secret" has not been a secret in the auto industry for a long time, and the current entry costs are much higher than they were at the start, the investors and entrepreneurs keep coming. One example is last week's announcement of the founding of the Drive Car Center for smart transportation ventures. The venture's official purpose is "instruction for startups at all stages, a field for trials of developments, and connections with potential customers." It is not hard to guess, however, that one of the main goals is also deep and close-up scouting of the territory for strategic investment opportunities in technologies - investments that will produce the next Mobileye (NYSE: MBLY), or at least a mini-Mobileye. Taking the current market conditions into account, these are not unrealistic expectations. Two more unicorns (young companies worth over $1 billion) sprouted in the US in 2016: Zoox, which is developing an autonomous passenger vehicle, and Quanergy, which is developing laser-based sensors for an autonomous vehicle. There are also numerous Israeli companies in the sector, some of which were founded less than three years ago and have raised a few tens of millions of dollars to date, and now have values in the hundreds of millions of dollars. As a result, scouting by the auto industry with a varying degree of commitment is rather common in Israel at present. Almost all of the main manufacturers and suppliers in the industry (Tier-1) are showing their presence. What is different about the Drive Center is its creation of something like a "dream team" - an unusual combination of investors and potential customers from various fields. For example, the venture has succeeded in incorporating under one roof two competing auto manufacturers: Volvo from Sweden and Honda, which is represented in the venture by its US R&D unit based in Silicon Valley. These two companies alone represent a potential market of millions of vehicles a year. Honda has already invested in Israeli auto-tech companies, such as Yokneam-based VocalZoom, and recently exhibited its voice control interface in a display vehicle at the CES exhibition. However, even though these two manufacturers, which are open to investments in R&D and capital, are certainly a respectable dowry for the venture, the actual dowry is larger, because Volvo is the owner of Chinese company Geely, which has a 4% share in the huge Chinese auto market. Israel is already well acquainted with the hunger of Chinese investors for local investments and their deep pockets. The Chinese auto industry in particular is now regarded as one of the most advanced and aggressive in applying advanced auto technologies. Its indirect interest in the local auto-tech market is therefore likely to augur a new wave of investors.
In addition to the direct connection to auto manufacturers, the venture has another interesting investor, who is both an investor and a potential super customer - auto leasing and fleet management company Hertz, which owns a fleet of three million vehicles in 170 countries. Hertz's participation in the Drive venture, the importance of which to the company is indicated by the arrival of the group's president in Israel, highlights an interesting change current taking place in the auto industry balance of power.
Up until now, the large international vehicle leasing fleets were considered "captive customers" of the global auto industry - they bought masses of cars through the traditional method of buy-use-buy. The rapid rise of technology-based car sharing companies, however, some of which are linked directly to the auto manufacturers (Volkswagen with Gett and General Motors with Lyft, for example), is a strategic threat to the their traditional business model, and is forcing them to "recalculate where they are going." This path, it seems, goes through Israel. Ituran Location and Control Ltd. (Nasdaq:ITRN); TASE:ITRN), one of the pioneers in assimilating connectivity and remote control auto technology, which subsequently became a global fashion in the industry, is undergoing similar process on a smaller scale.
The traditional business model of location and remote management of vehicles is also likely to become a problem in an era in which all the auto manufacturers and importers, and even external parties, can offer auto management and security services based on the technologies installed in the car already on the production line.
When you add private angels to the package, and of course the Mayer Cars and Trucks auto import group, which was the matchmaker between the major international investors, you get potential for venture capital investments in the ten, if not hundreds, of millions of dollars in the smart car sector from just this one venture.
Has the demand exceeded the supply in the local high-tech industry? Omer Shachar, who represents the Mayer Cars and Trucks group in the venture, believes that the Israeli auto-tech sectors is very far from scraping the bottom of the barrel. According to him, the second wave of companies, as he calls them, are sometimes offering even smarter and more advanced solutions, based on the experience already accumulated in various areas. In any case, this is only one prominent example. Behind the scenes, almost every Israel auto importer, and some of the leasing companies, are already inside with some investments in automotive venture capital.
Mobileye: A new path
If anyone needs reminding about the constant temptation offered to investors by the Israeli brain and entrepreneurship pool, it was available last week in the joint announcement by Mobileye and Volkswagen that they were cooperating in mapping. The new cooperation focuses on gathering of frontal information from the surroundings, based on Mobileye sensors, of millions of Volkswagen vehicles moving throughout the world - information about roads, road signs, buildings, etc.; transferring it to the cloud; analyzing it; and construction of automatic dynamic high-resolution digital maps in their vicinity. This is not the place to describe the technologies that make this sophisticated app possible, but we will focus on the business sphere and what can be read between the lines about this agreement. Mobileye is portraying the venture as an "essential solution to a critical problem" that is liable to substantially delay an autonomous car if it is not solved. It is clearly, however, a serious business in itself.
The two companies have signed an agreement for future commercialization of the mapping products. If you take into account that the auto manufacturers have invested billions of dollars in recent years in companies focusing on mapping with very limited global business, the future market potential of such a spinoff can only be imagined. It will be no surprise at all if it becomes a separate independent company in the future, and even holds a separate IPO.
In addition, a market for data mining from vehicles and commercialization of this information is developing. Mobileye insists that it is providing auto manufacturers only with technology for generating maps, and that all of the related areas - incentives for drivers, maintaining the privacy of the information or commercializing it (with the drivers' consent) with third parties - are the automakers' private business. It is clear, however, that the system gives Mobileye a new key for a potential entry into the developing business theater of the commercialization of information gathered from tens of millions of connected vehicles.
For example, one potential customer is the auto insurance industry, which can use such data to analyze risks and market advanced plans.
This is not small change. A study by the McKinsey consultant firm published last September under the heading, "Monetizing Car Data: New Service Business Opportunities to Create New Customer Benefits" estimates that the market will reach many billions of dollars within a few years.
Finally, quite a bit can be learned from the extent of Volkswagen's commitment to the joint venture. For example, it can be assumed that starting in 2018, the standard version of each new car of this giant brand, at least in Europe, will be equipped with Mobileye's sensors, rather than their being an option costing more money, as they are currently being offered. The benefit that the company will derive directly and indirectly from the mapping venture is likely to easily cover the software and hardware costs.
This will add another dimension to Mobileye's iron grip on the auto industry, and will make things very difficult for its competitors, of which there are quite a few, to get their competing components into mass produced vehicles. This grip will only strengthen when other auto manufacturers join the frontal data mining agreement. In short, if anyone believed that the Israeli auto-tech industry reached its peak in 2016, he has quite a few surprises in store for him in 2017.
Published by Globes [online], Israel Business News - www.globes-online.com - on February 21, 2017
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