Summary
Amazon's recent acquisition of Zoox for an estimated $1.2 billion puts it squarely into the competition for autonomous ride services.
Autonomous ride services, not autonomous package delivery, is the strategic intention of this acquisition.
Amazon will need to invest another $1 - $2 billion, eventually much more to compete in this market, but it is an enormous market opportunity.
Interestingly, the big three technology companies -- Amazon, Alphabet, and Apple -- will be three of the major competitors for this market.
The strategic importance of this acquisition for Amazon should not be underestimated.
Last Friday, Amazon (AMZN) confirmed it was purchasing Zoox and declared its intentions to become a competitor for autonomous ride services or autonomous ride-sharing (NYSE:ARS). The significance of this strategic move cannot be underestimated. This positions Amazon to become a major competitor in what will be an enormous market opportunity, providing it with a second strategic expansion, following AWS, beyond its online retail business.
Amazon's Strategic Intention
Many reactions to this acquisition erroneously concluded that the acquisition of Zoox is intended to procure technology for autonomous delivery. It's not. Amazon made its intentions clear. Amazon said the deal will help bring Zoox's "vision of autonomous ride-hailing to reality," and Zoox will continue to operate as a standalone business within Amazon. Autonomous package delivery isn't practical for the foreseeable future because someone needs to drop off the package since most people are not at home to come out and get delivery from an autonomous vehicle. Autonomous home delivery of groceries from Amazon is a potential secondary use, however.
Amazon intends to enter the competition for autonomous ride services, essentially Uber without a driver. This is expected to be an enormous market, but it will also require a significant investment from deep-pocketed Amazon. It is rumored that it paid $1.2 billion for Zoox, which is almost as much as Zoox had already invested in developing its autonomous vehicles.
Zoox has a unique strategy for autonomous driving, one that has proven to be more expensive than others but also has some exciting potential. Amazon will probably invest another $1 - $2 billion to complete development of its autonomous vehicles and several billion more to build a fleet of vehicles for autonomous ride services.
Zoox Unique Strategy
Most of the early competitors in autonomous ride services, such as Waymo, are focused on developing an autonomous driving platform of sensors, software, and computing. They retrofit this technology platform to existing commercial vehicles to create the first generation of autonomous ride services vehicles. For example, Waymo, which is the leader in this new market, has a fleet of 600 Fiat Chrysler Pacifica Hybrid minivans that it retrofitted for its early ride services. It also announced that it will retrofit 62,000 more, and 20,000 Jaguar I-Pace electric vehicles, at its retrofitting factory in Michigan.
Retrofitting existing vehicles makes sense because it lowers the cost of development and introduction. Following the initial success of autonomous ride services, competitors will develop second-generation vehicles designed exclusively for autonomous driving without the need for human controls.
Zoox's strategy is to skip first-generation autonomous vehicles and develop second-generation vehicles purpose-built for autonomous ride services. It's latest version, the VH5, has seats that face each other and no steering wheel or pedals. Since the car has no need for a driver, it is actually bi-directional, able to go full speed in both forward and reverse.
This bold strategy is also more expensive and time-consuming. In addition to developing and testing autonomous driving and building autonomous ridesharing services, it also needs to design and build unique vehicles. This strategy proved to be its downfall. It simply could not raise the amount of capital required. That's why it needed to be acquired, and Amazon was the best fit because it has deep pockets.
Zoox has been testing its autonomous driving technology in first-generation test vehicles (retrofitted Toyota SUVs) in Las Vegas and San Francisco. According to reports filed with the state of California, Zoox drove approximately 67,000 autonomous miles in the state in 2019, which was more than many, but it was much less than the leaders. Waymo drove more than 1.4 million miles and GM Cruise drove more than 800,000.
Why Was Zoox Only Worth $1.2 billion?
Zoox had previously raised almost $1 billion with a reported market valuation of approximately $3 billion in its last round, yet it sold to Amazon for $1.2 billion. This gets back to the problem that Zoox's bold strategy was just too expensive. Most likely, it would need another $1 - $2 billion to complete its autonomous technology and second-generation vehicle. It then would need as much as $8 - $10 billion to contract with a manufacturer to build its initial fleet of 100,000 autonomous vehicles, although debt financing would most likely be available for that.
The additional capital simply wasn't available to Zoox right now. Sure, Uber raised almost $15 billion before it went public, but it's now valued at $50 billion, which is not much more than when the last $10 billion was invested. Some potential investors, like auto companies, don't have the financial resources now and are already far along on their own AV development. Big investors, like Softbank, are already invested with other ARS companies.
In addition, the nature of private investments like the ones in Zook set high valuations for subsequent rounds. When it became apparent that Zoox would require a couple of billion dollars of additional investment, the valuation on the last round was most likely a problem. If investors were willing to invest, but at a much lower valuation, then the investors in the last round would have to take a significant write-down, or they would force down the equity of previous rounds. By selling the company, rather than raising more investment at a lower valuation, the investors in the final round may have been able to get back much of their investment, depending on the terms.
Most likely, Amazon was the most appropriate investor, and it wanted to control the business completely, and not be a passive investor. It has deep pockets and the market potential for autonomous ride services (ARS) is a big opportunity, which Amazon could use to keep accelerating its future growth.
What Is The ARS Market Again
I've discussed the market for autonomous ride services (ARS) in previous articles (Waymo Has A First-To-Market Advantage In Autonomous Ride Services), but it's worth summarizing again here. ARS is ridesharing without a driver. It is expected to be much less expensive, much more profitable, and more convenient because it doesn't require a driver. Like ridesharing, it will be a local business. Fleets of autonomous vehicles will provide ARS in selected municipal areas. For example, a fleet of 100,000 AVs eventually could provide ARS in the greater Phoenix area, serving about 7.5% of the transportation needs. It's not like the auto industry, which is global.
ARS will eventually displace most of the ridesharing market, which is why Uber and Lyft have an interest in expanding into this market. It will also displace some private car ownership since most cars are expensive and sit idle 90-95% of the time.
ARS has the potential to be an enormous market opportunity. In estimates from my previous articles taken from Autonomous Vehicles: Opportunities, Strategies, and Disruptions, the market could be more than $75 billion by 2025 and more than $750 billion by 2030.
Who Will Amazon Compete With In ARS?
Currently, Waymo (GOOG) is the leader in the ARS market. It has driven more than 20 million test miles autonomously in 25 different cities, and it has driven another 10 billion miles in simulation. It currently operates its ARS, Waymo One, in the Phoenix area with 1,000- 1,500 trips per day prior to the suspension of activities for COVID-19. Notably, approximately 10% of these are fully autonomous without any safety driver on board.
In recognition of the anticipated capital needs to build autonomous vehicle fleets, Waymo is now operated as a separate company and has received $3 billion of outside investment at a rumored valuation of $30 billion, which some analysts thought was low.
GM Cruise (GM) is currently the number two competitor in this new market. Cruise has done significant testing and is expected to release its ARS in the later part of 2021. Cruise is also a separate business, which has raised more than $6 billion at a rumored valuation of $19 billion, although some analysts estimate that the business could be worth more than $40 billion eventually. In 2020, GM Cruise had approximately 1,750 employees and was spending about $1 billion per year, which is why it has $2.3 billion available. This is approximately twice the number of employees at Zoox, as a comparison.
Ford (F), through Ford Autonomus Vehicles LLC, has also announced its intentions to compete in this market. This ARS is also operated as a separate business with outside investment. Ford intends to release its new autonomous ARS vehicles in 2022.
Uber (UBER) and Lyft (LYFT) also have intentions to provide ARS to replace their ridesharing business. They have no choice. Both are exploring combinations of developing their own AV technology and doing partnerships. Given the amount of investment required to produce safe autonomous driving technology and to build ARS fleets, it's unlikely either can do it one their own.
Apple (AAPL) is the wildcard in this market. It has been developing autonomous driving technology (Project Titan) for many years. Although it hasn't disclosed its intentions (it never does), legal filings indicated that it has 2,700 core employees working on this project. It has also disclosed testing in California and filed for more than 100 patents on autonomous driving. Most likely it has invested more than a couple of billion in this technology. I previously wrote about my expectations for Apple (Deciphering Apple's Autonomous Vehicle Strategy).
Anticipating that someone will say that I neglected Tesla, let me say that I don't see it as being a major competitor in ARS for two reasons. First, its technology may not be sufficiently autonomous for ARS. Second, ARS will be a fleet-based market, not a swarm of Tesla owners sending their cars out for passengers. Tesla makes excellent semi-autonomous cars. I own one and love it, but it won't be an ARS autonomous vehicle.
Interestingly, this new and enormous market for ARS could become a battle of the three technology titans: Alphabet (GOOG), Amazon (AMZN), and Apple(AAPL)!
Amazon's ARS Opportunity
The acquisition of Zoox is a terrific strategic move for Amazon. There aren't many really big new markets for large tech companies like Amazon, Alphabet, and Apple that can provide the growth they desire. ARS is one of the biggest, if not the biggest.
By acquiring Zoox, Amazon has catapulted into the middle of the development cycle. It is too late, risky, and more expensive to start now to develop its own autonomous driving technology. The acquisition cost $1.2 billion, and it will need to invest another $1-$2 billion to complete development and testing, prior to building out its fleet. Zoox's strategy of a purpose-built second-generation AV will also take a little longer than Waymo and Cruise, but that's OK. There will still be plenty of market opportunities.
Even some "back of the envelope" calculations indicate that if Amazon/Zoox can catch up to Waymo and Cruise by investing another $1 -$2 billion in the short-run, then it could have an enterprise value of $30 - $40 billion. A meaningful share of a $750 billion market by 2030 could be a big boost to Amazon's market value.
Another way of looking at this opportunity is to compare Amazon's strategic expansion with Zoox to Amazon's previous expansion with AWS. AWS was launched in 2012, although there was prior development. By 2017, AWS had $17.46 billion in annual revenue, and last year, AWS had grown to $35 billion and accounted for 80% of Amazon’s profits. Some analysts estimate that AWS could account for as much as $400 - $500 billion of Amazon's market value of $1.3 trillion. Amazon has a clear path forward to growing it's Zoox ARS business to more than $35 billion in revenue in the next 5-6 years with only a 10% - 20% market share. Since this new market will be growing rapidly and is expected to be profitable, would that add an equivalent value to Amazon?