Led in part by Japan, the third largest auto-producing nation in the world, the automotive and mobility technology space continues to grow at speeds as fast as the fastest new automotive innovations. Startups are playing a key role in developing these cutting-edge technologies, including in autonomous driving, electric vehicles, and connected cars. In Japan, which is leading automotive technology innovation in autonomous vehicles and hydrogen fuel cells, the government published system protocols for autonomous driving technologies (Level 3) as early as April 2018 for implementation in 2020.
In this Insight we review some of these innovations, how to protect the interests of investors in these technologies, and issues that startup companies working in these sectors may face.
Major recent global innovations in the automotive and mobility sectors include:
- Connected, Autonomous, Shared, and Electric (CASE) vehicles. They are the future of the automotive industry.
- Greater connectivity, autonomy, sharing, and electrification of automobiles, which are driving investment in technology startups in the automotive space.
- Autonomous-vehicle sensors and advanced driver assistance systems (ADAS), batteries, electric vehicles and charging, semiconductors, and urban air mobility.
- Japanese innovations in these technology sectors include autonomous taxi services and airport transportation, high-definition maps and open-source software modules for autonomous vehicles, advanced hydrogen fuel cell and alternating-current battery technology, and silicon carbide (SiC) semiconductor films for EV power electronics.
- Japanese companies have been developing hydrogen fuel cell technology, which is projected to reach a market size of approximately $43 billion by 2026, growing at a CAGR of 66.9% from 2019 to 2026.
When investing in Japanese automotive startups or technology, it is important to consider the following key terms for protecting investor interests:
- Trade-Secret Misappropriation – there has been an increase in trade-secret litigation, especially in relation to departing employees. It is critical to put into place a trade-secret policy and protocols such as immediate IT access restrictions before employees exit your organization.
- Liquidation Preference – this includes not only dissolution and liquidation of the target company, but also an M&A exit. Investors will want to receive a return on their investment before the holders of common stock through the use of Preferred Stock. Please note: The webinar presentation linked below provides an explanation of nonparticipating liquidation preference vs. participating liquidation preference.
- Negative Covenants (also called Protective Provisions) – usually, founders and management strongly resist these provisions, but investors will demand them as a condition to their investment. These provisions require investor approval for certain material transactions or even employee-related matters.
Notable supply chain, regulatory, and legal issues for automotive and mobility startups working with new technologies like those mentioned above include:
- Supply Chain: The coronavirus (COVID-19) pandemic is creating supply chain disruptions all over the word that are calling into question force majeure provisions in commercial agreements.*
- Supply Chain: There is enormous demand for silicon carbide semiconductors for automotive applications, and as a result, companies are rapidly expanding supply capacity.
- Regulatory: Automotive qualification (ISO 26262, ISO/TS 16949) is key for any automotive startup and boosts the value and credibility of the company.
- Regulatory: Product Warranties – there are lengthy product warranty periods required by statute. Not only are they negotiated between parties, but longer warranty periods are statutorily required and can last 10 years, 15 years, or even longer in certain jurisdictions.
- Regulatory: Foreign Investment Approvals – major jurisdictions have preapproval and/or prefiling requirements for foreign investments. ( e.g., the Committee on Foreign Investment in the United States or Bank of Japan filing pursuant to the Foreign Trade and Foreign Exchange Law in Japan.)
- Legal: Data privacy and cybersecurity is a significant legal issue in the automotive sector for automotive startups and investors because of the ability of connected cars to gather information like geolocation data and the potential for this data to be hacked.
Check out our “Working With, Or Operating, A Tech Startup in the Automotive and Mobility Sectors” Automotive Hour presentation to learn more, including about emerging automotive and mobility technologies coming from Japan.
Media Module - Datasource Item: Working With Operating Tech Startup
* Read more in our report, “Cross-Border Transactions Caught at the Crossroads: Navigating the Global COVID-19 Crisis through Force Majeure Provisions.”