Multiple outlets are saying that the talks between General Motors and soon-to-be electric SUV maker Rivian about an investment have broken down. The reason why is what caught my attention.
For quick background: Rivian has caught headlines a couple ways as of late, first for their big reveal in Los Angeles and then for a $700 million investment in Amazon. There have been ongoing rumors that GM would throw in with Rivian, too.
And, as part of the piece linked above, I’ve toured the Rivian facility in Plymouth.
I’m also an avid listener and reader of the Stratechery blog and Exponent podcast. In it, they talk about Aggregation Theory. It’s how tech companies like Facebook, Google, Netflix, Amazon and others have rose to prominence.
I haven’t heard Aggregation Theory talked about too much in this town, so here’s a quick definition.
The value chain for any given consumer market is divided into three parts: suppliers, distributors, and consumers/users. The best way to make outsize profits in any of these markets is to either gain a horizontal monopoly in one of the three parts or to integrate two of the parts such that you have a competitive advantage in delivering a vertical solution. In the pre-Internet era the latter depended on controlling distribution.Stratechery
GM, Ford, FCA, all of that are pre-internet companies. As we know with the dealer network (and the tons of government protections with that), these companies are all about controlling distribution.
So why did the Rivian deal fall apart, allegedly?
Because Rivian wouldn’t be exclusive to GM. They couldn’t be the only ones to distribute it.
Discussions ended in the past two weeks, with Rivian founder R.J. Scaringe wanting to keep his options open, said one of the people. Rivian has had several other potential suitors take a look, the person said.Bloomberg
Rivian’s CEO, RJ Scaringe, has talked about building a platform multiple times. But what if the platform wasn’t just for his R1-T and R1-S vehicles?
I think Amazon — a company that succeeded in part because of aggregation theory — understands what it’s like to centralize something. Amazon getting into a car company that would become the underpinning of say five or six brands makes perfect sense.
Volume brings prices down. What’s $69,000 now could be cut significantly with real scale. Think about what happens when you go from the low number of cars Tesla makes in a year to making enough to serve the demand for two or three mid-size brands.
If you could build an Amazon of automotive — where the underpinnings of the market was basically one or two shared platforms, you could bring prices way down and the automakers would be reduced to competing on extras like entertainment systems and trim.
The automakers of today would lose badly on that level. Have you ever used most manufacturer in-car systems that weren’t Apple Car Play or Android Auto? It’s a dumpster fire of design.
Competing on the edges is a much thinner business for the Big 3. And Amazon-ish Rivian could extract the value out like they did in other industries — and judging by the positive customer reaction to Amazon in the past, regular drivers might be happy about it.
A Real Danger To The Detroit Three
American automaker’s profit centers are trucks and SUVs. You shift people from those, or significantly lower the profit margins with competition, and the American auto industry as we know it will have a very hard time keeping up.
Already, it seems that the next generation GM platform may not support SUVs and trucks. Rivian is almost ready to go.
Rivian also has access to a lot of money, with investors like Amazon and their seed investors who seem willing to play long ball over many years while the Big 3 have to play quarter by quarter to serve Wall Street, putting them at a disadvantage.
What happened to newspapers where aggregation theory destroyed their business model — because it wasn’t news people paid for, it was access to the bundle of everything happening in their community and newspapers controlled that distribution of information — could happen, in a way, to cars. When it comes to cars, it’s transportation and freedom that most people pay for. What’s under the hood isn’t of concern to most as long as it is reliable and does the job.
Automakers and suppliers contribute between 3% and 3.5% of the American Gross Domestic Product (GDP) and employ 1.7 million people. Not to mention, electric cars don’t need oil changes or independent service centers. You could have one or two platform service centers in a populated county and be done with it.
If Rivian (or a company like it) can unbundle the automobile, where it is Rivian hardware underneath a good number of cars across multiple brands on the road, it’ll forever change the auto industry and the American economy. And make the companies that drive that change a ton of money.