Automotive industry gets into bed with Silicon Valley - GM invests $500m in Lyft

Profile picture for user ddpreez By Derek du Preez January 4, 2016
Summary:
The companies will jointly develop an autonomous on-demand network. Does this spell the end of car ownership as we know it?

lyft
What’s the biggest problem facing companies like Lyft and Uber? One could argue that it’s the legal challenges such companies face from drivers, claiming that they are not simply partners using a technology platform, but are actually employees that have rights.

What’s a solution to that problem? Get rid of the drivers.

Cue an announcement this morning from General Motors, one of the largest car manufacturers in the United States, and Lyft, one of the most popular ride hailing/sharing technology companies operating out of Silicon Valley, stating that the pair are going into business together to create a network of autonomous on-demand vehicles.

By cutting out the cost of the driver, the cost of ride sharing/hailing a vehicle could fall so dramatically that car ownership (at least in urban areas) could no longer seem like a sensible financial option.

Instead of three parties taking a cut (a driver, the car manufacturer/leaser and the technology platform) this will just leave two parties to share their earnings (car manufacturer/leaser and the technology platform).

Drivers thought that they had a tough deal before…

The announcement

GM’s $500 million investment in Lyft is half of a $1 billion funding announcement this morning for the Silicon Valley based company. Lyft now describes GM as a “strategic investor” and it said that it is an important milestone in “redefining traditional car ownership”.

Other investors include Janus Capital Management, Rakuten, Did Kuaidi and Alibaba. Lyft said that it is now valued at $5.5 billion (which is still significantly less than the $50 billion valuation of Uber).

As well as working together to create an autonomous network of on-demand vehicles, GM and Lyft have said that they will immediately begin working on creating a series of national rental hubs where Lyft drivers can rent short-term vehicles.

Lyft said that this should unlock “new ways for people to earn money without having to own a car”.

John Zimmer, Lyft’s president and co-founder, said:

This raise and collaboration with GM are exciting milestones in our three-year history that continue Lyft's leadership in redefining traditional car ownership.

We are thrilled to take this momentum into the new year and continue improving life in our cities through more affordable, accessible and enjoyable transportation.

Whilst GM president Dan Amman said:

We see the future of personal mobility as connected, seamless and autonomous. With GM and Lyft working together, we believe we can successfully implement this vision more rapidly.

Amman will also join Lyft’s board as part of the deal.

Implications

From my perspective, this is a case of GM recognising that it needs to somehow get involved with changes in the automotive industry now or potentially face losses in a few years because people are no longer buying cars in cities. In the context of its earnings (i think around $150bn), GM’s investment isn’t staggering for the company, but it gives it a stake in the ground.

For Lyft, the opportunity to jointly work on driverless cars with GM and build an autonomous network with one of the largest car manufacturers in the US is a no brainer. As I noted before, the biggest challenge (and one of the biggest cost factors) for companies like Lyft are the drivers themselves.

Equally, as I noted at the end of the last year, this is what we can expect to see more of in 2016. Large companies that have assets and resources making investments in innovative companies that need to leverage those assets and resources.

Route to market will be a hell of a lot quicker than Lyft developing its own driverless cars or GM trying to jump on the Uber/Lyft bandwagon itself.

This is old industry meeting new industry - with Silicon Valley at the centre of the change.

And for the consumer? Do I really care who built the car I’m hailing via Lyft? Nope. If it means less costs (and is potentially safer) because it’s driverless, then I’m sure many people will be happy. As we’ve seen in plenty of markets, no amount of nostalgia or allegiance to traditional cabs can outweigh the ease of use or price point of these new companies.

However, we shouldn’t shy away from the fact that this could mean that taxi driving is no longer

Tearing up L plate after passing driving test
actually a career in 10 years time. That too has implications.

My take

Will we see something similar from Uber? Lyft has a first mover advantage here, but Uber has a much larger network.

Equally, regulations are going to be a challenge for these companies. Driverless cars aren’t a sure thing just yet, even though governments seem open to the idea.

But ultimately, this is a smart move from both companies.