Driven by Technology

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One of the documents that I keep my eye on every year is the “Global Innovation 1000,” which is produced by Strategy& (strategyandpwc.com), which used to be Booz & Co., a name that you’re probably more familiar with.

The most recent, the 10th anniversary of the study, came out last October.  And given that you might be thinking: “Gee, it sure takes him a heck of a long time to get around to writing about something that came out last fall.”

Actually, the impetus for writing about the study is something that happened on March 2 at the Geneva International Motor Show.

Volkswagen Group CEO Martin Winterkorn made a presentation at the show, during which he pointed out that Volkswagen invested some €11.5-billion in 2014 for research and development.  That’s more than the company had ever spent before.  More, Winterkorn said, than any other company in the world.

That’s “any other company,” not “any other automotive company.”

Which reminded me of the Strategy& study, which I pulled out.  And sure enough, for the 2014 study, Strategy& shows that Volkswagen is the number-one R&D spender in the world.  Rounding out the top 10 are Samsung, Intel, Microsoft, Roche, Novartis, Toyota, Johnson & Johnson, Google, and Merck.

Or looked at another way, the list would consist of two vehicle manufacturers, two companies categorized as “computing and electronics,” two companies categorized as “software and internet,” and four companies in “healthcare.”

If we go to the top 15, then GM is at 11, Daimler at 12 and Ford at 15.

With the point being that the auto industry is spending a tremendous number of dollars, Euros and yen for developing cutting-edge technology.

For those of you wondering, “What about Apple?”, well, the answer to that is that the company is at the top of another Strategy& ranking, that of the “10 Most innovative companies.”  Meaning that they are clever at the way they spend their innovation dollars.  On that list, there is just one automotive company: Tesla, at #5.

And speaking of Apple, Winterkorn said in his remarks, “It may come as a surprise for you, but I highly welcome the interest of Apple, Google and others in the automobile. Because that means, the car will gain more acceptance from ‘Digital Natives.’”

Or, said another way, if leading-edge consumer electronics and tech companies think auto is worth spending time and money on, then presumably the younger cohort, who may evince a startling disinterest in owning a car, may be somewhat more engaged with the automobile, even if it is simply that they’re into car sharing rather than car owning or leasing.

According to Winterkorn, Volkswagen has some 46,000 researchers and developers on staff, as well as more than 10,000 IT experts.  But it is worth noting that while many auto companies have done their utmost to become less vertically integrated, Volkswagen is a company that is still developing and producing lots of the elements that go into its vehicles, so a nontrivial amount of the R&D goes into not only electrified powertrains and autonomous systems, but into improving factories for producing everything from connecting rods to gas tanks.

Similarly, Toyota, number 7 on the R&D spending list, is a company that is comparatively vertically integrated, and in instances where it doesn’t produce a given part or subsystem or system, it may be that it comes from a supplier company that it has more than a customer-supplier relationship with.

While someone may point out that, say, Apple doesn’t really make anything itself, and that Google outsourced its initial Googlecars to automotive supplier Roush, in the cases of Volkswagen and Toyota it is clear that they want to have deep knowledge of what goes into their vehicles, and the only way you can truly accomplish that is by actually designing, engineering and producing those key items.

Of course, developing that knowledge is not inexpensive, which brings us back to that €11.5-billion.

Winterkorn is able to boast that the Volkswagen Group has the largest networked fleet in the world and that it has the world’s largest low CO2 fleet.  And it is no secret that Volkswagen would like to become the world’s largest vehicle manufacturer.

All of that comes back to making the big investments in R&D, which leads to the development of world-class products. (Remember: in addition to VW, group companies include Audi, Bentley, Bugatti, Lamborghini, and Porsche.)

Whether it is regulations that restrict grams of CO2 per kilometer (or miles per gallon), increasingly crowded city centers in need of a mobility solution that may not be individually owned passenger cars, or a desire to have a car pilot itself from point A to B and beyond, it is clear that the industry is going to change.  And this change will be driven by technology, pure and simple.