I recently wrote to Colin Barnden, Lead Analyst at Semicast Research, asking him about a tweet he sent on October 7th, in which he wrote:
“Consider…Denso abandons DN-DSM for trucks to license manufacture of best-in-class Guardian from @seeingmachines. Exits relationship with FotoNation & signs non-compete agreement with SM for DMS, this clears Toyota to appoint Denso/SM to supply Fovio DMS for all cars & pickups.”
I’d assumed he was referring to auto and Toyota primarily but he wished to clarify at length this and other matters on which he disagrees with what I’ve written.
Therefore, in the interests of making Safestocks a forum for genuine debate to the benefit of all investors, I’ve included his comments in full.
“You have a number of different issues mixed up, both here and recently. I’ll have a go at unpicking some of it.
Firstly, the tweet was about Guardian and Denso, not auto and Toyota. SM have decided to abandon anything to do with contract manufacture and are heading for an IP-only business model. The problem with Guardian is the price/volume vortex – which is where Tesla are stuck. There is nothing wrong with Gen2 per se and SM have sensibly decided they cannot pour any more money or resources into manufacture and distribution. Dumb would have been to raise say £250M and try to become a global aftermarket company (suicide…and as an investor you’d have been wiped out). Smart is to let someone else with the necessary expertise make Gen2 and SM use the data and take the monthly SaaS revenues. No point reinventing the wheel.
There’s realistically three companies I see who are established aftermarket truck equipment suppliers that Guardian would make sense to go to: Bosch, Conti and Denso. Of those, Denso has already developed a competing product (DN-DSM) so it follows they see the value and are probably most interested. Take DN-DSM and FN out of the picture and Guardian is good to go. The point being if you make those relationship changes, it might open the door to an automotive agreement with Toyota too. That is just speculation (hence the word “Consider…”) and a Toyota deal is at the end of this long chain of events. However Guardian could bring Denso closer to SM (I believe Bosch is working with OEM2 and Conti with OEM3) so there are strategic benefits for both SM and Denso to look into this. Time will tell of course.
Where Sanjay at Panmure gets “no value” for Guardian from is a complete mystery to me. I believe the CAT deal was worth about US$17.5M [CAT vehicles in operation ~3 million units]. For truck/coach/bus it is probably more like 500 million vehicles in operation, so what is the value of a licensing deal for Guardian to say Denso to access that market? US$25-50M??? Maybe much, much, more could be on the table, so it looks to me like a significant cash injection is on the way in the short term. You can’t forecast it and it is a binary outcome (either yes or no) so can’t put in a financial report. SM is an IP company, there are other players better suited to Guardian manufacture and marketing for aftermarket and all that has happened in recent weeks is a change in the go-to-market strategy.
Guardian is also the data gathering platform. In August it was over 1.3 billion kms of naturalistic driving data. The rate of gathering is unknown but it is clearly more than 100 million kms a month and in a world of AI and ML the company with the most data wins. Always. That data is captured in the form of video clips which are sent via 3G/4G to the R&D team (Mike Lenne, Tim Edwards et al.) who are doing analysis and further development of the algorithms. If you read the placing documents from last year you will see one of the areas that SM was going to spend a lot of the money on was advanced scientific research equipment. What you have then is the video clips showing areas for new research (edge cases), the scientific equipment to understand what happens to humans in those circumstances and the results fed back into improvements in the algorithms to improve fatigue and distraction detection further.
It would be great to think that you can skip the scientific research bit and all that is needed is ML and enough compute power on a GPU to do everything perfectly (a la the Nvidia pitch) but that just leaves a solution consuming huge amounts of power and kicking out lots of heat (which is roughly where Affectiva are). There is no short cut to the research, science and sheer hard graft to understand human fatigue and distraction and get the best performance/power consumption trade-off. This work is hard, laborious and necessary. Guardian is the feedback path from the test bed (humans operating in real world trucks) to the R&D/science lab (Mike, Tim and team). To be frank, this is some of the smartest joined-up product development I have ever seen, all pulled together under the leadership of Paul Angelatos and Ken. The staff totally deserve their share awards in my view, the strategic thinking and foresight is extraordinary.
On to auto…from a tech perspective, automotive is not a contest. You just can’t compete with an FPGA solution with either an MCU or GPU for DMS. For vision processing you need hardware acceleration to do it in real time, and Fovio can do that. Add in the 1.3 billion kms of data from Guardian and you have a platform that is untouchable. And it is and OEMS know that. DMS is a crowded market and competition for SM extends well beyond SE (Aisin Seiki, Can Controls, Clarion, Eyesight, FotoNation, Idemia, Mitsubishi, Omron, Panasonic AIS, Pioneer). With Fovio FPGA and 1.3 bn kms of data, the competitive position really comes down to SM vs. all others. It is not yet clear if OEMs want high performance or low price but that will become known over the next 6-9 months as the DWs are announced following the RFQs in March/April. Due process takes time. Also I completely disagree with comments that SM have DWs that they have not announced in the form of an RNS. I do however believe there may be OEMs that have given a verbal nomination and the legal agreements are being worked on. That takes time to work through, there are many decisions to be made for a new vehicle model and it is a complex process which really does take months.
What I have learnt from my experience as an analyst is the company making the most progress is always the one making the least noise (why tell anyone ANYTHING if you are ahead?). Mobileye is probably the best known example for you, but others where this was true are Qualcomm, Broadcom, Marvell. As an analyst researching those companies in the early days, you just hit a brick wall. Apple is the same -ARM staffers sometimes refer to them as ‘the folks at Cupertino’ – so too Xilinx and Nvidia (guess which has more silicon revenues in production vehicles). SM realistically only need to work with 15-20 OEMs for worldwide coverage, and probably the top ten is enough (everyone else will follow the decisions made by the leaders). So really the lack of information flow coming out of SM I see as evidence of their competitive leadership, which is blatantly obvious when put alongside using FPGA for the silicon solution and the 1.3 bn kms RNS. This is the perspective that almost 25 years of experience gets you.
So my view is unchanged…a super smart company adapting its strategy (Guardian) to husband its financial resources and looking very well placed to take a leadership position in automotive when DMS takes off around 2021. Can’t see the BoD going for a takeover before then, unless someone like Apple or Waymo comes knocking with an unbelievable offer… which is a scenario we have talked about previously.”
Chris Menon holds stock in Seeing Machines.