Editor: You recently published a paper on the “technological revolution” in the automotive industry. Give us the broad strokes on trends and what constitutes a revolution.
Cahill: I’ll describe some of the facets with a few anecdotes (the paper cites quite a few statistics, which your readers can access here). Ten years ago, I first saw a navigation system while driving to a ball game in a client’s high-end car. With no ability to give directions, the system was crude by today’s standards, but to a map guy like me, this technology was mind blowing. Five years ago, a former colleague opted to buy a Taurus on the sole basis of its new Sync system that could interface with his iPod. Today, these systems are ubiquitous.
Personally, I can say that safety-related technology, such as a rear-facing camera, will figure directly into my own decision to purchase a new car sooner than I otherwise would have done. A McKinsey & Co. survey, among others, shows that I am part of a growing population of consumers who want these features now, and I don’t see this behavior leveling off any time soon. These technologies will become standard features in every car at some point, and what remains is for them to filter down to the lower-cost cars.
The “revolutionary” point here is that technology has become a key differentiator for consumers and, therefore, a competitive advantage for original equipment manufacturers (OEMs). Further, this is high-margin business. With money to be made, suppliers are focused on developing solutions for OEMs, which in turn are focused on building the cars that consumers are demanding.
Editor: What are some of the business issues arising from this new consumer behavior?
Cahill: Hiring practices raise interesting issues beyond the enduring need to attract the best engineers, which are in short supply. Today’s companies need to reach out on the manufacturing side and think in terms of hiring non-traditional talent. Here I am speaking about people with gaming, meaning video game, technology and telecommunications backgrounds, basically a consumer electronics orientation.
Reflecting this trend, the consumer electronics show in Las Vegas, which is a massive event, now has a meaningful automotive component. Car companies are very visible, and tech companies that want to become non-traditional suppliers are looking for market share in the gigantic automotive industry. The trick right now from a legal perspective is in figuring out how to deal with one another.
Editor: Do these technologies raise liability issues on the consumer side?
Cahill: Yes, in fact, liability and “irritation” issues. When you parse out the data, old-school quality issues like “the car stopped running” are shifting for a tech-savvy consumer base, with complaints running more along the lines of “this nifty sync on my Taurus is not interfacing fast enough.” Today’s consumers are giving poor quality ratings to cars that have never been in the shop, simply on the basis of issues that are more closely associated with a laptop or mobile device.
On the marketing side, when a consumer complains that the bluetooth doesn’t work right, you need trained customer relations staff to handle these issues. And you need trained sales staff in the dealerships who can explain to non-tech-savvy buyers “how this works.”
On the legal side, the issues are everywhere. One example involves what are called “connected vehicles,” and I’ll just touch on the liability implications. A big one is that more than 90 percent of auto accidents, in one way or the other, are caused by driver error. That’s a given. The connected vehicle concept is a safety advancement aimed at reducing such incidents. Essentially, the feature is a small-scale radar system that will detect, for example, when you are closing too fast on a car in front of you. Even if you are literally asleep at the wheel, the car will break automatically and, if the technology works right, slow the vehicle to a complete stop because it senses a car ahead. Super cool, right?
But not so fast on that conclusion, because the technology also implies a significant shift in legal liability. Now, if I rear-end a car, it means that the automatic breaking system, which you (the OEM) sold to me as a safety feature, must have failed. It’s not my fault that I fell asleep and crashed into that car. It’s your fault because your breaking system didn’t work right. The same would hold true for lane-change sensors and related beeper warnings – all of that technology is now implicated in these situations.
Further, it doesn’t matter that your technology has eliminated, let’s say, 90 percent of such accidents; this success goes unnoticed as people who didn’t have accidents simply go on with their lives. The legal question of liability for the remaining 10 percent has left the realm of being a no-brainer in faulting driver error and now will include at least the question of product liability and potential millions in losses. So we can frame the issue as follows: if an OEM could jump ahead five years and know that it will have developed the technology to a point of being 99.9 percent reliable, then maybe it’s worth taking the liability risks today, but getting there is the trick.
Editor: So a company might end up developing technology that doesn’t ever compensate for tradeoffs on the consumer liability side. What does that debate look like?
Cahill: It’s a fascinating internal debate between legal/risk management and marketing/engineering. Customers are increasingly demanding these technologies. It’s a competitive advantage if you can offer a system that works, and we’re seeing this play out in safety-related advertising for self-parking vehicles, as one example. The marketers and engineers are excited that customers want to buy their car, but the lawyers will not so easily embrace technologies that essentially put the onus back on companies for the errors of their consumers.
Still, the message I’m hearing at conferences is clear: that ship has sailed. Nothing is going to stop this technology from moving forward because customers and regulators are demanding it. Legal is not going to stop it, so the real question becomes, how do we manage it?
Editor: Tell us more about connected vehicles, and touch on some of the privacy issues.
Cahill: In the connected vehicles space, the National Highway Traffic Safety Administration (NHTSA) uses the terms “in car” versus “not in car” to distinguish technologies. The more advanced technology is not only my car sensing your car in front of me but your car transmitting its location back to my car. I think of it also as the infrastructure, meaning the road, broadcasting messages in a Wi-Fi context, for instance, to warn of icy conditions ahead – with similar liability issues attached.
The privacy point is that you can’t enjoy the benefits of receiving important safety information without taking some risk in divulging where you are, how fast you are going, and maybe how much weight is in your car. As a consumer, I have my phone with me at all times, so Verizon always knows where I am. As a society, I’d say we’ve gotten used to that, though not necessarily with respect to our cars and the idea of being tracked. And these issues expand out, for instance, in potentially enabling the stores you drive by to target you for coupons and other advertising-related efforts.
Of course, this is where privacy policies come into play, and we have a lot of experience in helping large OEMs develop policies that, like cell phone policies, are disaggregated, provide full consumer disclosure, and don’t allow targeted advertising (unless approved by the consumer), though that question will certainly come up. The key statement to consumers will be: “If you want these features, here’s what that means from a privacy perspective.”
Another big concern relates to a possible hacker, terrorist or even just a mischief-maker who is looking to cause pileups on the highway by interfering with communication. And when you think you’ve got all this solved, remember that these technologies are developing quickly. The space-age technologies in today’s luxury cars will quickly become standard-issue for your grocery-getter sedan. That cycle moves very fast.
Editor: What kinds of partnerships are developing among automakers and tech companies as a result of the technology revolution?
Cahill: Fundamentally, these alliances are formed on the basis of wanting to combine technologies or leverage geographic market share. The ZF-TRW merger, which is the biggest automotive supplier merger in a long time, is a good example. That deal was driven explicitly by a desire to combine technologies, what they call “drive train” in electronics, which includes automatic braking and other safety features as well as potentially more advanced technologies. Two giant global companies combined so they could be more competitive in providing advanced safety/efficiency technologies.
Dykema focuses more on the middle-market supplier community and advising OEMs in their efforts to establish a global footprint. We see the same issues from the investor and private equity communities that we identify in the ZF-TRW merger. The key questions are, do you have a defensible technology position? What is your technology, and where are you going with it? The value proposition lies in protecting and increasing market share. Companies will combine technology and production capabilities when it doesn’t make sense for each to expand operations overseas. For instance, a U.S. company that wants to enter the Asia market will merge with, or enter a joint venture with, an existing Asia-based operation, rather than build its own plants in the region. Of course, there are antitrust concerns, but we can make those work most of the time through careful structuring.
Now you can layer in the geography piece because major players like Toyota, Ford, GM and Fiat Chrysler want their vendors to be able to provide the same part globally. In looking for the most efficient solution from a capital perspective, suppliers are combining forces to establish the requisite global footprint. That’s the model for traditional automotive suppliers, though there are new complexities in what I’ll call the interactions between Silicon Valley and Detroit. The Connected Vehicle Trade Association now lists Intel, Cisco and Oracle (among other telecommunications and technology companies) along with traditional names in the auto supplier community, and everyone is working to figure out how this will work. The relationships aren’t necessarily entrenched yet, and some can be volatile and fraught with conflicting objectives, but many are working well.
From a legal point of view, these relationships call for contracts among players with very different pedigrees. Silicon Valley companies have lots of customers in lots of industries, while the automotive community historically was centered on its own industry, implying a different sort of leverage in contract negotiations with traditional suppliers that were selling up the chain. It’s not that one side is smarter or more protective than the other. It’s just that they’re not used to dealing with each other, and now they want to do business together. The motivation is there, but it requires a novel approach to crafting these contracts.
Editor: I imagine that Dykema’s deep experience in the automotive industry provides a lot of value in this context.
Cahill: It does. Dykema was founded 85 years ago in Detroit and boasts an equal number of years working in the auto industry. We represent OEMs and suppliers and touch on all of these emerging issues from various angles. We know how the purchasing function works – legally for certain – but also in terms of the chain of command and internal politics as well as the incentives and individual concerns, for instance, of a licensing expert versus the purchasing staff. We go into the game with this information, and that’s a real strength of our firm.
Published May 1, 2015.