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Imagine. Its 6:25 p.m. and youve justwrapped up a meeting. You still have severalitems on your must-do list before youcan call it a night and begin a 25-minutecommute that used to take as long as90 minutes in the bad old days of rush-hourtraffic. You flick open an app on your phoneand request a pick-up at the office; a textconfirmation comes back and a few minutes

later a car pulls up. Home, you say, asyou launch a call to your client in Shanghai.The car slips easily into the self-drive lane,checking road conditions and flashinga message that you will arrive home in24 minutes. In that time, you will haveanswered a few e-mails, skimmed the newson your tablet, and set your pick-up time fortomorrow morning. You arrive home readyto relax and focus on your family. You stepout of the car and it moves off to its nextpick-up.

Even now that military drones have becomea familiar topic, the idea of self-driving carssounds pretty far-fetched. But is it still justscience fiction? Or are self-driving vehicleson the verge of becoming a viable form ofpersonal mobility? Will the market acceptthem, want them, and pay for them?

We think the answer is a resounding yes:The marketplace will not merely acceptself-driving vehicles; it will be the enginepulling the industry forward.

Maket damics will dive

mometm behid self-divig casA number of key factors point toward astrong adoption of self-driving vehicles,including demogaphics, safet, andspace. Consumers are eager for newmobility alternatives that would allow themto stay connected and recapture the timeand psychic energy they squander in trafficjams and defensive driving. But will peoplewillingly cede control to a machine and giveup driving their own cars? Lets analyze

Shifting demographics and tendencies

For baby boomers, especially, turning

16 and getting a drivers license was arite of passage. But demographics arechanging, as are attitudes towards driving.Younger generations, (Gen Now), whogrew up on game consoles and smartphones, are not rushing to get their driverslicenses the way baby boomers did.

Self-driving cars open up new possibilitiesand new markets, and not just for thosewho are legally eligible to drive, but also foryounger people, older people, and thosewith disabilities. For them, self-drivingvehicles promise greater freedom andmobility and greater control over their lives.

Safety

The average American commuter nowspends 250 hours a year behind the wheelof a vehicle; whether the value of that timeis measured in lost productivity, lost timepursuing other interests, or lost serenity,the cost is high. And there are other costs.A 2011 AAA study found vehicle crashes arethe leading cause of death for Americansaged 434. Ninety-three percent of allcrashes are attributable to human error.

The pursuit of improved vehicle safety hasspurred the National Highway Traffic SafetyAdministration to focus its attention on self-driving vehicles.

Population density

In the early days of the automobile,America was expanding, conqueringthe vast open spaces with a networkof highways. We shaped our towns andvillages around these highways, buildingvast suburbs miles beyond urban centers.But now, population density is increasing

and the trend in the U.S. and worldwideis one of rapid urbanization. Over the past50 years, increased population density inthe United States has coincided with anincrease in household wealth and growthin the number of multicar families.

Current trends are unsustainable overthe long term, and new alternatives areemergingnot only from within theautomotive sector, but also from a host ofnew players that are changing the shapeof personal mobilityand could ultimatelytransform every aspect of how we use,purchase (or not), insure, and even finance

our vehicles.

Can we build a safe, self-driving vehicle?Yes. In fact, Google has already loggedmore than 200,000 miles in a fleet of self-driving cars retrofitted with sensors. AndGoogle is not alone; traditional automakersand suppliers have also developedself-driving functionality using sensor-based solutions and have a host of newapplications in the pipeline. At the sametime, a number of organizations, includingautomotive and high-tech companies andthe U.S. Department of Transportation,have been focused on the potential for

using connected-vehicle communicationtechnologies for collision avoidance andtraffic management. Whats missing, sofar, is the convergence of sensor-basedtechnologies and connected-vehiclecommunications that is needed to enabletruly autonomous vehicles.

M&A SPOTLIGHTJAnuAry 2013

Self-Divig Cas: The Atomotive Idstsnext Fotie

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CovegeceThe convergence of communicationsand sensor-based technologies offerthe best model for a self-driving car,and ultimately will allow for vehicle-to-vehicle (V2V) and vehicle-to-infrastructure(V2I) communication. The convergenceof communication- and sensor-basedtechnologies could deliver better safety,mobility, and self-driving capability thaneither approach could deliver on itsown. Convergence has many benefits:lower cost and complexity, less need forsophisticated artificial intelligence, moresafety critical functionality, and fewerlarge-scale infrastructure investments.However, there are still significant hurdlesto convergence, including the need forimproved positioning technology, the needfor high-resolution mapping, the existenceof a reliable and intuitive human/machineinterface, and the challenge of creatingstandardized communications systems.

AdoptioAssuming that self-driving vehicles hitthe market, will consumers buy them?The adoption of most new technologiesproceeds along an S-curve, and we believethe path to self-driving vehicles will followa similar trajectory. While the availabletechnology does not yet enable self-driving, it is moving in that direction. Webelieve that sensor and connected-vehicletechnologies will continue to develop andconverge, leading to an eventual inflectionpoint beyond which it is likely that the driverwill increasingly be taken out of the loop.

A confluence of multiple, interdependentactivities and forces, including regulatory

action, business cycles, technologicaladvancements, and market dynamics, willultimately determine the trajectory andspeed of market adoption.

Implicatios fo ivestmetWho will design and manufacture theseautomobiles of the future? Currently,some new entrants, as well as establishedplayers, have expressed interest.Intel recently launched a $100 millionConnected Car Fund to develop smartervehicle technologies. Robert Bosch LLC, theautomotive parts manufacturer, is currentlyworking on a next-generation driverassistance system that is part of its vision ofcollision-free driving.

In a crashless-car world, cars could bere-designed to be lighter, negating theneed for a heavy steel layer of physicalprotection. Ultimately, the size, shape,and design of the vehicle will be differentand will open up huge new businessopportunities for a host of new and existingplayersfrom software and electronicscompanies to design and manufacturingfirms to the traditional car companies.While there is no clear leader, companiesare trying to figure out how to compete andcollaborate at the same time. Over the long

term, it is likely that nontraditional firmsmay play a more significant role.

It is still too early to determine exactly whatkinds of strategic alliances, joint ventures,or mergers will reshape the competitivelandscape. However, we have identifiedfour potential new business models.

I. The baded itegated life-stlemodel: In this model, a companywith no traditional presence in theauto industry and one that is alreadyan integral part of the consumers lifeoutside the vehicle could becomea participant in the ecosystem. Imagineif Apple decided to design an iCar?

II. The ope sstem model: A majorplayer in the data market might notwant to manufacture vehicles, butcould well design a vehicle operatingsystem. The operating system (OS)

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Pate, natioal Secto Leade

AutomotiveTransactions & Restructuring

T: 312-665-1916

E:gsilberg@kpmg.com

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provider, perhaps a company such asMicrosoft, could partner with any of theworlds current car companies or withnew players who might compete in thebranded technology arena.

III. The mobilit o demad model: Giantretailers with core competencies inmanaging complex distribution channelsor fleet providers with the capability tomanage the complexity of distributing

a fleet of cars could enter the fray andaccrue significant value in the newecosystem. Could you sign up for arental plan from Costco? Under thismodel, success will be determined byefficiency, reliability, flexibility, vehiclemaintenance, customer service, ease ofhuman vehicle interface and integrationwith existing consumer devices.

IV. The OEM model: Traditionalautomotive manufacturers havedecades of experience in designing andmanufacturing vehicles and creating anemotional connection with consumers.Many consumers would feel mostcomfortable getting into a driver-less cardesigned by Ford or General Motors.

CoclsioDespite their fantastical connotation,self-driving cars are not that far frombecoming a reality. Current automotivetechnology involving sensors andcommunication devices allows driversto improve their driving and reducecollisions. As issues around convergenceand adoption are met, driverless carswill become more and more prevalent.The advantages of driverless cars in

terms of safety, increased productivityand pure pleasure make it likely that newtechnologies and business models willcontinue to develop. Numerous investmentopportunities are likely to be created in thisfast-paced and highly evolving area of theautomotive and technology industries.

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