They Can Build Cars That Drive Themselves, but Not Cars That Buy Themselves

The prospect of self-driving car technology being widely used on the nation's roads is looking more and more feasible with each passing month -- to the degree that companies like GM (GM -0.02%) and Ford (F 0.37%) are putting more than a few eggs into a self-driving future basket.

On this industrials segment of the Industry Focus podcast, analysts Sean O'Reilly and John Rosevear look at what the major auto companies are doing to position themselves to maintain profitability in a future where far fewer people own cars, because more of them feel confident about being able to hail a self-driving ride-share vehicle whenever they need one. Tune in to find out more about the Chevy Bolt, Tesla's (TSLA -0.39%) long-term strategy, a possible future for pick-up trucks, and more.

A transcript follows the video.

This podcast was recorded on Jun. 16, 2016. 

Sean O'Reilly: How are GM and Ford positioning themselves to handle this? Because GM, they invested $500 million in Lyft. They're all looking at this. They're all trying to follow Tesla with the driverless technology. What else is being done in order to position themselves, because I don't think they want to go through bankruptcy court again.

John Rosevear: No, no. And, to be clear, Ford never went into bankruptcy court. It was a close shave, but Ford refinanced itself before the market forced it to go into court and restructure. But anyway, the vision, the way Google and Tesla and Uber come together as the big disruption threat that we all see on the horizon, is a universe where you don't own a car, you hail a car with a software app whenever you need one, it just shows up, it's electric, it's self-driving, it's comfortable, and it's safe, because self-driving cars that talk to one another won't get into very many accidents. That's the thinking, and it seems to be very sound thinking if we can perfect the software.

That together is the threat. What some of us refer to as the robot-Uber world, with these self-driving cars. As a digression personally, I think this is what Apple's (NASDAQ: AAPL) car is really about. I think what they're aiming to be, is the premium robot-Uber, if they go into this business. That's my theory.

What are GM and Ford doing about this?

O'Reilly: I just found out the Chevy Bolt is apparently a big deal in this world.

Rosevear: It's funny. I was actually about 20 feet away when Mary Barra first unveiled the Chevy Bolt about a year and a half ago in Detroit, it was a big surprise. They were showing off the new Chevy Volt, with a "V", which is of course their innovative plug-in hybrid, essentially, that has great owner loyalty. They just rolled this thing out. It looks like a little crossover in person. It's not sexy and fast like a Tesla, and everybody is like, "Huh? What's that about?"

O'Reilly: Does it have the body of the Volt?

Rosevear: No, it's built on, it's very loosely related as I understand it to one of GM's small car platforms, but it's a new architecture that they created.

O'Reilly: This looks like the Ford Focus, I'm looking at it now.

Rosevear: The Bolt is very interesting. I spent some time talking to the folks who worked on the program at GM, in Detroit at the auto show in January. They're not interested in Tesla. This car was designed from the ground up with ride-hailing in mind. They went on and on about all these features. It's got this special rear view mirror they got that has so far only been used on top line Cadillacs, that combines cameras to give you a seamless view around the car and the rear view mirror, without the window pillars or things like that in the way, because the cameras fill in the gaps.

It's got floors that are flat, rear doors that open wide, the seat is configured in the back seat to make it roomy for passengers. Even though the Bolt isn't a particularly big vehicle, it is very roomy in the back seat. It's easy to slide in and out of. It turns on a very tight radius. It's very maneuverable. There are cameras and sensors that help you pull right up to the curb. It's got all of this smart technology in it for tracking and so forth. It's like, "Huh?" They're telling me all this and it's like tailor-made for Uber or more specifically, Lyft.

Now, we're seeing a few months later, GM is testing self-driving versions. GM acquired a little company in San Francisco called Cruise Automation. It was like a 40-employee company that had been working on a self-driving system that could retrofitted to certain Audis. It was like this little niche thing. GM took them out for a rumored $1 billion. They have not yet fully explained this purchase, but the hints that have been coming out of GM were that they needed one particular thing to make their self-driving software system work, and Cruise had the thing. It was the missing piece of their puzzle.

O'Reilly: They paid $1 billion dollars for this?

Rosevear: If they paid $1 billion dollars and they get self-driving cars to market two years ahead, is that a bad investment?

O'Reilly: No. I will not argue that.

Rosevear: We don't know for sure yet. But it's certainly a bet that GM can make. Now, they've already got ... the Bolt doesn't even arrive at dealers for normal customers to buy until the end of the year. But there are already self-driving Bolts testing on the streets of San Francisco. Lyft has said -- you mentioned that GM put half a billion dollars into Lyft in January -- it appears they've been working with Lyft for a while before that was announced. Maybe even as they were working up the specs for what became the Bolt and so forth. Lyft has said that they're going to test a self-driving taxi service in a U.S. city to be named, within a year and that the cars will be self-driving Chevy Bolts.

O'Reilly: That is just amazing to me.

Rosevear: This isn't the future. This is in the product plan. It's coming. It's right there. If you ask a GM product employee who works on the electric cars or the self-driving stuff, "What are you doing to catch Tesla?" They give you this look. They're like, "Catch Tesla?" Tesla just released their beta system early. They're like, "We got Tesla's range. We've got a self-driving system. We're not catching Tesla." They don't quite say it that way. They are much more gracious than I am making them sound. Props to GM for biting their tongue there. They feel like they're right there. They really have something to show for that.

O'Reilly: To help the Bolt case, and then bringing it around to the valuations and everything -- I'm trying to be unbiased here. I've read an interesting analysis of ... If everybody on planet Earth or just the United States even, want the driverless cars obviously. Nobody would be buying a new Ford or GM car and we wouldn't own it, we just hail them, quick 2-minute trip and all that stuff. The number of miles that these cars that are presumably circling our cities are going to drive in a year will be astronomical. Does that not imply that there's going to be a high replacement rate and the automakers will technically be fine?

Rosevear: Even if they are self-driving electric cars, making cars is hard. When I say that, what I mean is, making cars profitably to global standards of quality that we've all come to expect. Making a fragile, high-performance, exotic and selling it for half million dollars is relatively easy. Making a Toyota Corolla or a Chevy Cruise is very difficult, to that level of quality and perfection, time after time and making a good profit on it.

If we're all going by robot-Uber, those cars are going to get used up quickly. Somebody's got to make them. Obviously, GM is angling to be one of those companies that's going to be making them. Then, at the same time, this may become the standard in cities. Maybe it'll replace buses and subways in cities that have buses and subways. I don't know. There's also a good argument that 30 years from now, come whatever happens with technology, Ford and GM are still going to be selling a ton of pickup trucks in Texas.

O'Reilly: Yeah, amen.

Rosevear: Maybe those pickup trucks are electric, and maybe it just takes the right combination of product features and affordability to make these loyal pickup truck customers who order the VA pick-up every five years or seven years and say, "Whoa! Wait a minute. Maybe there's something to this electric thing." A dual-motor Ford Super Duty with monster torque and monster trailer towing capacity, I think that would get a close look from a lot of people, even if it did not have a V8 roar or a big diesel sound. I think in time they will be able to, as the costs make sense for people, sell electric pickups, but I don't think they're going to stop selling pickups for a long time. Maybe not 200 years from now but certainly 30 years from now.