While the transport and logistics sector has some of the most active corporate venturers of any industry, most of the investments are minority equity stakes in peers rather than more nascent businesses.
This is unsurprising given the fundamental technology underpinning most automotives – the internal combustion engine – has remained broadly unchanged for more than 100 years, and cars, bikes, trucks and planes address the need for people to travel in a way that allows companies to grow through sales and marketing and production efficiency rather than leaps in innovation.
Change, however, is under way as technology and political pressure affect the industry’s core operations. To access different geographies or diversify a product range, transport companies have sold stakes to one another.
China-based SAIC acquired 1% of US peer General Motors (GM) at its flotationlast year; Italy’s Fiat picked up 35% of Chrysler after its demerger from Germany’s Daimler and sale to private equity firmCerberus; Volkswagen bought a fifth of Suzuki for $3.5bn, with half the money buying shares in the German company in return; and Ford, the father of the modern car manufacturing process, sold down its one-third holding in Mazda to 13%. Similarly, Malaysia-based vehicle manufacturer Proton’s sports car subsidiary Group Lotus bought a reported 25% in the Renault Formula One team.
In large, conservative and often bureaucratic, process-driven transport companies, corporate venturing units tended to be short-lived. Germany’s Volkswagen, which has just acquired slightly less than half of sports car maker Porsche as a prelude to a full acquisition, ran its corporate venturing unit within the AutoVision division for five years.
In an academic paper, Strategic Use of Corporate Venturing: A Case Study Analysis, Maximilian Möllers at RWTH Aachen University found the main reason Volkswagen closed its corporate venturing unit was because its culture was "not entrepreneurial" and the unit lacked "support from internal committees and the top management". Volkswagen declined to comment but a company insider told Möllers: "The company is used to thinking in [lists of spare] parts, not in funded ventures."
Möllers said the more complex structure of a big corporation slowed down the decision process in a venturing unit and would eventually stop it. He said one reason for longer discussions with internal committees was the fear of cannibalism – an external venture could develop a technology that rivalled a technology proposed by the in-house research and development team and so the venture’s idea "must be quite better to get the support".
Although the strategic importance of having a window on technology was important, Volkswagen also had challenging financialobjectives and sought oversight of the third party. The venture had at most three years to break even, and it had to achieve a high return on investment (20% annually for the whole portfolio), Möllers said.
In the Nordic region, Volvo’s Tech Transfer unit has been more successful, and, since its $1.1bn sale from Ford to China’s Geely in August, has expanded its team and remit.
The other iconic Scandinavian car maker, Saab, has merged with Netherlands-based sports car company Spyker and linked up with Sweden’s state-backed venture capital firmto develop new gears (see related article).
However, the technology underpinning all parts of a vehicle is being re-examined as new materials, power sources and computer power become available. Automotives have become a home between homes, powered from renewable sources and incorporating more software and electronic devices than some offices.
With such relatively rapid technological change – it takes about 20 years for a new power source to be developed – have come changes in consumer tastes, often towards smaller, more fuel-efficient cars and regulatory pressure to improve.
The German government at the end of 2009 said there needed to be cars with fuel cells by 2015, while London and other regions have introduced tariffs on emissions (see Intelligent Energy case study).
Corporate venturing can be used as an insurance policy, to take minority stakes in third parties developing technology that might be important but is separate from a manufacturer’s main research and development focus.
The head of corporate development at one large Asian car maker, said: "Japanese companies are extremely conservative. Investing is a business development tool, but there is not a lot of direct investing. It is more window dressing for start-ups to introduce technology in return for money, product development and channels to market."
He added that investments were a hedge from not knowing the direction of travel, such as whether full electric vehicles or hybrids would take off. Car makers, such as Toyota, are also understood to be examining whether their research and manufactur-ing capabilities could be leveraged outside transport into areas such as robotics to assist an ageing population.
US-based Boeing has refined its policy of looking in related sectors for high-performance advanced materials that might be applicable in aircraft safety and performance. Boeing has a deal referral policy with oil services group Schlumberger to swap deals once a quarter.
Summer Locke, technology sourcing manager for global technology at Boeing Research & Technology, said: "We scout for technology in adjacent industries under Boeing’s radar – companies that would not be found at the trade shows and conferences our engineers attend.
"Most of the technolo-gies we review come as referrals from investors such as venture capitalists and other corporations such as Schlumberger. We do have a referral sharing relationship with [Schlumberger]."
The alternative is to try to use these technologi-cal changes to a vehicle maker’s advantage. GM last summer set up its corporate venturing unit with an initial $100m, and four deals have already been struck (see GM ventures profile).
GM is trying to take advantage of struc-tural changes among the manufacturers of vehicle parts. Jon Lauckner, president of GM Ventures, said: "Now GM is through its bankruptcy, it is willing to take more risk to get advanced technologies in our vehicles first."
The change reflects the car business.He said from 1945 to the 1970s, car companies had large research and development centres and captive component makers, such as GM’s Delco. But over the next 20 years, tier-one – the most important – original equipment manufacturers (OEM) making parts for vehicles were spun off with the aim of suppliying all companies in order to amortise tooling costs – Delco became Delphi, for example.
Although many of these tier-one OEMs, were reliant on just one or a handful of car makers for business, in-house, captive part makers disappeared. The growth of the venture capital industry and ability to use technology developed by entrepreneurs in other fields meant car makers could use corporate venturing to access technologies "at an embryonic stage", Lauckner said.
He added: "This will allow us to be in the market with the technology quicker than waiting for a start-up to be acquired by a tier one and then incorporating it from them."
As a result, GM Ventures is being watched closely by peers, but as the world’s former largest car maker tries to reclaim its crown, the use of corporate venturing as a way of bringing important technological innovation inside its cars first could be seismic for the industry. GM, therefore, has been ranked the most influential corporate venturing unit in the transport and logistics sector.
Logistics companies have grown with the globalised world – in many ways facilitating glo-balisation – and have been successful through capital efficiency rather than technological advances after cost pressures promoted standardisation. The standard container of eight by eight by 10 feet was in its way as important a development as Tim Berners Lee (coincidentally born the same year as the container unit) creating standards for the internet through the World Wide Web Consortium.
And as the standards have allowed the web to flouris over the internet, so Malcolm McLean’s decision to give away the patents to the container has helped build the globalised world.
One logistics investor said the sector had a poor long-term investing record because logistics companies made money by excelling at operational issues and so tended to be "penny and efficiency focused".
The investor added: "They are not good at long-term capital investments. The reason is there is no sense that they can scale up the technology and keep it proprietary, as happens with pharmaceutical or information technology industries with their research and development. And there is no evidence technology can tie a customer down and make it harder to walk away."
"So logistics companies look at service or business models, but moving into the company’s distribution chain is a transfer of risk without necessarily having the balance sheet to support the liability.
"And are they then any better at that than a start-up? If not, the role of a corporate venturing-backed company is to be a catalyst for innovation in the sponsor by signalling a technology’s usefulness, for example with RFID [radio frequency identification]tags, or different types of parcel delivery or collaborating with software. But, like laundry detergent, logistics is not about the formula but the marketing.
"Logistics is basically added-value transportation, warehouse and inventory management, with the transportation outsourced or retained if utilisation rates are high. If you retain a carrier network, you make money through scale. Pure-play service providers that do not own the network invest in assets that they can push back to clients at the end of the contract or write off over the lifetime. This makes them contract-by-contract operations that are knowledge-based and execution-focused rather than scalable."
While Federal Express benefited from $91m in venture capital money – and a casino’s blackjack table when its founder, Frederick Smith, needed to make his payroll one month – the exception in consistently supporting its corporate venturing team has been UPS.
Peter Bryant, president of consultancy TechTransfer, said: "UPS has had strong returns and linked it to the parent’s strategy for the next 10 to 15 years, as well as pilot start-ups in the company."
Netherlands-based peer TNT also had a long-term record with its Logispring general partnership before it was wound up in 2009 (see Logispring profile).
But other logistics companies are examining how to open themselves to more innovative ideas. Germany-based Deutsche Post DHL set up its DHL Solutions & Innovations unit in 2009 – it reports to the group’s chief executive. The unit also partners technology companies, such as Oracle, Intel, IBM and SAP, smaller specialists such as 7ID, Infoware and Tricon, universities (Massachusetts Institute of Technology and Fraunhofer Institute), as well as industry partners Metro Group, according to Petra Kiwitt, executive vice-president of DHL Solutions & Inno-vations in an interview with news provider Professional Services.
Other industrial and financialconglomerates with long supply chains, such as US-listed General Electric and Japan’s Mitsui, and regions at important transport nodes, including Singapore, Hong Kong, Estonia, Slovakia, Egypt and Panama, have also looked to support logistical developments.
However, Singapore’s state-backed Temasek investment company stopped venture investing in nascent companies after the dot.com bubble imploded, third parties said, to concentrate on infrastructure assets.