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Silicon Valley warning: Detroit still doesn't get it






A wheel of a 2010 Ford Taurus is pictured during a Ford event in New York, August 6, 2009. REUTERS/Brendan McDermid
A wheel of a 2010 Ford Taurus is pictured during a Ford event in New York, August 6, 2009. REUTERS/Brendan McDermid
</head> <body> <p>By Poornima Gupta</p> <p>SAN FRANCISCO (Reuters) - From Detroit's union halls to its boardrooms, the consensus belief is that billions of dollars in federal investment and loans kept the American auto industry from collapse.</p> <p>But drive up Silicon Valley, and you hear a sharply different -- and far darker view -- from some of the world's most prominent venture investors.</p> <p>The U.S. auto industry, they warn, remains too wedded to a dying business model and too out of touch with the sources of innovation to become competitive again.</p> <p>Instead, they look for a new group of upstart companies to shoot to prominence and profitability, eclipsing the automakers once known as the "Big Three" just as Google Inc came from nowhere a decade ago to eclipse established technology companies.</p> <p>"I do not believe that the U.S. auto business can be competitive," said Ray Lane, Managing Partner, Kleiner Perkins Caufield & Byers. "I don't see any of these new car companies based in Detroit."</p> <p>Lane, who is backing plug-in hybrid carmaker Fisker Automotive that is planning to launch a $39,000 model, said Detroit has lost its entrepreneurial spirit.</p> <p>"For years they have been led by accountants and lawyers, not engineers and entrepreneurs," Lane said. "That's OK if the industry isn't changing."</p> <p>So, what do the three U.S. automakers need to do to get back their once-dominant position in the marketplace?</p> <p>"Start over," said Marc van den Berg, Managing Director of VantagePoint Venture Partners, which backs high-profile electric carmaker Tesla Motors and electric vehicle infrastructure firm Better Place.</p> <p>The U.S. auto industry has been hit hard by high fixed costs and plunging sales in the past year. Even after $3 billion in federal trade-in incentives helped stabilize the market in recent months, overall sales remain down 28 percent.</p> <p>General Motors Co and Chrysler have been put through federally sponsored bankruptcies and restructured with $60 billion in federal funding.</p> <p>Even Ford Motor Co, which avoided bankruptcy, is counting on government support in other areas, including nearly $6 billion in low-cost U.S. loans to retool old factories.</p> <p>The only way to succeed is by a complete overhaul of the business model, where the carmakers move beyond just designing attractive cars, Silicon Valley venture capitalists say.</p> <p>"There is room for business model innovation and technology innovation," said Vinod Khosla, Managing General Partner of Khosla Ventures.</p> <p>Khosla said U.S. automakers need to embrace innovation at all levels, giving as an example Better Place, which is building out charging infrastructure and battery-swapping stations for electric vehicles.</p> <p>"Better Place is saying don't let the consumer buy the batteries," said Khosla. "That's a business model innovation."</p> <p>"There's lots of such innovation possible," he said.</p> <p>THINK GOOGLE, AMAZON</p> <p>The Silicon Valley financiers have high stakes in the transportation sector and are looking to herald the next wave of innovation in cars.</p> <p>Khosla, famed Sun Microsystems co-founder, is backing a number of biofuels makers including Coskata.</p> <p>His former firm Kleiner Perkins, a prolific fund that backed now-household names such as Google and online retailer Amazon, has set its sights on the green technology sector with bets like Fisker and fuel cell maker Bloomenergy.</p> <p>Kleiner Perkins' Lane said both Google and Amazon were spectacularly successful more due to their unique business model rather than technology.</p> <p>"Amazon is an innovation in business model, not in technology," he said. "It was nifty technology that Google had developed, but there were 10 others that had technology."</p> <p>"It was innovation in the business model that produced the value in Google," Lane said.</p> <p>Raj Atluru, managing director of another Silicon Valley venture capital fund, Draper Fisher Jurvetson, said big carmakers would still exist, but new names will herald change in the industry.</p> <p>"Tata Nano is going to change the entire supply chain. They are changing the economics," Atluru said. "Chery has gone from a start-up automotive company to $6 billion in revenue."</p> <p>Draper Fisher, which has brought industry-changing companies like Internet phone company Skype and Internet mail firm Hotmail to the marketplace, is betting on low-cost Indian electric car firm Reva.</p> <p>Chery Automobile Co, China's biggest carmaker, is among the growing ranks of Chinese firms with global ambitions while India's Tata Motors has already taken the market by storm with its $2,500 Nano small car.</p> <p>Lane said a number of changes are coming to the industry, including efficiencies in power train and electrification.</p> <p>The changes "will set us up for the next 50 to 100 years in a totally different industry than the one that was created in the last 100 years," he said.</p> <p>(Reporting by Poornima Gupta; Editing by Phil Berlowitz)</p> </body> </html> </div><!-- end article-body --> </div><!-- end aticle-body-wrapper --> <aside> <ul class="social-share-btns clearfix"> 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