SXSW Interview: Mercedes-Benz and the Future of Autonomous Driving

It's South by Southwest week on Industry Focus! In today's Energy episode, Dylan Lewis interviews Wilko Stark of Daimler (MBGA.F 1.38%) and Mercedes-Benz about the future of self-driving cars, the CASE initiative, and what Mercedes-Benz is doing to stay ahead of the curve.

When will we really start to see self-driving cars be adopted around the world? What challenges do different countries face when it comes to producing self-driving cars? How does Mercedes-Benz stand out from its competition, and what threats will the company have to watch out for from players like Waymo and Tesla (TSLA -1.11%)? Will there still be demand for luxury cars in a self-driving future? Tune in to find out more.

A full transcript follows the video.

This video was recorded on March 15, 2018.

Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Thursday, March 15th, and we're midway through South by Southwest Week. I'm your Tech host, Dylan Lewis, and I'm at South by Southwest with some of our other Fools attending sessions and grabbing interviews for the podcasts. We're going to air one of those conversations today. I had the good fortune of sitting down with Wilko Stark. He's the VP of strategy and products at Daimler, the VP of strategy and planning at Mercedes-Benz, and the head of the company's CASE initiative. We chatted about the company's timeline for autonomous driving, the different forms the autonomous future might take, and when cities might start seeing the CASE plan in action. Before we got into all of that, though, I asked him to break down exactly what CASE is.

Wilko Stark: First of all, we set up a CASE initiative one and a half years ago for one simple reason, because from our perspective at Mercedes-Benz, there are four major trends which are changing the automotive industry completely. This is Connectivity, autonomous driving, shared mobility services and electromobility. We strongly believe that it's not only these four trends which you have to push forward, but it's also the combination of these trends.

Lewis: So, it's very much a holistic view of all of these?

Stark: It's a very holistic view on that, and we push all these four dimensions, but we also push the combinations. Imagine self-driving cars embedded in mobility services. In this scenario -- this scenario is actually coming, in a few years it will be reality, so we are not talking about the far future. It's coming very, very soon. This is what we want to bring to the market. Therefore, we have this holistic approach to cover all these trends.

Lewis: Thinking specifically about autonomy and sharing, the A and the S in CASE, those seem like two things that maybe have the biggest impact on the future of car manufacturers like yourself, and the relationship that people have with cars. How are you guys preparing for that?

Stark: From our perspective, first of all, we have to push autonomous driving. We have two development paths. One development path is to improve the driver assistant systems we already have in our cars in serious production. The second development path is really to go to level 4 and 5, complete autonomous driving. We will come up with an autonomous self-driving car beginning the next decade, and this will be embedded in our mobility services. Therefore, we built up Mytaxi. Mytaxi is the leading ride-hailing service in Europe, compared to Lyft and Uber here in the U.S. It's a perfect combination. That's our view, we have to combine all of these dimensions.

Lewis: You mentioned a firm timeline there for autonomous driving, which is refreshing, honestly, because so many people that you talk to will say, "By 2030, most cars will be fully autonomous." I think it's lost in a lot of those conversations is, there's different levels to autonomy. How do you guys manage expectations, understanding that there's level 2, level 3, level 4, level 5 autonomy?

Stark: From our perspective, we have to distinguish, and therefore we are always talking about two development paths. The one development path is really improving the driver assistant systems we already have in our cars and go up to level 3. Level 4 and 5, or complete autonomous driving, is a completely different story. Regarding computing power, it's actually factor 1,000, regarding the sensor kit you need. Also, from a cost side, it's actually a factor 10 to 100. So, you cannot compare. These are two completely different development paths. What we did, we set up a [...] and we're going to launch a self-driving car. The self-driving car, of course, will be 100% electric, and it will be embedded in the first step in our mobility services.

Lewis: You mentioned Europe before. You guys are this very large international brand, and I think a lot of the conversation, particularly in the U.S., has been on U.S.-specific companies. How are the challenges different in Europe and in the United States with developing this type of tech?

Stark: I think, the key challenge for us is, we're a global car manufacturer, but you have completely different traffic situations around the world. I think it's actually easier here in the U.S. If you go, for example, to dense cities in Europe or, even worse, in China, the traffic situations are much, much more complicated. Therefore, we send our cars around the world to test these different traffic situations for self-driving cars. This is, we call it really deep learning. There are completely different traffic situations around the globe, and in the end, as a global manufacturer, we have to cover all dimensions.

Lewis: I imagine some of the learnings that you'll have in a market like China will still be relevant to whatever is going on in Germany or in France.

Stark: Absolutely. If you can handle very complex, difficult traffic situations, with also a lot of scooters or people on the street, then you can handle the easy traffic situations.

Lewis: It's kind of a cumulative knowledge, right?

Stark: Absolutely. You have to prepare for different regions. Of course, in a first step, we're going to launch our activities in Europe and the U.S., and therefore be invested on and build up -- Mytaxi is one example -- years ago. This is also a big advantage that we have at Mercedes-Benz, that we started this car sharing activity with car2Go, which is also here in Austin, actually years ago. So, we have a lot of experience in car sharing and mobility services.

Lewis: So, much of the regulatory progress that we've seen in the United States has come in California. They've had their hand forced there. Are there lessons from what we've seen in California that maybe we can apply to other states to help as a blueprint for moving this technology along? Because one of the big problems is the regulatory side, right?

Stark: Absolutely. One of the key challenges is the regulatory side not only in the U.S., but also in Europe and in China. This has to be clarified by the governments. But everybody's interested in self-driving cars and autonomous driving. I think, from my perspective, this will be fixed. We have so many cities around the globe which are knocking on our door and saying, "We would like to have mobility services, self-driving cars, and these cars of course have to be 100% electric."

Regarding California, of course, California is a front runner, and California is, based on weather conditions, a perfect state for autonomous driving. In the first step for the sensors, it's much easier if you have pretty good weather conditions, as you have in Southern California, compared, for example, to Massachusetts or somewhere else.

Lewis: Yeah. And you notice that all of the big tech companies in the United States are doing their development there. I don't think that's any coincidence. You look at all the companies in the self-driving space right now and the in the mobility space, you have your traditional car manufacturers, you have the Lyft, Uber, Waymos of the world. You're all starting from very different points. So, what are some of the strengths that you guys think you have as a traditional auto manufacturer? And maybe, what are some strengths you see with the competition that will be something that you guys are going to have to make up for?

Stark: I think the big advantage we have as a car manufacturer who has experience also in mobility services is, we cover the whole value chain. Imagine a self-driving car embedded in mobility services like Mytaxi, Uber, or Lyft. What do you need? First of all, you need an app. We have an app, it's Mytaxi. Secondly, you need a fleet management system. This is what we have with the Daimler Fleet Management System. You need an asset provider, somebody has to finance all the cars. This is what we have with Daimler Financial Services. And then, of course, we have the car, in the next years and we have the system for autonomous driving. That's a big advantage, because in the future, we're going to produce our self-driving cars in the production line. So, we do not have to retrofit the car afterwards. It's actually produced in line with all the other cars. That's a big advantage. The second big advantage is, we cover the whole value chain, what you need to actually employ self-driving cars and mobility services.

Lewis: And, is there anything you see looking out of the competitors where you're like, it would be nice to have that? Like, it would be great to have the charging network that Tesla has, or something like that? Where you're like, that's something we're going to have to work toward?

Stark: Of course. We have competitors. One example is Waymo, who is definitely pretty much advanced in autonomous driving. But we have the big benefit that, once again, that we cover the whole value chain you need. Secondly, we also have a lot of experience in autonomous driving.

And when it comes to the Tesla network, this is not so much for autonomous driving but for electric vehicles, we are now doing the same in Europe. We're building up a fast charging network which actually goes up to 250 kilowatts and 350 kilowatts with an 800 voltage system across Europe. We build up over 400 charging stations on the highways in Europe. This means that you can recharge your vehicle within 30 minutes. That's a big advantage for electric vehicles in Europe. In the future, you can really travel with an electric vehicle from Northern Germany down to Southern Italy.

Lewis: From a corporate culture perspective, you are at the forefront of what's going on in this space, and you're working on the fun, futuristic stuff. You also have the legacy manufacturing and standard car model that has existed for decades. How are you guys managing, we need to continue working on this stuff, it's been great, we also need to work toward this other stuff, and not feel like anyone's being left behind?

Stark: This is actually one of the biggest challenges. Therefore, on the one hand side, we have our core business, and the core business is very important, because today we earn all the money in the core business to invest in our future. And the future is CASE -- connectivity, autonomous driver, shared mobility and electromobility. So, we need both. And we have to say to the people in these different divisions, we need you all. Each part is very important. And, at the end, of course, we have to transform the whole core business into the CASE business.

Lewis: Yeah, because it won't be so far off that almost everything is electric, I would assume. Right? That's the vision at some point in the future.

Stark: This is actually the vision. But if you look at legislation in China and Europe and the U.S., you have to say, especially in China, electromobility is coming very soon. So, the Chinese government is pushing electromobility like hell. We'll see sales of 25-30% in some cities, maybe even 40%, of electric vehicles already in 2025. That's not far from now.

Lewis: And with you guys in the marketplace as a luxury manufacturer, particularly with the Mercedes line, how do you think this move toward shared mobility impacts that brand? I think one of the big selling points with a performance vehicle is that they're fun to drive, and they're great to sit in and they feel amazing, that car feels incredible. How are you building that line of thinking and that kind of branding into a more shared, autonomous future?

Stark: From our perspective, also in mobility services, there is a premium market. Even driving a Mercedes self-driving car in a mobility service is more affordable because you pay per kilometer and you don't have to pay for the whole car. Therefore, we strongly believe that there will be a market like we have already today, if you go into the Uber app, for example. We have uberBLACK, you have Uberpool, you have uberX, etc. There are different markets, different segments for mobility services. And we strongly believe that there's a premium market for self-driving cars in mobility services. This is one approach.

The second approach is what we are doing with our van division, is also to have a pooling concept. We also will come up with something comparable to Uberpool based on the Mercedes self-driving car. We develop together, as one example, Via, in New York. This is [...] classes in New York. We now have a prototype running with the pooling concept also in Stuttgart.

Lewis: Yeah, there are a lot of different visions of what mobility might look like in the future, particularly for folks that live in cities. The options of not owning a car and only relying on sharing services or owning a car and maybe having your car out giving other people rides when you're not using it. People have run wild with what the future might look like. How do you prepare for all of that?

Stark: I think absolutely key is, especially if it comes not only for mobility services, but also through propulsion systems, is flexibility. We will have different markets in the future, different requirements, and also completely different customer profiles. Therefore, we have to be flexible at Mercedes-Benz, and have to offer the different market segments what they want. I strongly believe that there will be a big market for mobility services for self-driving cars, but of course, there will also be a big market for usual cars, because people love to drive. It's fun to drive, especially if they drive a Mercedes-AMG, so you have to distinguish. That's already taking place today. If you go to San Francisco, for example, we have a lot of customers who commute with Uber or Lyft on a daily basis to work. But, they still have a car for the weekend, etc. The car is always and will always be an emotional product. People want to possess emotional products, like clocks, so we need to cover all these segments in all these markets.

Lewis: Yeah, there's this element of the car that, at least in the United States, for me, it's a rite of passage. Getting your driver's license is your symbol of freedom, right?

Stark: Exactly.

Lewis: So, I wonder, 20 years from now, 30 years from now, if teenagers are going to feel the same way about it. It sounds like you're preparing for whatever might come, though.

Stark: Exactly. And there will be, of course, a shift toward mobility services, therefore we'll be entering this market. We don't want to be at the end of the food chain and just become a simple car manufacturer. We don't want to lose the direct contact with the customer. Therefore, we're going to offer mobility services on our own having a direct interface with the customer.

Lewis: And that involvement and full integration gives you guys a lot of options as a business, right? If the market shifts from people selling cars to some sort of service, hybrid, maybe, and you guys are involved in the entire effort there, then they're still customers.

Stark: Exactly. And this is our approach. In the end, we want to own the customer interface, be it that he wants to buy a car, be it he wants to have a mobility service, etc., this is our approach. Therefore, we are doing everything in the CASE division to cover all of these segments. This will be the future of mobility and the future of Mercedes-Benz because we strongly believe that there will be also, in the world of self-driving cars, a premium market for Mercedes-Benz cars, especially if you look at the future of self-driving cars, the cars will look different. We talk about third place, for the car to become more like a living room where you really want to spend time because it's so comfortable and so convenient.

Lewis: And is that somewhere where you guys think you can really bring the luxury brand to the future of mobility? The idea that it's a living room -- it can be very spartan, it can be bare, or it could be luxury.

Stark: We strongly believe there will be a market for luxury brands for one simple reason, because if you look at the household income around the world, it's actually, the households with an income above $100,000 or $200,000 is rising tremendously. Therefore, there is a market, and there's enough money to spend on luxury experiences. And luxury experiences can be, in the future, in owning a car, and it can also be in driving a self-driving Mercedes Benz in mobility services.

Lewis: You threw a timeline out there before. What should people be watching over the next year, two years, five years, to make sure that what they're hearing with autonomous driving, and maybe the efforts specifically with your company, are panning out, and that they're on track?

Stark: Regarding the autonomous driving, I think it will come, and it will come in the major cities, and it will be, in the beginning, an additional offer for mobility. Let's wait and see what's going to happen if people are going to embrace this new technology. There might be some people who say it's a great experience, let's test it. Some people might be a little bit afraid. But, let's wait and see. The only thing I can say is, we stay flexible at Mercedes-Benz, and we strongly believe that the future will be connected, autonomous, shared and electrified. This is what we are going to prepare for.

Lewis: I have one last question for you. What was your first car?

Stark: My first car was actually a Volkswagen Polo.

Lewis: What does that look like? [laughs] I have never heard of that car.

Stark: A Volkswagen Polo -- it looks like a Golf, but it's a little bit smaller.

Lewis: So, a small kind of coupe car.

Stark: Yeah, exactly. It's a hatch.

Lewis: A hatch, OK. Did you ever dream that this would be what you were working on when you had that as your first car?

Stark: From my perspective, my father also worked for Mercedes, and it was always a dream for me to work at the Mercedes-Benz, because the products are absolutely fascinating. Therefore, I'm now really defining and developing the future of Mercedes-Benz, I think that's one of the greatest jobs you can have on Earth.

Lewis: Well, we're looking forward to seeing what you guys come out with in the next couple years. Thank you so much for joining me!

Stark: Thanks!

Lewis: Listeners, I hope you enjoyed that conversation. We have one more South by Southwest dispatch coming at you tomorrow on the Tech show. That does it for this episode, though. As a reminder, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Dan Boyd for all his help editing today's show and thank you for listening. Fool on!