Please answer the question based on the case: The Future of the Autonomous Automobile: A Strategy for BMW

1) How should BMW define the opportunity space and what is its resulting market? What is the size of that opportunity for BMW?

Future of the Autonomous Automobile: A Strategy for BMW By Olaf J. Groth, Ph.D., Eleonora Ferrero and Aleksey in the process of developing a relationship with Baidu, Malyshev the Chinese Google-like Internet company, to start testing similar automobiles in Shanghai and Beijing. Norbert Riedheim, the head of BMW's Future Car group, Given the rapidly changing scenarios, he wonders which is situated between BMW's global strategy, mar- what position BMW should aspire to, and what their keting and research and development (R\&D) units, has strategy should be. just been informed that three automakers have received Riedheim has been in Silicon Valley and knows California permits to test an on-road autonomous auto- all those companies well, and enjoys friendly relations mobile: Google testing on a Toyota car, Volkswagen's with management and even selective partnerships with Audi, and Mercedes-Benz. BMW did not apply, because Google. He knows that in the era of "co-opetition" new the company was in the process of developing a rela- technologies and new alliances can change the chesstionship with Baidu, the Chinese Google-like Internet board of innovation very quickly. In order for the comcompany, to start testing in Shanghai and Beijing. At the pany to remain relevant for the next 20 years, he and his same time, Apple announced its electric-autonomous colleagues need to be vigilant and stay on top of the latest iCar concept. However, BMW has been making signifi- developments in the ecosystem of autonomous driving. cant investments in the space of autonomous driving and BMW is focused and committed to developing autonreconfirmed its intentions to lead in this space during its omous vehicles, as evidenced by CEO Harald Krueger recent shareholder meetings. revealing at a BMW's recent shareholder meeting that Reviewing BMW's innovation legacy, the state of the company is gearing up to launch its first autonomous the autonomous auto ecosystem, and a range of critical vehicle by 2021: ". . the BMW iNEXT, our new innovauncertainties, Riedheim thinks about potential alterna- tion driver, with autonomous driving, digital connectivity, tive futures for the evolution of the space. His reflections intelligent lightweight design, a totally new interior and ultiare driven by a need to present a strategy to the Board of mately bringing the next generation of electro-mobility to BMW during an upcoming high stakes meeting. What the road." n1 kind of business should BMW aim to be over the next Riedheim is excited by this bold vision. He has been 10 to 15 years? What are its aspirations? What strategy at the company for a long time in different positions. should the company pursue and why? Having signed on with the automaker right after his graduate studies in engineering, he spent 3 years as an Introduction 1assistanttothegeneralmanagerofafactoryproducing Norbert Riedheim, the head of BMW's the 3-series sedan, followed by shorter stints in supply group in its global research and development (R\&D) the company's i3-series, the company's first foray into division, has just been informed that three automakers electric mobility. Having witnessed the engineering and have received California permits to test an on-road marketing prowess of his employer, he is confident that autonomous automobile: Google testing on a Toyota BMW will master the autonomous challenge as well. Yet, car, Volkswagen's Audi, and Mercedes-Benz. BMW Riedheim knows that the evolution of the autonomous did not apply for the permit because the company was automobile is still in its very beginning stages. How will Case 3: Future of the Autonomous Automobile: A Strategy for BMW this new world evolve and how will BMW evolve its common feature in luxury and performance automobiles position in it? What will he say about BMW's emerg- of many brands. ing strategy in his upcoming briefing with an important Finally, on January 8th 2014 during the Consumer BMW board member? Electronic Show in Las Vegas, BMW demonstrated its He goes back to his desk, and reviews the facts first fully automated car prototypes based on its regular once more. car models. 3 The car uses 360 degree radar technology, as well as a set of other sensors including cameras and A Brief History of BMIN_ ultrasound to accelerate, steer, and brake without driver intervention. The company also demonstrated another engines automaker got its start as a manufacturer of aircraft feature called "Emergency Stop Assistant," which will into a motorcycle and automobile company in 1928.2 vate an emergency call in case the driver experiences an Since then, BMW has manufactured motorcycles and unexpected health condition, such as fainting, a heart cars. It is most well known for its high-quality cars in the attack or a stroke. 4 These advancements demonstrated upper segment of the market. After WWII the company the ability of BMW to stay on top of the new technology. had to restore its manufacture and reputation. The first A litany of prizes and awards recognized BMW's car that started a new era for BMW was the 501 model, strengths: a famous classic today that quickly established the com- Brand reputation: BMW is acknowledged worldwide pany as a producer of high-quality, technically advanced as a successful carmaker. In 2012, Forbes elected BMW cars. Most prominent among its superior engineering as the most reputable business in the world, and in 2016 capabilities are its engines, which many experts attribute it became the second most valuable brand in the autoto its early legacy in aero-turbines ("turbine" still being motive industry, with a market value of $26.4 billion." the nickname of its 6-cylinder car engines). In 1973 the Handling, engines and traction motors: BMW was factory in Munich started building the BMW 2002 turbo able to become a market leader in the production engine. This was the same year that the first oil crisis of engines, which led the company to win several hit the western world, which had become dependent on 'engine of the year' awards, in an industry where cheap gas. Sales of gas-guzzling volume-produced per- technology is a top priority and competition is fierce. formance cars slumped and BMW started to develop a _ Information technology integration: BMW was strong skillset in more fuel-efficient turbo-diesel engines. able to integrate technology innovation in its vehicles, In 1990 the Bavarians, leveraging their competency winning international prizes such as the Berthold in making high-agility, precision steering, introduced a Leibinger Innovation award in 2014 for its laser-light new kind of rear axle that allows the rear wheels to turn technology and the Autoblog's 2014 Technology of a few degrees in the same direction as the front wheel. the Year award for the whole technology suite workThis improved car stability in turns at high speed, as well ing together on the BMW i8. 6 as the fun of the driving experience by a BMW driver, Environmentally friendly vehicles: BMW researched which is central to BMW's value proposition. Since then, dual fuel engines, hydrogen-driven cars, and hybrid few other manufacturers have managed to match this electric cars. Furthermore, 80% of its automobiles are active handling experience, which today is a hallmark of made from recycled and recyclable materials. 7 The the BMW brand. Brand won the World Green Car of the Year Award In 2001 the company built another competency, this in 2015 at the New York International Auto Show time pioneering cutting edge electronics: a new kind and at the 2014 Los Angeles Auto Show, BMW was of "head unit" (the control and entertainment console presented with the Green Car of the Year Award that sits in the center of a dashboard). It was called from the Green Car Journal for the BMWi3. "iDrive" and it allowed operating the unit easily with a joystick-like knob giving tactile feedback to the driver, without having to take his or her eyes off the road. The Ecosystem of Autonomous iDrive had been developed in collaboration with BMW's Driving Today Technology Office in Palo Alto, at the heart of Silicon Valley. After an initial period of drivers' adjustment The idea of cars driving themselves has existed for a few to the new technology and user interface, the iDrive decades, since the early days of Tsukuba Lab in Japan and various iDrive-like derivatives quickly became a in 1977 and the European EUREKA Prometheus project C-46 Part 4: Case Studies in 1987. But only recently, with the advances in com- Lane control: Helps the driver to steer though curvputer technology, has it become a reality. The 2004, ing highway roads. This is mainly a security feature 2005, and 2007 Urban Challenges conducted by the that helps drivers to avoid potentially dangerous Defense Advanced Research Projects Agency (DARPA) accidents like the car driving into oncoming traffic in the U.S. yielded significant advances, with cars or veering off the road. eventually completing a 132-mile course successfully Speed control in heavy traffic: This feature goes a as exemplified by the winner of the 2005 DARAP bit further by allowing the driver to let the car navUrban Challenge: Stanford University's VW Touareg igation system accelerate and slow down the vehi"Stanley." cle when the car moves in a traffic jam. This adds The domain of autonomous driving promises stun- the driver some relief to an otherwise tiring journey ning prospects as well as some key uncertainties. It is at through tough traffic conditions. the intersection of large opportunity and the uncertainty Fully automated car: The highest level of automaof a number of future trends that could affect the domain tion is achieved when the car can drive itself in any to take a turn in one direction or another. According to conditions, including driving through crossroads Navigant Research, annual sales of autonomous vehicles and crosswalks with or through traffic lights, making could reach nearly 95 million by 2035.10 Morgan Stanley turns, changing lanes, keeping distance with other analysts also believe that self-driving cars will change the vehicles, and responding to any kind of emergency auto industry." situations. In this case the driver inputs the desti- At the core of the self-driving car is state-of-the- nation into the navigation system and allows it to art microprocessors, i.e., computer chips called Central drive. This feature has been widely discussed as the Processing Units (CPU) or Graphical Processing Units future of mobility. Most drivers would spend their (GPU). GPUs are CPUs that have special capabilities time being entertained, being social, or being prorelated to processing imagery or graphics. Two major ductive in their cars. players in the microprocessor technology market are working on the hardware for self-driving cars-Intel, 12 maker of CPUs and NVIDIA, maker of GPUs. Recently, Fully Automated Cars: The Competitive through cooperation with these Silicon Valley stars, car Landscape manufacturers globally have obtained processing tech- While BMW 15 and Audi 16 have already presented protonology that powers critical components to allow them to types of fully automated cars, other car manufacturers build self-driving cars. Several companies and research are developing and testing partial autonomy approaches. centers 13 are working on an even more powerful type Toyota/Lexus are working on the concept of assisted of processor-Quantum Computers that will be able driving. Tesla recently announced that it is already to handle massive computational tasks in parallel-a installing navigation hardware on its cars, 17 although quality essential for the artificial intelligence needed its system is not intended to take full control either, but for autonomous driving. With Google recently joining rather provide assistance for the driver to improve safety. the effort, 14 the prospect of creating one (quantum com- GM first invested $500M in ride-hailing company Lyft puter?) becomes more realistic. There are different levels of self-driving, which means and then the two companies announced plans to test a 'autonomous automobile' can mean different things to fleet of autonomous Chevrolet Bolt electric taxis on the different people. For BMW to craft a more nuanced road within a year. 18 strategy, the company will need to draw the distinction Other players are more skeptical: Volvo's head of between the different modes of the car's autonomous R\&D, Peter Mertens, has been very direct in saying that assistance for the driver: the prospect of a driver reading a newspaper or answering e-mails while driving "is a very, very long term Self-parking: A car with this feature can park itself vision." n The carmaker is concentrated on safety instead, without driver intervention. This is primarily a such as object avoidance and more traditional protection convenience feature for most drivers, but can also such as material strength. Yet, in a surprising twist, that aid drivers that are physically impaired. It can help same year, (which year?) Uber's Founder and Co-CEO avoiding fender-bender accidents that may increase Travis Kalanick, started to hire dozens of autonomous car insurance costs. auto experts at leading technical institutions, and it was Case 3: Future of the Autonomous Automobile: A Strategy for BMW C47 Eimama 1 Colart Carmakor Comnatitnre Docitinninn for Autnnnmnue Nrivinn The chart above represents projected year of availability of Autonomous Automobiles for some car manufacturers. The size of the bubbles corresponds to the total car production by the company for the year 2013. The X axis shows the year in which car makers are expected to go to market with their versions of autonomous cars. The Y axis shows the degree of autonomy, as described above. Volvo with its well-established reputation of making approaches between car makers is only the beginning some of the safest automobiles on the road, that heeded of a complex picture: as a seasoned, technology-savvy the call to partner. 20 strategist, Norbert Riedheim knows that competition Along similar lines, Ford engineer Torsten Wey may not only come from established players, but also opined that he does not believe cars will ever be fully from new entrants into a given market: BMW needs autonomous: "I doubt we will ever get there," he said. 21 to anticipate. According to Wey there are situations when the car's One of these new entrants is Internet giant Google, autopilot is not intelligent enough to make decisions. which demonstrated its self-driving car in the sumThe human driver does not only consider behavior mer of 2014. The technological program at the heart of his own car, but also takes into account behaviors of the Google car is called Google Chauffeur. 23 It is an of others. Experienced drivers can intuitively predict example of a truly driverless car that can move itself what other cars on the road will do and act accord- in a targeted, pre-programmed fashion from point A ingly, augmenting the measurable data of the moment to point B using advanced sensors that collect and with their own experience. For instance, when a driver interpret data from the environment. This is enabled sees a car in front of them slow down to turn into a by multiple Google technologies, including its Maps restaurant parking lot, the driver can judge that the navigation technology. Google uses a Toyota-brand car will likely not stop right there in the middle of vehicle for testing its autonomous driving system, but the lane, based on subtle contextual clues and a life- it is not in a formal joint venture with the firm and time of learning. A computerized system, however, could still choose any other automaker as a partner. 24 does not yet have that intuition and will not acquire Being cash-rich, the company could also develop it for a long time. Yet earlier, Ford tripled its auton- its own car, as has been successfully demonstrated omous vehicle development fleet and accelerated its by Tesla. on-road software and sensor testing. 22 Alternatively, much like Tesla, Google could coopClearly, automakers are in an uncomfortable erate with an established carmaker (in Tesla's case it was dance of cautioning expectations yet forging ahead a design collaboration with Lotus in the UK). Along full steam. But this diversity of signals, views and those lines, the company announced its new self-driving technology development center in Novi, Michigan, in of HERE. 30 These 3 automobile companies will be May 2016 and one of the first projects at the new facility directly controlling an essential part of the autonowill be the self-driving Chrysler Pacifica hybrid minivan, mous automobiles' value chain-mapping and location developed in-house. 25 services-while securing the supply of critical geoBut given its deep pockets, Google could conceiv- location data in their automobiles. ably also still buy an ailing carmaker, such as Saab, still It would be wrong to limit the ecosystem view to struggling to recover after its purchase by National traditional geographies, like Silicon Valley in the U.S., Electric Vehicles Sweden (NEVS), which is owned by or other entrepreneurial hubs like Berlin in Europe Hong Kong-based energy company National Modern and R\&D labs in Japan that have been strong in autoEnergy Holdings. Or it could approach Volkswagen motive or IT innovation for decades. A look into the to take over the Seat or Skoda subsidiary, which future of the automobile has to take into account seem to be duplicating each other's offerings in the developments in Asia. For instance, autonomous taxi VW brands family. startup nuTonomy announced a pilot in Singapore that To further complicate things, it is not just in the it could become the first company to operate Level-4 visible corners of the technology world that prominent driverless taxis commercially in a city. 31 And, as mencompanies like Google are working on autonomous tioned,BMW selected Baidu as its partner in the Chinese automobiles and from which sudden advances could market when, in the Fall of 2014, it needed a highemerge. In start-ups, universities, and R\&D centers resolution GPS system to start testing in Shanghai and around the world, leading technologists are work- Beijing, two of the most demanding, densely populated, ing on pre-commercial solutions. In early 2013 there and vast automotive markets in the world. And now were multiple reports about companies and individ- Baidu claims it is developing its own automated car, but uals who were working on an affordable self-driving unlike Google, it works on driver assistance and is not feature. One of them is Professor Paul Newman from a fully self-driving car. Oxford University who works on self-driving technol- The Chinese market is already the largest and the ogy that utilizes cheap sensors. 26 Also, Intel awarded fastest growing in the world, with 18 million cars sold the top prize in its Gordon E. Moore competition 27 to in 2013, 32 a compound annual growth rate (CAGR) a Romanian teenager for using artificial intelligence to between 2005 and 2012 of 18.1%, and an expected 6.3% create a viable model for a low-cost, self-driving car. average year-over-year growth through 2020 making One company took it a step further and designed a it a tremendously important market for BMW. commercial self-driving accessory that can be installed Luckily, BMW made an early, courageous decision to on selected models of compatible cars with sensors enter the Chinese market, benefiting from the excellent mounted on the rooftop. It is a startup called Cruise, 28 relationships held by a former BMW board member and which emerged from a Silicon Valley incubator, former government executive in charge of the compaY-Combinator, and started accepting pre-orders for ny's government relations. The effort bore fruit: in 2013 it assisted driving system in mid-2014. In March 2016, BMW sold 390,713 cars in China, up 20\% from a year Cruise was acquired by GM, which appears to be earlier. This meant that China had officially overtaken interested in integrating the system into the design of the U.S. (375,782 cars sold) as the group's biggest market its own cars. and had outpaced the overall company's market growth Another critical element of autonomous driving- of 13.9 percent. 33 mapping and location services-is also flourishing glob- As Riedheim leans back in his sleek BMW carbon ally, especially in Europe. Nokia Corporation's former fiber chair, he wonders how this ecosystem might evolve mapping business, HERE-based in Berlin-provides and how should BMW position itself within it? What an open platform for cloud-based maps. HERE is not are some plausible, alternative futures? Having studonly the main alternative to Google Maps, but also ied disruptive innovation and strategy throughout the the market leader in built-in car navigation systems. years, Riedheim knows that big bets often don't pay off According to Nokia's website, 29 four out of five cars in because too many variables in a market forecast change. North America and Europe feature HERE integrated So, understanding these alternative futures first will help in-dash navigation. Not surprisingly, in August 2015 him to craft a strategy that is robust against different BMW, Audi, and Daimler announced their acquisition market states. This image shows the vast expanse of the technology ecosystem that contributes intellectual property and capabilities to the domain of autonomous automobiles. The volume of innovation is substantial and hints at the commercial promise that innovators see in this area. In the last five years the following patents have been registered: 208 for Component Automatization, 168 for Lighting Technology, 119 for Server Technology, 118 for Driving Mechanism Technology, 101 for Energy and Battery Technology, 94 for Heavy Machinery Technology, 87 for Internet Protocols \& Communication, and finally 81 for Autonomous Driving \& Driver Assistance. Please see the Appendix for a list of the Most Frequent All Original Patent Assignees and Locations of Origin. Exploring the Future cannot drive, either because they are elderly, too Through his work with design consultancies over the young, physically or visually impaired. A car that years, Riedheim has learned that this exploration first today is driven by a family member can become an independent transportation vehicle for all famrequires a clear view of all the uncertainties that could ily members, even those under 18 and without a combine to pivot the market and ecosystem in one direc- driver's permit. However, it is not clear if, or how, tion or another. this technology might be adopted by the consumer majority. What will be their aspirations, concerns, Key Uncertainties anxieties, and potential mistakes? Additionally, the Many uncertainties related to self-driving automobiles permissible behaviors allowed in the car itself will will prompt both business executives and policy makers depend on whether the vehicle is fully self-driving. to take action of one kind or another. In this complex For instance, driver-passengers could be able to spend ecosystem issues emerge in six different areas: their time in the car messaging, reading, or working. Social: Who will use self-driving cars? Autonomous fully autonomous car will not require any intervenvehicles can be used to transport people who tion by the passenger ... or will it? What if systems fail and driver-passengers are required to become vehicles will be able to optimize their consumption active drivers? by themselves based on road conditions as well Technological: Today self-driving cars are possible as acceleration and breaking behavior, and secbecause of the existing hardware and software tech- ond, electric cars and smart charging infrastrucnology. However, as described, there are both cars ture may at some point converge on autonomous with fully self-driving features pre-installed (such automobiles, such that gasoline could become as Google's car), and systems like Cruise, which can obsolete. allow other cars to become self-driving. The devel- Legal: Self-driving cars have to be explicitly legal opment cost of these technologies differs widely and encouraged by regulators, not just be tolerand will influence pricing to consumers and hence ated as a dubious "gray area." Bad or lagging legthe adoption response by consumers: for instance, islation could slow down the investment required a survey by JD Power and Associates found that and therefore the development of the technolonly 20% of Americans currently would 'definitely' ogy. Furthermore, authorities have to develop or 'probably' buy a self-driving car if the price was new liability frameworks to answer the following only $30.000.34 questions: who has what kind of influence over Economic: Firstly, there are of course various crises autonomous cars "misbehaving" and who will in Asia, the U.S. and Europe that have depressed therefore bear the legal and financial responsibilconsumer spending over the past two decades. Will ity? Would it be the driver, the software or the IT the global and regional economies recover suffi- hardware provider, the data processing companies, ciently to enable consumers to replace their vehicles the telecom companies linking cars wirelessly, the with new, unproven autonomous ones, or would application providers for different functionalities they resort to buying pre-owned vehicles that are that may have little to do to with driving but could cheaper and use more established technologies? interfere with behavior in the car, the car manuSecondly, self-driving vehicles will impact different facturer, or the company responsible for the car's market players. Insurance companies might change maintenance? their business models based on a lower rate of acci- Ethical: Two main aspects represent key uncertaindents. Driverless vehicles may allow some com- ties in this area. The first issue concerns privacy: panies to save money on drivers (such as taxi or what information will be collected by autonomous bus companies). Also at the national level, research automobiles, and who has access to it? The second from The University of Texas 35 estimated that if just point regards safety. How can autonomous cars be 10% of vehicles were self-driving, a country such prevented from being hacked, getting virus-infected, as the U.S. could save about $37 billion a year on and being used for remote criminal activities such as healthcare and environmental costs. For the same terrorist attack or drug delivery? How does society reason, the U.K. government has announced its address computer-savvy minors hacking into cars commitment to spend 10 million on a test-bed for and sending them on remote joy rides? Will physiself-driving cars. 36 Finally, the cost and purchasing cally or visually impaired passengers be at the mercy power in different regions will weigh into the mar- of malfunctioning autonomous driving intelligence? ket economics in different ways, since self-driving cars will change the current production process and To get more information about these and many countries will facilitate autonomous automobile other uncertainties and assumptions, both governments adoption among consumers in different ways and and private companies have started to experiment. In along different timelines. the U.S., California, Nevada, and Florida allow comEnvironmental: Pollution regulations will change, panies to use self-driving cars on the road for testing considering the new emissions generated by purposes. 37 Meanwhile, BMW has tested its self-driving self-driving cars, which may be lower than the car in Europe, and recently also got permission from emissions generated by cars today. This assumption the Chinese government to test its cars in Shanghai and is based on two main factors: first, autonomous Beijing. Case 3: Future of the Autonomous Automobile: A Strategy for BMW C-51 Figure 3 Map of "Hot Topics" Related to Autonomous Driving that Gained Public Attention on the Internet (Graphic Developed Through Quid.com) 2 This graphic shows some of the key uncertainties from a public perspective, as articulated through news and other coverage on the Internet. It demonstrates that many of the issue areas are interconnected, supporting the point that the autonomous car is a complex system of systems with 2nd and 3rd order effects that could be undesirable and are on the minds of consumers and legislators, i.e., potential buyers, for that reason. But Riedheim knows time is critical: the Board will positions), which ones will be hard to replicate in the feel that BMW has to make the strategic investment, emerging automobile industry ecosystem? (carmakpartnering, and positioning decisions now, even absent ers, Internet companies, technology startups, R\&D perfect information, if they are to be at the forefront. labs, governments, insurance companies, suppliers, Questions he'll need to be ready to answer: etc.)? Which ones does it still need to build and 1. Strategic challenge/aspiration: Given the changdevelop, and why? ing scenario, what kind of business should BMW aim to be over the next 10 to 15 years? What are its aspirations? 2. Objectives: What are the key metrics that would failures are possible and should be accepted as indicate BMW met the challenge and achieved its part of the entrepreneurial path? What kind of goal? learning milestones should the company set for goal? 3. Opportunity: What is the size of the opportunity for BMW? As Riedheim sits down to start work on these ques- 4. Competitive advantages: Given BMW's current tions, he knows the burden on him is considerable: the competencies, (e.g., internal capabilities, market future of this iconic company is at stake. 2 The authors wish to thank the helpful people of Quid.com for making their technology available for this case and for their tireless counsel on its use and value. DO YOU NEED THIS HERE SINCE YOU HAVE AT THE START? WOULD ELIMINATE. Exhibit 1 Emergent Strategy System (ESS) and Tools Exhibit 3 Financial Data BMW Income Statement 2013 39 Case 3: Future of the Autonomous Automobile: A Strategy for BMW Exhibit 3 (cont.) Financial Data BMW in Fiaures 201349 'Including supplies of series parts to BMW Brilliance Automotive Ltd., Shenyang. IIncluding transfer of non-current assets in conjunction with merger of BMW Peugeot Citron Electrification GmbH, Munich. 'Proposed by the Board of Management. BMW Research and Development 2013"1 'Research and development expenditure for the year rose by 21.3% to 4,792 million, mostly for projects aimed at securing the Group's future business (2012: 3,952 million). The research and development ratio was 6.3%,1.2 percentage points higher than in the previous year (2012:5.1\%). The ratio of capitalised development costs to total research and development costs for the period (capitalisation ratio) was 36.4% (2012: 27.6% ). Amortisation of capitalised development costs totalled 1,069 million (2012: 1,130 million). Further information on research and development expenditure is provided in the section Results of Operations, Financial Position and Net Assets and in note 10 to the Group Financial Statements. Total research and development expenditure, comprising research costs, development costs not recognised as assets on the one hand and capitalised development costs excluding the scheduled amortisation thereof on the other, was as follows