Five years ago, when the US auto industry was just beginning to recover from the Great Recession, there was widespread speculation that the old model of the car business was broken, and that only the new economy could come to the rescue.
And with good reason. The US auto market had cratered, plunging from a peak of over 17 million to a devastated 10 million in yearly sales.
Both General Motors and Chrysler had been bailed out by the federal government and gone bankrupt. Ford saw its stock price fall to less than $2 a share. Gas had spiked to over $4 a gallon in some parts of country. Credit, the lifeblood of the car business, had been wiped out.
Meanwhile, Apple was on a path to become the world’s most valuable company. Facebook was tasking over the media landscape. And Tesla, after suffering a brush with financial death in 2009, looked like the most innovative company of four wheels.
Silicon Valley and California in general was suddenly filled with new and futuristic ideas about transportation, from Google driverless cars to numerous electric-car startups. Detroit, by contrast, was lurching toward the largest municipal bankruptcy in US history (it would come in 2013), and its great automakers looked to be crippled dinosaurs, completely out of step with the times.
The US auto industry was a problem to be solved, and Silicon Valley specialised in solutions.
A doomed industry?
“The automobile industry is in the middle of a fundamental transformation,” wrote former Intel CEO Andy Grove in the Wall Street Journal in 2009. “There is a lot of information available on how companies have dealt with major changes in their business environments, but little is known about the transformation of entire industries.”
“History shows that most companies do not deal well with transformation.” he continued. “One reason has to do with senior managers. They usually ‘don’t get it.’ They have a difficult time accepting that the future will be vastly different from the present because they rose to power in the old business environment. They excelled in the old environment and didn’t acquire skills necessary to operate in the new.”
Fast forward to 2016 and the senior mangers in Detroit that Grove worried about have deepened their engagement with Silicon Valley and the technology industry to an unprecedented degree. General Motors already had a venture-capital arm before it invested $500 million in Lyft and bought Cruise Automation for its innovative self-driving tech.
Ford had such a solid connection with Microsoft that outgoing CEO Alan Mulally was discussed as a successor to Steve Ballmer; the company also put $182 million into software startup Pivotal earlier this year. Fiat Chrysler Automobiles has teamed up with Google to create driverless minivans. And all the automakers have a Silicon Valley presence, which enables them to scout emerging technologies and act on them quickly.
An auto sales boom in the US that started in 2013 and set a record in 2016 with 17.5 million new cars and trucks delivered has fuelled Detroit’s engagement, as has the broad realisation among the car maker’s executive teams that this is their opportunity to disrupt themselves and profit from the experience. Cheap gas, an improving employment picture, and ample credit means that Detroit is selling pickups and SUVs and raking in cash. The game plan is to take some of those winnings and send them in search of rapid innovations that Motown can’t create on its own.
At the same time, Silicon Valley has started to encounter some investor turbulence. Startups with hefty valuations don’t see IPOs as a way to pay back their investors. That leaves getting acquired as an option, but a level of saturation with social networking and apps might have set in.
The Detroit automakers aren’t in the market for messaging apps, but they are looking for technologies that can future-proof them, or advance the process of making cars smarter. In conversations with people in the auto industry, there’s a sense that the tech sector has begun to figure out that Motown has money and wants to spend it.
The signals from the top are also strong. “We’re going to disrupt ourselves, and we are disrupting ourselves, so we’re not trying to preserve a model of yesterday,” GM CEO Mary Barra said in a BI Interview in 2015. “And when you think of the assets the company has — the scale, the control of the vehicle platform, the ability with embedded connectivity, the knowledge we have of just every aspect of the vehicle and how we’re putting it together now — I think there’s a lot of plus signs, and we can lead.”
That attitude was echoed by Ford CEO Mark Fields, who BI also interviewed. “It’s a very exciting time at Ford, because we are transitioning from an auto company to an auto and a mobility company,” he said. “Mobility for us, at the very simplest level, is to allow people to live, play, and work where they want. How do we help enable them to get around to do that? And there’s a lot of talk around technology companies disrupting the auto industry. Our approach is very simple: We’re disrupting ourselves.”
Birds of a feather
So how did this reversal come about? Even if Detroit isn’t really in a position to rescue Silicon Valley — Silicon valley doesn’t really need to be rescued — then why is the dinosaur now so enthusiastic about participating in its own disruption?
Simple: Detroit was the Silicon Valley of the early 20th century, a hotbed of entrepreneurship, fascinated with the most high-tech contraption of the time — the automobile. True, over the decades the culture of the auto industry has become stratified and bureaucratic, but despite that, the car itself has been steadily improved. Detroit has never backed off from technology, and the engineers and executives who have chosen to work for Ford or GM are still excited about new stuff.
When they look at Silicon Valley, they see a place ruled by engineers, a contemporary version of Detroit’s own origin story. And that’s why Silicon Valley and Detroit’s newfound mutual admiration could be the beginning of a long and beautiful friendship that stretches from the Bay Area to the banks of the Detroit River.
NOW WATCH: This $5 billion factory is the key to Tesla’s future — and it’s in the middle of the desert
Business Insider Emails & Alerts
Site highlights each day to your inbox.