As Detroit Rusts, Silicon Valley will Take Over the Auto Industry

President Obama is trying to save General Motors (GM) and Chrysler as part of his plan to reindustrialize America. But this is missing the point in the same way that the Treasury and Federal Reserve are trying to recreate the shadow banking system. China has recognized that both the automotive and financial worlds have changed; what are we waiting for?

China’s banking system has largely avoided the complexity of financial innovation and sees no need to catch the history it missed. So too is China ready to jump past the high complexity of sophisticated internal combustion engines and zillion speed automatic transmissions. As far as I know Toyota’s (TM) hybrids and Lexus’ 8 speed auto-trans are leading or beating the Germans in the useless complexity wars. China is bold enough to say that with all-electric cars, complexity is reduced to such an extent that there are no longer any barriers to entry in the world automotive scene.

What will be differentiating factors between vehicles if China is right? Electric motors and batteries will become available off the shelf, and complex transmissions will no longer be needed. Most steering and suspension parts along with digital and analogue computerized controllers, will become more standardized and also be available off the shelf. Of course branding, quality of fit and finishes, and quickly adapting to the fashion of the moment will continue to be important. But the key differentiating factor will be each brand’s software controlling how the standardized parts feel in unison to the driver.

We are already seeing hints of this today. Most auto companies have shared the development of the new breed of 6+ speed auto-trans hardware. But from the driver’s perspective, some shift harsher or much too often. The difference is the software. Drivers would have no idea their cars share the same transmission hardware.

Now take it to next level where there becomes virtually no hardware differentiation between vehicles. And the complexity becomes balancing power consumption and recovery, and battery life. Performance is now driven by the sophistication of the controlling software, thus software is the new horsepower.

Do we have to retain the assemblers for America to be dominant player in the world automotive industry? Is that not the same as saying Dell (DELL) contributes more to the American and world economies than Intel (INTC) and Microsoft (MSFT)? The answer to both questions is obvious. And that does not even consider the risk that assemblers such as GM and Dell face in managing changes in consumer preferences.

Readers could argue that auto parts makers have been squeezed hard by the assemblers, and many are already bankrupt. It can also be said the disk drive and memory manufacturers have lower margins than the box makers. But that misses the point that America does not have to focus on the commodity parts business in any industry. There is plenty of value adding profit to be made in the new auto electric motors, electronic controllers and most of all software.

Historically America has been a nation of innovators, positioned in the most value adding parts of the food chain. We need to be less concerned about the low value adding assemblers and more focused on designing and building high value parts and very high value software. We do not need Ford (F), GM and Chrysler for America to make a lot of money and create a lot of high paying jobs in the auto industry.

Don’t be surprised to see “Intel Inside” on Chevy’s trunk lid.

Disclosures: Author is long INTC and MSFT.

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