Can you provide a bit of context into the mission and structure of the Co-Pace model?

Co-Pace was formed two years ago because Continental understood they could be doing a much better job with start-ups. It’s not only the initial engagement but the whole process. You can’t treat a start-up as a regular supplier in day-to-day negotiation. You have to be more swift and agile to work with them. You have to understand their constraints and where they come from. The idea was to form a group not related to any business unit of the organisation but to service them all, with its own budget, procurement, and legal system, which allows us to be more swift and agile and have some flexibility because we have our own budget for PoC. Our pitch to business units within the organisation is, “We understand your needs, sore points, wide spots — we’re going to find the right technology or start-up that can meet that need. We’re going to build the framework with that start-up, run it for you, innovate, and fund it.” A lot of business units come to us and say, “Where do we sign?” It’s very interesting for them, the fact it’s not coming out of their budget and they don’t have the hassle of engaging with a start-up. They can focus solely on the technology.

Does Co-Pace work exclusively with Conti or also with external businesses?

Ideally, it serves only the business units within Conti, but when you work with start-ups, in some cases, you need to give them added value, even if they don’t work with Conti. When you’re the bridge between start-ups and the business units of Continental, some that approach you aren’t suitable. What do you do at that point? Do you say goodbye? Or do you try to give them value? To create a good reputation, you have to give them some added value or connect them to other groups, so a side-track of this work is trying to help start-ups, even if they’re not suitable for Continental. But I don’t serve international groups not related to Continental, generally.

Can you run through how you work with a business unit within Conti?

Various business units are at different points on the scale of innovation. Some have been working with start-ups for many years and know how to work with them already. Then, your approach is very different compared to a unit that has never worked with a start-up before. You need to educate them and make them understand — what is the added value of the start-up? It’s a different discussion and totally related to which business units you’re working with. How open are they to work with start-ups, and what kind of phase are they at in their innovation?

So, it’s more of a pull strategy for Co-Pace, where the business unit says they have external market pressure or an internal product issue and they’re looking for a solution. Co-Pace bridges the gap between the start-up world of innovation and that business unit.

Let’s be frank. Within a tier-one, it’s not really innovation; it’s product enhancement. OEMs and car manufacturers are driving innovation, and they’re pushing the tier-ones to go and look for that stuff. If they see a very innovative tier-one, they would approach another tier-one and say, “What can you show me like that company showed me? That could be interesting for me.” I think most of the pressure derives from the customers themselves looking to innovate, differentiate themselves, and find new verticals and exciting ideas to engage and attract their customers.

Take the Powertrain Division for these tier-ones, even the OEMs — is it very difficult for them to innovate internally given the shift to EV or different power trade mechanisms? Is it that inertia that prevents that? You need these new models like Co-Pace?

It has a lot to do with the history of the group. Take Continental. This was a group founded in 1871. A lot of the groups within the company have been doing the same process for many years. When you say, “I can find a start-up that can help you,” usually, they say, “How can a five-year-old start-up teach me something I’ve been doing for 100 years or more? It’s a lack of understanding of what a start-up is and what it can contribute to the organisation. Once they’re engaged with a start-up and see the value it can bring, they tend to have “not invented here” syndrome. They say, “Oh, they’re doing that, I can do it by myself.” Big organisations are very sceptical about what new companies can provide to their regular business model, and even if they see the value, they tend to dismiss it and think they can do it by themselves.

Is that quite an ingrained disadvantage for these big institutions? These corporate executives are paid to sell gas or diesel powertrain engines. It’s very difficult for them to spend capital or effort on innovation, even though the change is coming.

I think, when you challenge a business unit to innovate, they usually take it to product enhancement. They will look at how to do the same product they’ve been developing for years for a lower price and with better efficiency. It’s not real innovation. Real innovation is bringing something you’ve never tried before to enhance your revenue stream. And for that, sometimes, you need a disruptive group, separate from the day-to-day operations, who look at what other companies are doing worldwide. They bring knowledge and challenge the business units; “Look at what these guys are doing, this could be interesting,” or, “You have a sore point here that you are not able to address. align yourself with this technology that can help you.” You need this kind of group of people who are detached from the day-to-day business. Otherwise, it just doesn’t fly.

Yes, 100%. They only acquired it as a subsidiary because, in this form, we can run it through another procurement or legal system.

What are the biggest challenges you’re facing, driving innovation within Conti?

There are a lot of internal processes that prevent you moving forward, even if the organisation wants to do something with a start-up. Procurement is a very good example. Procurement departments within big organisations usually treat start-ups as a regular supplier. “Okay, let’s sign the agreement; half a year from now, one year from now…” They don’t understand, a year from now, a start-up will be in a completely different place. For them, it’s just regular day-to-day operations. And a lot of the people we’re working with don’t have KPIs for start-ups. They’re focusing on the day-to-day and say, “If I work with a start-up, it’s an additional workload for me, so why should I do that? I just want to do what I’m paid for, get my bonus. Don’t disrupt me with other stuff that will create more workload for me.” This needs to come from the top. You need support of management to understand it and push forward with innovation. Even if you have a group like us leading in innovation, sometimes, you might find it really hard because procurement is putting up barriers and business units that you’re working with don’t want to engage with a start-up because of the extra workload. There are all these internal policies or bureaucracies that don’t allow you to do the much better, swifter job you would like to do.

How do you encourage business units to spend time on innovation?

The first and most important thing is not to think of this as a full-scale strategy to change an organisation. Look at this as a tactic; gain their trust, help them with the sore points, find what hurts most. Come to the business units and say, “You’ve been tackling this problem for so many years, you’ve not been able to solve it, let me try and help.” If I’m able to solve it, they will be much more open to listen, to do more stuff outside their comfort zone and adjacent to what they’re doing because now, I’m really helping. The way to approach it is, find the sore point, help them in the day-to-day, then get them on board for the bigger stuff you want to do. Of course, you need the support of the management team, giving KPIs for start-ups and innovation and incentives to do so. You need the whole structure to support you in that because, if you’re alone, it’s a really tough job to do.

How do you overcome “not invented here” syndrome?

When I’m working with start-ups and confronting a problem a business unit is trying to solve, you don’t try to challenge it and say, “I can find someone who can do it better,” but you really try to help. And this is the point you need to relate to them, something they need to understand. When you don’t challenge them, but you help and support them, you take down the “not invented here” syndrome. If you find a solution that is an exact fit for a problem they have been facing, they will be very open to listen to that and do something. If you’re looking at a start-up to replace something they’re doing, that will be “not invented here” syndrome. It’s a very delicate line of understanding their sore point, not trying to challenge what they’re doing, but rather, assisting them.

Do you treat the business unit leader as your customer?

Of course because, if they don’t bite into the start-up, nothing will derive out of it. If I’m just doing PoCs with a start-up and no one is taking them forward, what am I doing here? I need them on board, I need them to be convinced, to push things internally, or nothing will fly.

What type of KPIs would you suggest for managers to use?

Even in the BUs, you need to have innovation roles much closer to the core of the business, but their role is just to create innovation. They take what an innovation manager finds and test it. When they come back with results, it’s much closer to the business unit. I’m coming with a good idea and showing it really works, so an innovation manager with an engineering background and their own budget to do this kind of testing is a nice way to bridge the gap. Every division manager within the business unit needs to have KPIs or a budget allocated to working with innovation technologies and start-ups — a budget they can’t use for anything else. P&L managers will always want to use their entire budget. The worst thing they can have is money saved aside because that means, next year, they will get less. They will push to use this budget for innovation. That’s also a good way to approach it and push these guys to do more innovative investigations.

Have you seen larger automotive businesses evolve by introducing these new innovation positions or budgets for innovation?

Yes. If we take Continental, if you went back ten years, you wouldn’t see AI or cybersecurity. These are new positions and group leaders. People are focusing more on software than hardware. Ten years ago, most engineers worked with hardware. None of them knew how to do software. Now, you’re seeing more coming from high-tech companies and start-ups, doing more with software. Naturally, it’s still a very hardware-oriented company, but the focus on software is increasing. In every business unit, there are challenges and people working on how to integrate software solutions in a better way to enhance their hardware.

Is Co-Pace a revenue-generating unit or just a cost centre for Conti?

It depends how you look at it. Our role is to bring more innovation and revenue streams to Continental. If we bring start-ups that are eventually integrated within business units and increase revenue streams, create new products, increase market share — these are the things we’re measured on. But we are like every R&D centre, which is a cost centre. We don’t have any income, so I would say we are very close to an R&D centre. You spend a lot of money to see a return in the future, but it’s not just burning out cash. The idea is to generate new ideas and revenue streams.

So, you follow through the relationships you’ve introduced to Conti, measure the revenue and value add, and check that against your costs?

Yes. It’s still very early in the game, only two years, but we are already seeing some commercial discussions which will lead to revenue. We already know we’re on the right track. To evaluate that, we would need a few more years to understand, “Was this a success or not?”

How do you encourage business units to change what they’ve done for years or even decades?

By being a good salesman. You need to speak to people in their language. You need to explain it to M&A guys, financial guys, engineers, in a way that will make them understand why this is a good use case. You need a good understanding of how the organisation is evolving, what’s happening out there, and a gut feeling that this will be the exact fit.
Then you need to do a lot of convincing. I tried to introduce a start-up that is adjacent to everything the business units are doing. You wouldn’t find an exact fit for that start-up, but it complements or enhances a lot of the products. That is why it was interesting for me. I identified eight business units that could be relevant. I talked to all of them, explained what this start-up was doing, and gave them examples of how it could enhance their product in the future. I got five on board. We created a workshop between these five business units and the start-up. In one day, we came out with new ideas and PoCs. You need to understand the product and the roadmap of the business unit so well that you can really tap into that and explain to them why this is important, even if it’s an adjacent topic.

So, it needs deep communication between an innovator like yourself and the business unit leaders, to understand product pipelines and processes?

Yes. Not only the leaders — we need middle management on board as well. As a manufacturing company, middle management is sometimes even more important than top management, so you need these guys to understand what a start-up is and how it can contribute to them. Management is one story, but if you don’t get these guys aligned as well, nothing will move.

What is it about Conti that enables it to run with this model? Is it a certain culture or philosophy, or can any large institution do something similar?

It was learned in blood. They tried to work with start-ups and failed until they understood they needed to do it somewhat different. It didn’t come from wanting to be more innovative, but more a case of, “We’ve been trying, it’s not really working, let’s find the best way to do it.” It came from a deep understanding that the way we’d been handling ourselves with start-ups was not the right way to go about it. I’m responsible for the Israeli ecosystem. For many years, Continental tried to run these operations from Germany, and it was not successful until they put a man on the ground. To get things moving, you have to have someone on the ground to push things forward. I think a lot of these understandings evolved throughout the years of trying and failing; putting innovation managers under the BU, then the BU decides tomorrow, it doesn’t put any budget into innovation because it needs the money somewhere else. “Okay, we need a group which is totally separate to the business unit.” These are the kinds of things that evolved.

Is the biggest challenge around budgeting? Is that budget fixed or does it change by BU?

It’s not the biggest but it’s one of the biggest, for sure. Start-ups come to me and say, “This company has been doing tens of billions of euros revenue — what’s 50k for them for a PoC?” Every business unit has a budget, and they have specific topics they can spend their money on. If you’re a start-up that wasn’t on the budget request, coming in with an adjacent topic, you’ll need to wait until next year. That’s what really stops an organisation from working on innovation. If you say to a start-up, “I can’t talk to you now, let’s talk in a year,” that’s it, it’s gone. They’re not going to wait for you. It’s definitely one of the enablers of doing business with start-ups, but there are many more.

How do you input some flexibility into that?

Every business unit needs a certain amount of their budget related to innovation, which they choose how to deploy, but that only came from the understanding that working with external innovation would bring a lot of value. It wasn’t the case before. Now, they’re giving business units a lot of flexibility to utilise this amount as they see fit. It’s still a problem because, if you have 100k, you choose two companies, there’s two other companies you can’t work with, so you need to choose right. Or you want to do something adjacent that costs more than 100k. There are still a lot of difficulties, even if you have a budget allocated for innovation. That’s why an organisation like Co-Pace, which has its own budget for innovation, can really help you. You can do a co-investment together. They can devote more funding. They can find another business unit related to that topic and get them on board as well. Having another organisation that looks at the entire group and knows exactly who is doing what allows you a lot of flexibility.

So typically, you would invest part of Co-Pace’s budget on these potential partnerships to ease that BU into putting up part of their budget?

Exactly, and the fact someone with a lot of experience working with start-ups is taking them in hand. The worst case on their part is, “I have 100k. Am I making the right call? Is this the right start-up?” Having someone on their side who has experience evaluating start-ups — not only on the technical side but also on the soft analysis side — gives them a lot of comfort to say, “Okay, I might not know if I made the right choice, but I’m dramatically reducing the risk factors.”

What kind of people do you hire for these R&D innovation centres? Is it a mix of understanding the business units but also the start-up, VC-type expertise?

Yes. Usually, someone with an engineering or technological background, who used to work for a start-up and understands the mentality — or developed something by themselves. But take me, for example. I don’t have an engineering background. I have a lot of experience working with start-ups. 20 years I’ve been working with start-ups. I don’t see a lot of people in Continental with that kind of experience. You need people who have experience working with start-ups, who understand the other side and can bridge between cultures; not only geographical cultures but on a company scale. How do you bridge between a big conglomerate and a small start-up with different focuses and agendas? You need someone who can talk to technological people, innovation managers, financial guys, but also someone who can be the middleman between start-ups and the organisation. These are the kinds of people we would like to hire.

What are some of the strategies towards innovation you’re seeing across auto? Take autonomous vehicles as an example — is there a material difference in the approach to innovation in that field?

If you take EV for example, EV is nothing new. It’s been around since the 1830s. GM had serial production of an electric vehicle in the nineties called the EV1. You had Veloplace. Now, you have a lot of companies doing that. What is so innovative about the electric vehicle? I think the innovative part is the business case. It’s not better technology, but it’s cheaper. The business case model changed, allowing you to own an EV car very close in price to a regular car. When you look at other verticals like the autonomous vehicle, it’s more of a technological breakthrough; technologies that were out there but no one thought of how to integrate them in a vehicle. The radar has existed for many years — how do you use it in a car? Trying to evaluate the distance between you and the car in front of you, analysing images. Mobileye came with this solution in the late nineties, but the technology was available even before that. It’s thinking how to take all these available technologies, combine them together, and make them work in a better and more efficient way. Combining them with software solutions like Aya. How do I enhance the things that used to run on a very expensive processor and move things forward? How do I take advantage of the cloud? How do I rack it all together and put it into vehicle technology to push it forward? It’s a mindset revolution. How do I take everything that is available and put that towards one effort to create something unique?

What are the different approaches to innovation you’re seeing in the auto industry?

I think the biggest differentiator is that an OEM would like the technology tomorrow, while the tier-one would like it as far away as possible because they have the liability. It’s having the technology available but in a way that is safe and can be monitored. I think this is the biggest challenge of autonomous vehicles because the technology is already there, but is it safe enough to run by itself? That’s a big question mark. Would anyone vouch for that? Would the regulatory authorities approve that? That’s the big question here. It’s not if the technology will be there and when, but is anyone willing to bet it’s safe enough? I think there is a huge difference between how OEMs and tier-ones are seeing the world. OEMs are pushing the tier-ones to be fast like an OEM. An innovation manager at one of the biggest OEMs told me, “We don’t want to be the first, but we sure as hell don’t want to be the second.” That’s the biggest challenge for an OEM. They want to be fast enough, they want to be first in the market, but they want to make sure the technology works, that they can go to someone if something goes wrong. The tier-one, knowing they would come to them, needs to be safe, so they’re taking it very slow to make sure everything runs right.

How is the relationship between tier-one and OEM changing as we shift towards EV?

One day, OEMs found themselves not as car manufacturers but car assembly lines. When the vehicles are becoming more complicated with software integrations, adaptations, taking things and putting them into automotive, the less the OEM can be involved in that and call the shots. The tier-ones are becoming the strong players. OEMs are feeling they have less control over the process itself, so they are trying to get more involved in which start-up they pick. They don’t want to relinquish that or leave it to the tier-one to decide. They want to say, “This is the start-up I want you to work with. If you don’t want to, I’ll take it to another one. Why? Because I can’t intervene and influence the process, but I can tell you who to work with.” It’s become a challenged relationship, where OEMs are still trying to call the shots and set the tone, but they are doing it less and less.

Where does the power really lie in this new world? If the OEM is still the assembler and the customer, they still have the scale, but if a tier-one owns more of the IP and process, can they actually charge or extract the economics from that?

I think Mobileye is a great example of that. For many years, they dominated the ADAS market, and we’ve seen a lot more companies try to bite and take a chunk out of what they’re doing. Even if you have the best technology or solution out there, you can’t say, “I’ll do what the hell I want and charge the highest prices,” because eventually, someone will kick you out of the game. It’s a fine line of trying to have the best product and not letting the others step in but still not being too dogmatic, so people would not want to replace you.

Do you think it’s crucial for tier-ones to stay as close as possible to the OEMs — because they’re the customer — but also stay at the forefront of innovating, of owning that process and IP?

Yes. Eventually, the way tier-ones and OEMs are working will change dramatically. It’s still the same as it was 20 years ago, which makes zero sense to me. If an OEM sees an interesting technology at an interesting start-up, it engages with it and tests it. Then a tier-one steps in and does the same evaluation. Then it starts working with that company. If the OEM understands they need a tier-one and the tier-one understands they need a customer to pay for it, why can’t they say, “This is a start-up that’s interesting to both of us, let’s work on this together, save time and money, and share results.” I think that will be the new way tier-ones and OEMs work on these things together, in a much more collaborative way, rather than the silo-centric way it’s run today.

We’re seeing an explosion of partnerships with technology companies or start-ups. Is there not an opportunity there for them to purchase the technologies, owning more of the IP to increase their power in the value chain, or do they see this as sharing the economics with the OEM, where they can’t compete with them in terms of bargaining power?

I think that’s the million-dollar question. When you find the right start-up, the right technology, you have a few ways to approach it. You can buy the company, you can work with it, or you can try and develop it by yourself. What is the best way to approach it? There are a lot of variables — what is your character as a tier-one or OEM? What is your aim? How well does this solution suit your needs? How close is it to market? When companies started acquiring cybersecurity start-ups; is that really the best way to go about it? Buying a start-up and implementing it within a big conglomerate? M&A is very hard, most M&A transactions fail, and trying to combine a start-up mentality within a big conglomerate is already problematic enough. So, should I buy a start-up or develop it in my own team? Continental and Helman bought cybersecurity companies. Volkswagen decided to develop it on their own, putting in money and developing a solution totally suitable for their needs. It comes down to the variables and how well they address your agenda.

Take Mobileye, for example. Intel bought them, so it’s become even more difficult for tier-ones and OEMs to compete because it’s not their core competency, and you’ve got other technology companies that want to be involved and have expertise to lend to these start-ups.

Here, I beg to differ. Mobileye was a dominant player for many years, but you see a lot of tier-ones like Continental and ZF competing with them. You start to address new, thriving technologies. ZF is one of the biggest collaborators with Mobileye, but they’re still trying to find other alternatives and routes to challenge that, to find the best way to approach it and not rely on one supplier. Even if a company is bought for such a large amount, you see a lot of competition coming out of it. Why? Because people understand this is so important, maybe I need to develop it, maybe I need to buy a start-up to do something with it, and thus, they create more competition. Without Mobileye, I don’t think there would be such a vibrant automotive ecosystem in Israel. These kinds of purchases drive the start-up scene or the companies looking for a solution, rather than trying to do it by themselves. It creates a lot of noise in the system, and a lot of talented people are saying if this is so important, if people are willing to pay so much money for it, why not do it myself? Why not develop it, then come with solutions that compete against these technologies?

Do you see any other companies following different strategies to incubate innovation that you find interesting?

Yes. I like to look at it as four stages. The first stage is, I’m hearing a lot of noise about something, let me go and check it. Then it’s sending people, maybe opening a local presence, not putting a lot of effort there. The second phase is, I’ve understood there’s something interesting there, so I want to put more effort in. I either do it myself or collaborate with someone. The third is, okay, we understand this is very important and we see the potential here. Now, we’re increasing and putting more structure behind it, making it more efficient. And the fourth, we’ll do full-scale work on this together. If I take the Israeli ecosystem, you see a lot of big companies here who are just seeing what’s going on, others who are more involved or saying, “I’m putting a man on the ground.” Others are saying the man on the ground is not sufficient, I need a bigger team, and the final solution would be a full-scale R&D centre. These are the kinds of things that evolved, and it totally depends on where you are on this spectrum. You see companies who are much more innovative in their way of thinking, devoting a lot of effort to innovation and putting a lot of focus on it, and companies who don’t want to be the outsiders or the last in the game trying to see what others are doing.

This is part of the challenge of innovation, there’s no handbook for it, it depends on the situation.

Exactly. I used to consult a lot of companies trying to open innovation hubs in various places, and they ask me this question all the time. What is the best way to go about it? And I used to say, “What is the best way for you?” The best way to go about it is thinking, “What is the best way for me?” What suits me as a company? What is my focus? What is my agenda? And then starting to do something out of that. A lot of companies say they are seeing other companies doing something, but it is not relevant to them. They think they can do it differently. It’s not a copy-paste from one company to the other. The real silver lining here is trying to find how to do it the best way that can suit and align with your needs. That’s the challenge.

What do you think are the biggest misconceptions around innovation and corporate innovation and incubating that innovation?

Treating a start-up as a regular supplier and thinking it works the same way. A company that’s been around for 50 or 100 years, they don’t understand that a start-up might not exist tomorrow, and they live from day to day. They cannot say, “Let’s talk in one year,” because in one year, they might not exist. This is the usual misunderstanding — how does a start-up think differently from us? What are their main focuses and red lines compared to us as a big conglomerate?

The second misconception is thinking a start-up cannot add value to the organisation because you’ve been doing something the same way for the last 100 years. That is the exact way to fail because, if you continue doing the same thing, eventually, others will find better or more efficient ways to do it. If you don’t have you ear to the ground, see the new ideas out there, find out how to implement and work with them, you’ll be left out of the game, no matter how big you are. History is filled with companies that thought they knew better than everyone else and don’t exist now. You can learn a lot, even from start-ups, and you have to be more open to that.
The biggest misconception is, “I’m the biggest conglomerate, everyone will want to work with me.” I get this a lot. There are big companies competing with you, all saying the same thing. A start-up can work with one or two, so why should they choose you? What is the added value you’re giving them? The ecosystem has changed where it’s more customer-centric, so now, working with start-ups is more start-up-centric. Start-ups have the ability to choose. Just because you’re a big company doesn’t mean they’ll go with you. They need to choose the best ones for them.

Continental & Corporate Innovation

Current Director, Co-Pace, the start-up of Continental

inpractise.com/articles/corporate-innovation

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