To build the internet of things we’re going to need a lot of chips — orders of magnitude more than we have in use today. Generally those chips will fall into three categories, and each of those categories is poised to become a booming business with a lot of volume and room to grow. Let’s break it down:

Connectivity: This one is a no-brainer. If we want things to connect to the internet, we’re going to have to put radios in them. It may be Wi-Fi, Bluetooth, Z-wave, ZigBee or even a 3G or 4G cellular standard (or all of the above) but there has been and will continue to be a land grab for radios among the big chip companies. The rise of connected devices is the reason Qualcomm bought Atheros back in 2011 and the reason little known microcontroller company Atmel purchased Ozmo Devices in December.

We’ll also see new products aimed at integrating radios together, not just from Broadcom — the king of radio integration — but also smaller companies such as Redpine Signals, Altair and others. And these radios will be going into more devices. Just a quick scan of Kickstarter or Indiegogo shows a plethora of home gateways, Wi-Fi enabled devices and sensors that have radios integrated from a variety of vendors. A report from the OECD on the internet of things estimates that a family of four will go from having an average of 10 devices connected to the internet now to 25 in 2017 and 50 by 2022. Every single on of those will have a radio — or multiple radios.

Control: These chips are the brains of the operation. But unlike in the personal computer or server market, where Intel and AMD fought for dominance (more truthfully, AMD tried to at least achieve profitability), or the smartphone market where Qualcomm has taken out competitors ranging from Texas Instruments and Freescale on the application processor side (leaving Apple, Samsung, Broadcom and Mediatek standing), this market has a much wider variety of players known for their embedded processors and microcontroller. The one name that spans all of these industries is ARM.

At the low end, microcontrollers can range from 8-bit processors that manage setting on your microwave to higher-end chips inside a set-top box. Companies like Freescale, Texas Instruments, Atmel, Intel and STMicroelectronics all are pushing their microcontrollers (MCUs) inside the internet of things. The variety of use cases and devices inside connected devices mean some gadgets will need more power savings than performance or merely just a cheap 32-bit chips designed for a more industrial application. Many of these companies have an advantage for the internet of things because they are used to supporting a wide variety of end products with their firmware and sales teams.

They have designed their chips to be modular. If the bigger players want to play here they will have to build out multiple lines of chips with differing performance specs that can be supported across a wide range of end devices. That’s very different from building out a line of chips with slightly different specs all designed for servers. I bet a few of the big vendors, especially on the connectivity side, might try to acquire this knowledge.

Botanicalls moisture sensing system.

And since many of these sensors will be integrated onto small packages with radios and maybe even MCUs there will be a lot of value for a company that can pop all of the above onto a system on a chip — it’s cheaper, smaller and more power efficient. So consolidation will happen within these categories as well as across them as more devices get online and we ask them to share more information about their environment.

So be they MEMs, microcontrollers or radios, there’s a lot of silicon (or maybe gallium arsenide) inside the internet of things. And the types of chips required will stretch the silicon industry — that has been primarily focused on keeping up with the performance requirements of Moore’s Law — into new directions. Power savings, integration and size will matter when it comes to connected devices more so than the all out race for performance that has dominated the chip industry for decades.

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This brings Qualcomm up to the third largest chipmaker in the world for 2012 and shows how the shift to mobile devices and consolidation in the server and PC market has changed the fortunes of the chip industry’s biggest players. So while Intel is still the top chipmaker in the world, it is expected to see its sales decline by 2.4 percent, roughly in line with the chip industry as a whole. Of course, with an anticipated $47.54 billion in sales and a whopping 15.7 percent of the overall chip market this isn’t surprising.

Qualcomm’s growth came off of a much smaller base to reach an anticipated $10.2$12.98 billion in sales. Other notable bits from the IHS rankings include Samsung still at the No. 2 spot and experiencing growth above and beyond the overall industry thanks to its share in Samsung-LED. LED lighting and certain sensor components grew this year as well. Broadcom and Nvidia should also see higher percentage growth while both Texas Instruments, Freescale and AMD were the biggest losers. IHS iSuppli expects this downturn to be short-lived as long as the global economy continues to stabilize. It anticipates growth in 2013 to hit 8 percent.

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Chip company AMD said its sales would come in 10 percent lower in the third quarter compared with sales the previous quarter. The news, which was released on Thursday evening was a shocking decline from AMD’s previously announced expectations that third quarter sales would decline by 1 percent, plus or minus 3 percent, sequentially.

AMD blamed its troubles on the macroeconomic environment, which has hurt chip sales, and others are blaming it on yesterday’s reported decline in PC sales. Intel and ARM are also leery about the sales environment. But what’s happening here goes beyond AMD’s refusal to embrace mobile a few years back, and beyond worries about a European decline. Thanks to ubiquitous broadband at home and via mobile devices as well as an increasing reliance on the internet, chip firms are embracing heterogeneity in their product lines.

From one competitor and strict product divisions to a free-for all.

Phones, tablets and netbooks! Oh my!

So while an overall decline is sales is occurring, and the PC market is clearly hurting as numbers from Gartner and iSuppli yesterday show, the big picture is that we’re going from two separate architectures locked into a defined space to more architectures and many vendors in a free-for-all.

This isn’t a binary competition either between ARM and x86. Because ARM licenses its IP to a variety of vendors we’re also seeing companies such as Apple, Texas Instruments, Qualcomm and others innovate and offer different features, designs and price points. On the server side ARM is making progress with vendors and we’ll see ARM-based servers in production by the end of the year. There are other new architectures out there for processing big data that are also gaining ground. Tilera, a maker of a RISC-based many-core chip has silicon running in production on a few thousand servers today.

How this macro-shift plays out in today’s world

• On Wednesday an analyst downgraded Qualcomm because of looming competition from Intel in the market for mobile chips, because Intel is prepping a combo chip that has both an Atom processor and baseband chip to act as a radio. Qualcomm has owned that market for years, but after Intel’s purchase of Infineon back in 2011, Intel may become more of a threat.
• Apple’s A6 chip inside the iPhone 5 contains a custom-build Apple CPU. This may add fuel to the almost ever-present rumors that Apple might dump Intel chips in its MacBooks for its own chips.
• ARM this week unveiled a built a networking layer into its designs aimed at the server market trying to deliver the kind of fast IO that servers need.
• In June AMD and ARM created a group of companies called the Heterogeneous Systems Architecture Foundation, pushing for new software for this heterogeneous world. Qualcomm last week joined that group, which gives it far more credibility.

What’s next?

So right now, chip firms are lowering their sales expectations, writing down excess inventory and keeping an eye on the global economic picture. But they are also taking strategic steps such as the creation of the Heterogeneous Systems Architecture Foundation and integrating other types of chips with their core products as Nvidia and Intel are doing.

The way we access computing has changed as people have gone mobile, while on the back end the architecture is also undergoing its own shift to deliver the type of web-based services we want and need. It would be suicide if the chip firms whose products are the basic building block of computation didn’t adapt. As they do, keep an eye on the average selling price of chips (I expect them to drop in a competitive environment) as well as how these players take on the next big disruption coming to the computing and chip space — the Internet of Things.

At that point it won’t be Intel versus Qualcomm, but ARM trying to take market share from Freescale and major firms prowling around for buys in the microcontroller, timing and maybe even embedded OS sector. What’s happened so far as Patrick Moorhead of Moor Insights & Strategy, notes, is that computing cycles that were once limited to desktops and servers have become continuous throughout the day and over multiple devices. This occurred in part because of the adoption of Apple’s iOS and Google’s Android OS helped unify the once-fragmented mobile OS market.

Moorhead expects that trend to continue even further as we connect more and more devices to the Internet. And none of the big giants in the chip world are going to let that opportunity go.

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Tesla’s line of Model S cars

For the last five years we’ve become accustomed to seeing the hottest tech hit our mobile phones, but that may be about to change. Sure, phones will continue to get smarter, and perhaps innovations rivaling capacitive touch or natural language personal assistants will still hit the mainstream on handsets, but our vehicles have a brighter future. The chip industry is betting on automotive in a big way: Firms are developing more and more speciality silicon for cars.

Nvidia, Texas Instruments and others are building special applications processors to run the consoles and dashboards of today’s in-vehicle entertainment and navigation systems, while smaller firms such as Freescale and Spansion are building specialty chips for handling co-processing or communications. Overall in the last three years the cost of chips inside a new car has increased from $299 to $355 per vehicle, according to IHS iSuppli. However, those numbers are skewed by the huge numbers of new cars with less silicon inside hitting highways in highly populated countries such as China and India.

When it comes to Western Europe and the U.S., the value of silicon and the new stuff coming online is far more expensive — and advanced says Egil Juliussen, principal analyst infotainment and ADAS at IHS iSuppli. Juliussen estimates that in the next decade we’ll see driverless cars, so to get there a lot will have to happen for the on board silicon and sensor networks.

There are several reasons that the car may be the new font of innovation for mobile applications. Automobiles are high-priced goods so they can absorb a few high-priced chips, and they have batteries that can power more silicon without being forced to shut down after lunch. This is a trend that has been building up for a while, but I think in the next year or two we’re going to see cars with services that redefine technology, much like the iPhone redefined touch screens or the Xbox 360 redefined video game consoles that are now full-featured entertainment machines.

A battle for the brains inside the car.

The automotive console on my 2006 Acura TSX is like a dumb toaster compared to the consoles of today’s new vehicles. But with all of this built in connectivity and navigation systems, cars need a smarter application processor to run everything and Texas Instruments and Nvidia both hope to provide it.

Nvidia scored a spot running the controls of the latest Tesla, while Texas Instruments is working with in-vehicle infotainment providers like Harmon to place its OMAP processors inside cars. Both firms have of applications processors built for automotive use that are related to their smartphone application processors, but which offer more performance. For example, a quad-core chip is better suited for a car than a phone where all the cores can process and consume power thanks to a huge battery.

Plus, as cars go driverless we’ll see a need for greater processing capabilities because they will have to track and model various possible collision scenarios based on the information sent from vehicles around them. Those cars will also have to communicate with the automotive components like brakes and tires as well as require more advanced communications chips for sharing info with other cars. They’ll also have more sensors on the vehicle.

Infotainment and connectivity drive today’s chips.

At the high end chipmakers are focused on entertainment and connectivity. As this chart below from IHS iSuppli shows, the amount of revenue derived from putting better navigation and Bluetooth into cars is steadily rising. And while the jury is still out on how cars will connect without incurring huge data bills and straining network capacity, it’s clearly a platform of interest to carriers.

What’s more interesting than the run of the mill infotainment and connectivity chips are the emergence of specialty processors such as a speech recognition chip from Spansion slated to come out in 2013. This co-processor will work with Nuance’s speech recognition libraries and contain databases of sounds on the chip so more of the processing occurs on the device as opposed to getting sent to a server somewhere.

The result is a faster response and more offline functionality. Sending less information to the cloud benefits the owner in the form of lowered data costs, but it also makes sense for someone who might be verbally requesting directions while driving at 60 miles per hour. Waiting for your spoken command to take a round trip on a 4G or 3G network might leave you a few hundred yards past your destination.

Another element of connected cars worth watching is how electric cars will connect with the smart grid and adapt to the changing electricity demand or how they interact with other cars to relay traffic information back to drivers and public safety officials.

So as Apple and others attempt a coup on the entertainment side, building a platform and walled garden for the apps, navigation and driver interface, under the surface are a host of other opportunities for innovation and chip vendors that want to make cars smarter and more responsive.

What will that mean for users? The average American holds onto a car for more than 10 years, according to Juliussen. So will new cars soon have a shorter useful life before their hardware malfunctions or just can’t support the latest software? I’m not sure I’m eager to see the future of mobility if it means I have to buy a new car every five years or less.

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That’s not only an impressive feat of miniaturization and integration, it could kick off the next-generation of LTE deployments, lower the costs of building mobile networks and reduce the energy required to run them. When all those factors are taken into account, base station SoCs could cut the cost of delivering a bit of data, which ultimately could lead to cheaper mobile data plans for the consumer.

The brains of a base station typically reside in a channel card, a sort of hopped-up motherboard designed to perform the extremely complex task of encoding and decoding radio signals. Usually wireless infrastructure vendors like Ericsson and Alcatel-Lucent design those channel cards as a bunch of discrete components: digital signal processors, applications processors, and a variety of hardware accelerators. The new QorIQ Qonverge design stamps all of those discrete components onto a single piece of silicon.

So why is this significant? SoCs are much cheaper to manufacture than the sum cost of all of those separate components, and also drain far less power. According to Scott Aylor, director and GM of Freescale’s wireless access division, a single QorIQ chip can support the capacity of a three-sector 20 MHz LTE cell site – the same configurations Verizon and AT&T are using in their new 4G networks – for one quarter of the cost. Aylor also said the highly integrated platform also drains three times less power, which will help operators design more energy-efficient networks. If operators can build cheaper networks and cut their operating costs, they could theoretically offer mobile broadband at cheaper prices.

That performance and power efficiency will make QorIQ a building block for future network technologies such as LTE-Advanced, Aylor said. LTE-Advanced will require enormous processing resources as the bandwidth pumped out by each cell grows well beyond 100 Mbps. “We’re well ahead of the LTE-Advanced curve,” Aylor said.

Furthermore, Freescale customers like Alcatel-Lucent and Nokia Siemens Networks are already exploring a radical shift in network design. Known as cloud radio access network, or cloud-RAN, it seeks to divorce the base station from the cell site. Instead, operators could build signal-processing farms in a private cloud, in essence virtualizing their base stations. Whenever capacity is needed, cell sites – which are little more than radio heads at this point – would reach into the cloud and grab it. Again, Aylor said SoCs would be ideal for such a scenario.

“We can build farms of 64 of these things on a single card, then daisy-chain them together,” Aylor said. “There’s not a significant limitation on our side as to how far we can scale.”

Aylor said the key to developing the SoC was Freescale’s utilizing new 28-nanometer process technology, allowing it to condense a lot more performance in much less space. That means Freescale’s competitors can’t be far behind as most of them are already going down the 28-nm path.

Digital signal processing giant Texas Instruments has already developed powerful SoCs for use in Cloud-RAN platforms and is using them to power smaller-sized cells. Aylor, however, said Freescale believes it has significant advantage over its competitors as it can supply a single-chip solution across the board, from the lowliest femtocell to the most powerful macrocell.

Not all network vendors subscribe to the SoC approach, Aylor admits, but Fujitsu and Alcatel-Lucent are already converts. The Franco-American networking giant is already using QorIQ chips in its new lightRadio architecture, initially in its Cube small cells, but it plans to begin designing its macro base stations around the new SoCs as well.

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China Mobile has a massive network of 700,000 GSM and 220,000 3G base stations built into towers throughout China’s vast landscape. The base station is easily the most expensive element of the wireless network, and as China Mobile looks to the next wave of wireless technology, LTE, it doesn’t want to repeat that enormous infrastructure investment by installing pricey hardware at the bottom of every tower. Instead, it’s looking for Intel’s help to move all of that network intelligence into the cloud, leaving only the radios and antennas at the cell site.

The Cloud-Radio Access Network (Cloud-RAN) isn’t the public cloud of Amazon Web Services. Rather it’s a private cloud run by each operator in local data centers, but the principle is the same. China Mobile could centralize an enormous number of now-distributed computing resources. That would not only save capital and operating costs, but it would also allow it to webscale the network’s biggest number-crunching requirement – converting the analog fuzz scooped out of the airwaves into digital ones and zeros the network can understand.

Using supercomputing principles to handle baseband processing means no longer having to build networks to meet peak demands at every tower. Cell sites usually see huge upticks in use at a few predictable times each day: during work hours in a business district, for instance, and mornings and evenings out in the suburbs. Outside of those peak times, that capacity just goes to waste. But with Cloud-RAN, operators can allocate capacity where and when needed, following the flow of network congestion from the suburbs to the central city and back again. By putting their base stations in the cloud, operators could drastically cut the processing power necessary to run the network as a whole – by some estimates as much as 40 percent.

Meet the Cloud-RAN players

Alcatel-Lucent, Nokia Siemens Networks have developed Cloud-RAN platforms of their own, giving them fancy names like lightRadio and Liquid Radio respectively. Meanwhile, chipmakers Texas Instruments and Freescale have both begun retooling their baseband designs for future cloud implementations. But Intel aims to take the concept one step further. Instead of merely relocating base stations to the cloud, Intel proposes using its multi-purpose Xeon processors to perform the same signal processing tasks that are now the purview of highly-specialized equipment.

In short, Intel wants to replace the big-iron wireless networks of today with what are essentially server farms that can be built and deployed for a fraction of the cost.

At a telecom industry conference last year, the GM of Intel’s Communications Infrastructure Division, Rose Schooler said that the telecom industry has been hobbled by its fixation on proprietary network interfaces, opaque platforms and a morass of complex signaling protocols – that’s code for telecom vendors not wanting to open up any more than wireless standards require. By adopting the more open standards of the computing industry, the wireless industry could innovate at the faster pace of computing, Schooler said.

Not surprisingly, the traditional telecom vendors think Schooler and Intel suffer from a case of wishful thinking. Freescale and TI have also tapped into computing architectures for their next generation of chip designs. Freescale uses IBM’s PowerPC, while TI has begun integrating ARM cores into its latest basebands. But TI hasn’t done away with the key proprietary component of its baseband designs: the digital signal processor (DSP). No matter what Intel claims, wireless networks are highly specialized creatures and therefore require highly specialized silicon, said Tom Flanagan, director of technical strategy for TI’s wireless base station infrastructure team.

“Its kind of naïve to think that you can replace this highly optimized technology with something general purpose and not lose anything,” Flanagan said in a recent interview. “We build that expertise into the hardware because hardware is exactly where it needs to be.”

For Intel to replicate the base station with generic Xeon processors would require it to build many of its functions into software, and doing baseband processing through software is a highly inefficient way to run a network, Flanagan said.

What are Intel’s chances?

To build a wireless network business, Intel doesn’t just need to battle the established telecom vendors, it has to make the case for Cloud-RAN to the wireless carriers. Last year at CTIA, Verizon CTO Tony Melone was dismissive of the new cloud architectures emerging at the show, saying that they were neat design concepts, but hardly ready for prime time. Verizon Wireless is the world’s most aggressive carrier when it comes to LTE and implementing new network technologies, so Melone’s lack of endorsement is telling.

Another obstacle is the enormous backhaul capacity that a Cloud-RAN architecture would require. Sending raw unprocessed radio frequency data over the network to a cloud data center would require much more bandwidth than a copper or microwave backhaul link could provide. That means fiber is the only way to support Cloud-RAN, and no operator has fiber links to all of its cell towers.

But if Intel lands a contract with China Mobile it may not have to worry about other customers. An LTE deployment from China Mobile could eventually scale to more than a million cells, translating into a heck of a lot of high-end chip sales. Intel, however, faces competition from the incumbents on that front as well. Intel has been working with on China Mobile’s Cloud-RAN project since its inception, but recently the carrier began testing Alcatel-Lucent’s lightRadio technology as well.

Given the decline of its core PC business, Intel needs to find new markets for its X86 processors and figures that the wireless industry is ripe for the picking. But its attempts to break into other aspects of that industry have flopped. Intel has tried for years to challenge ARM’s dominance in the mobile computing market with its Atom processors, but the X86 architecture’s notorious power problems have kept handset makers disinterested. Only earlier this month did Atom start showing life. Most recently Intel has been trying to position its processors as a means of making dumb femtocells and picocells smart.

I’ll give Intel one thing. It’s tenacious. With every wireless initiative failure – note WiMAX – it immediately launches another. And where it can’t develop a wireless technology on its own, it buys a company that can. Cloud-RAN could be a key turning point for Intel or another flop, but we’ll probably have to wait several years to find out. While China Mobile is trialing LTE now, its commercial rollout could be as far away as 2014.

Dice image courtesy of Flickr user alancleaver_2000

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More important is that this action is the next round of the chip wars between Intel and those who build ARM-based CPUs.

This battle has been building for several years as mobile computing — on smartphones and tablets — has quickly matured, while traditional desktop computing has stagnated. As early as last December, for example, smartphones began outselling personal computers and those sales show no signs of stopping. The biggest difference, at least in terms of the chips that power these two markets, has been one of strategy.

Until recent years, Intel focused its efforts on what’s called the “clock speed” of CPUs, rapidly increasing the performance of computer chips to better handle desktop operating systems and processor-intensive applications. Less thought was given to reducing the power consumption requirements of these chips.

Contrast that to chips built on the ARM architecture, which is licensed out to chip-makers such as Nvidia, Qualcomm, Texas Instruments, Freescale and a host of others. Instead of the “top-down” strategy of boosting performance first and focusing on power requirements second, ARM chips have used a “bottom up” approach. Early ARM chips weren’t capable of running complex software, but could run for days between charges. Once the power requirements of the silicon were effectively managed, ARM chips began to ramp up performance; most recently with quad-core chips that can offer 16 hours of high-definition playback on a tablet.

These chips now power everything from phones to tablets to e-readers, all markets that have two things in common: They’re all growing, and Intel’s silicon is inside few of them. This confirms early analyst expectations from January 2010 when ABI predicted that more mobile devices would be running on ARM chips instead of Intel’s silicon by 2013.

As if that wasn’t bad enough for Intel, Microsoft demonstrated in January that its next version of Windows, possibly available in 2012, doesn’t require Intel’s chips to run. Instead, Microsoft is optimizing its operating system for use on the battery-friendly ARM-based chips; now that these CPUs have improved their performance, they’re capable of running Windows on notebook computers. Microsoft’s software will still support x86 chips from Intel, likely for many years to come, but the trend is clear.

Intel continues to shift its strategies towards improving battery life with its chips, reportedly planning to speed up the product cycle. Plus it’s trying to jump-start what it calls the “ultrabook” category of notebooks. But the damage is already done, especially if notebook makers are already bidding on chips from both Intel and from ARM licensees. At least Intel doesn’t have to worry about the silicon it makes for large servers… Oh wait; that’s the next battle after this one, which is also ramping up soon.

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Specifically, Freescale plans to begin marketing Fuji’s insulated-gate bipolar transistor, or IGBT, devices to its automotive customers. These devices convert alternating current (AC) control signals to the current needed to turn the motor. Or, as Fuji explains in this 2007 issue of the corporate technical journal, Fuji Electric Review, IGBT modules in hybrids are used to “convert the power generated by the engine into electrical energy, to charge and discharge a battery, and to drive the motor.”

Found in applications ranging from solar and wind power systems to robots, IGBTs are known for fast switching and high efficiency. This combination makes them “ideal,” Freescale says, for use in electric vehicle motors ranging from 20KW to 120KW. The company adds that with a more efficient IGBT, a hybrid or electric car will lose less power as wasted heat.

In a mid-range vehicle sold in the U.S., electronics make up 20-30 percent of the car’s cost, enabling stability control, navigation, transmission and engine management and many systems in between, Freescale Global Automotive Marketing Manager Steve Nelson said in an April 2010 interview for GigaOM Pro (subscription required). Hybrid vehicles, with their regenerative braking and start-stop systems designed to reduce fuel consumption, “have substantially higher semiconductor content compared to regular passenger cars,” according to the research firm Frost & Sullivan. The Volt, a plug-in hybrid car, uses 10 million lines of software code and 100 electronic controllers, and each Volt on the road has its own IP address.

All-electric vehicles will have even higher semiconductor content. As we explained over on GigaOM Pro last spring, electric cars rely on computerized systems to extend their range and manage complex battery packs made up of hundreds of lithium-ion cells, each of which needs monitoring. Thermal controls and other management systems help ensure efficient charging and longer life.

Fuji has made it a goal to expand use of the company’s IGBTs in hybrid and electric vehicles, as well as renewable energy, reaching beyond the industrial sector that currently makes up the bulk of its IGBT business. According to Freescale, IGBTs make up the largest segment of the market for electric vehicle power systems. They’re also the final piece of the puzzle for the Austin, Texas-based chipmaker’s EV system portfolio. The company says this latest deal with Fuji means it can now “offer all of the major electronic components of EV systems,” including microcontrollers, analog gate drivers, battery monitoring integrated circuits, power IGBTs, modeling and simulation tools, and software tools for motor control development.

To learn more about connected and electric cars come check out Green:Net on April 21 in San Francisco, and hear from speakers from GM’s Onstar, Ford, Tesla Motors, Coda Automotive, and startups like Virtual Vehicle (one of our 10 Big Ideas companies).

Image courtesy of Yutaka Tsutano.

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