We argued that oil is dead. While some readers took that literally, this wasn’t the case, of course. What we meant was that it was difficult to see a world in which oil demand would significantly outstrip supply in a world where it would be increasingly difficult to maintain OPEC discipline and with the shale revolution spreading.
The pivot point comes when electrical vehicles (EVs) become cheaper than gasoline-driven cars, which is expected mid next decade. This is powered by improvements and economies of scale in battery production, relentlessly driving their cost downwards.
However, there is a second revolution brewing, that of autonomous vehicles (AVs). The impact of this revolution will also be keenly felt amongst many industries, like car manufacturing, transport services, car dealerships, and rentals, etc.
Autonomous driving isn’t yet there, but there are powerful forces driving it forward:
- Improvements in artificial in general and computer vision, in particular, enabling computers to distinguish objects on the road and build a 3D model of the environment in real time.
- Ride sharing companies like Lyft (Private:LYFT) and Uber (Private:UBER), which spread the fixed cost of ride sharing over a great many cars.
- EVs, which cut maintenance cost of cars by an order of magnitude. This is crucial for a move from many cars which lay idle for most of the time to much fewer cars which are used much more intensively.
To illustrate the last point, here is Benedict Evans (our emphasis):
Moving to electric reduces the number of moving parts in a car by something like an order of magnitude. It’s less about replacing the fuel tank with a battery than ripping out the spine. That remakes the car industry and its supplier base (as well as related industries such as machine tools), but it also changes the repair environment and the life of a vehicle. Roughly half of US spending on car maintenance goes on things that are directly attributable to the internal combustion engine, and much of that spending will just go away. In the longer term, this change might affect the lifespan of a vehicle: in an on-demand world vehicles would have higher loading, but absent that, fewer mechanical breakages (and fewer or no accidents) might mean a longer replacement cycle, once the rate of technology implementation settles down.
In controlled settings like mining and farming, AVs are already here, and we can gauge some of the advantages already, like saving on labor and carbon emissions (as much as 60%, according to McKinsey) through optimized driving.
This is likely to spread to other commercial applications like warehousing and construction (excavators, forklifts, etc.), then highway trucks, then vehicles. But this neat sequence can be upended by innovators cracking the problems.
It looks like California will take the lead, from The Guardian:
But this month, California set the stage for the next phase of innovation that could dramatically alter transportation and mobility across the globe. The state has proposed regulations to allow fully autonomous vehicles to drive on public roads – meaning empty cars with no steering wheels and no backup driver inside. The new rules are a game-changer for the nascent industry, opening the doors to a host of complex questions about legality, ethics, and safety. The regulations, which could go into effect this year, pave the road for a deployment that could revolutionize modern society.
A game changer indeed. There are already 27 companies with permits to test autonomous vehicles on the roads today in California, even if there still has to be a human behind the wheel. But according to the proposed rules, companies can self-certify that their vehicles are safe without anybody at the wheel, a remarkable development.
Not everybody agrees that safety drivers will be gone soon, from Recode:
I think we should expect safety drivers to be around for a long time. Companies are going to be very conservative in their removal, because there is little incentive for them to remove them until they are sure it’s going to be worth it. The long-term ROI is so clear, and that makes it easy to be patient.
However, this is not necessarily less safe. We know that where there is a person behind the wheel as sort of standby for emergency situations, it is generally difficult to stay engaged if most of the driving is taken out of his/her hands.
California might not have it all alone though, from the World Economic Forum (Pdf):
Volvo Car Corporation announced its Drive Me project as it rolls out a number of features in the driver-assist category in early 2015. 38 In partnership with the Swedish government, 100 production-ready autonomous cars will be in the garages of customers by the end of 2016. The cars will be allowed to drive on 30 miles of roads in the city of Gothenburg in what would be the first public test of a self-driving vehicle.
This hasn’t yet started (see here for progress) but will so soon. The area in which these cars can drive autonomously is ring-fenced, and the drivers have a choice to either drive manually or sit back and enjoy the ride. It will roll out later to other parts of the world, like London, the US, and China. Uber is already testing autonomous Volvos (OTC:VOLAF), as well as Ford Fusions (NYSE:F) in Pittsburgh US, but with their own technology.
Once a city will allow driverless cars on its roads, things are likely to go pretty fast, from Recode:
But just think about what happens once that first city has 24/7 readily available autonomous driving. That city will feel like the city of the future. Overnight, not having autonomous in your city is going to feel like when you lived in a place without broadband, or a city without mass transit or electricity. Every other city or country is going to be on a mad dash to modernize to autonomous at that point.
Transport as a Service (TaaS)
Autonomous driving is going to change the way many think about cars. Basically, cars are vehicles to provide transport services. One thing to keep in mind is that the average vehicle is used only 4% of the time and parked the other 96%.
As a result, the incentives to own a car will be greatly diminished as these transport services will often be much cheaper to acquire by simply hailing a car with an app or one on the street when one needs them. Here is Lyft co-founder John Zimmer (from Medium):
We see car ownership as a burden that is costing the average American $9,000 every year. The car has actually become more like a $9,000 ball and chain that gets dragged through our daily life. Owning a car means monthly car payments, searching for parking, buying fuel, and dealing with repairs.
The shift from owning a car to acquiring transport as a service (TaaS) at the point of need will also include a host of other costs, like fuel, maintenance, parking, and insurance. With reduced cost comes increased mobility for people not previously able to afford it, or places where public transport was scarce or non-existent.
There might very well be a pretty dramatic decline in the number of cars, from OilPro:
Researchers at the University of Texas have conducted a realistic simulation of vehicle use in cities that took into account traffic congestion and rush-hour use. They found that if our vehicle fleet was fully autonomous, every shared autonomous vehicle could replace 11 conventional vehicles. As their study showed, the world would only need 800 million vehicles to supply transportation services for nine billion people, or 200 million fewer cars than what already exists in the global vehicle fleet.
However, the AV revolution could also lead to an increase in traffic and congestion if autonomous cars are used a lot for running errands and deliveries, creating a fleet of zero-occupant cars whizzing around. Or consumers might opt to live further out of city centers when faced with the option of a relaxing and/or entertaining commute.
While it seems implausible that the net effect of AV is an increase in vehicles on the road, let alone more congestion, but it can’t be totally excluded at this moment. Even if it happens, a tax on zero-occupant vehicles could take care of much of this problem. Another solution would be smart lanes, or lanes for vehicles with three people or more.
There will still be people who enjoy driving and owning their own cars, but it’s likely nevertheless that the number of vehicles will be considerably reduced.
There are a number of new business models emerging which are all pay-per-use or ‘TaaS’ models:
- Car sharing
- Peer-to-peer car rentals
- Taxi alternatives
Here is Lyft’s co-founder John Zimmer arguing that the individual ownership based models (car sharing, peer-to-peer) are less efficient compared to service company solutions. Why is that?
For starters, our fleet will provide significantly more consistency and availability than a patchwork of privately owned cars. That kind of program will have a hard time scaling because individual car owners won’t want to rent their cars to strangers. And most importantly, passengers expect clean and well-maintained vehicles, which can be best achieved through Lyft’s fleet operations.
He also argues that TaaS is way more flexible, companies are likely to offer any kind of plan based on needs and usage:
Don’t drive very often? Use a pay-as-you-go plan for a few cents every mile you ride. Take a road trip every weekend? Buy the unlimited mileage plan. Going out every Saturday? Get the premium package with upgraded vehicles. The point is, you won’t be stuck with one car and limited options.
Finally some good news for US healthcare, from Recode:
Nearly 37,000 Americans die each year in car accidents, and nearly 1.3 million die globally. For every death in the U.S., there are more than 100 treated in emergency rooms, with an annual cost of $33 billion in 2012.
To put this into perspective, in the world (from The Guardian, our emphasis):
1.2 million people die on the road each year, equivalent to a 737 plane falling out of the sky every hour. In 94% of the cases, the cause is human error.
These statistics are also important in another sense. There are unresolved legal issues in cases of autonomous cars cause fatal (or non-fatal) accidents, but it will be clear that from a safety point of view, we have much to win from this revolution so this shouldn’t hold it back.
Apart from a drastic reduction in accidents, another big boost in saved human lives and reductions in healthcare cost will be the result of the joint revolutions of EVs and AVs.
Pollution is a major silent killer in the world. According to the World Health Organization, 8.2M people die each year from air pollution. Even the International Energy Agency acknowledges much of this, putting the figure at 6.5M people a year.
From the World Economic Forum (Pdf):
Globally, transportation causes more than 200,000 premature deaths a year from air pollution, 1.25 million road deaths and approximately 30% of the carbon dioxide (CO) emissions behind climate change.
AVs will significantly reduce the number of vehicles but not the number of kilometers driven. Insofar as AVs produce much more efficient traffic streams and less congestion. From Roland Berger (Pdf):
analysis by Nationwide Insurance on the root causes revealed that over 70% of traffic congestion in the US are caused by bottlenecks, incidents and poor signals. These factors can be greatly reduced, if not eliminated, by autonomous driving.
Whether AVs lead to more efficient traffic streams remains to be seen. Here is the main argument in favor, from Roadandtrack:
It only takes one jerk’s tap of the brakes to spark a traffic jam that can reach for miles and last for hours. This issue is only exacerbated by drivers who don’t understand what makes a traffic jam worse and what makes it go away. But as CGP Grey explains, there’s actually a strategy that – if every driver knew it and adhered to it – could make many traffic jams just disappear. Just maintain an equal distance from the car in front of you and the car behind you. That’s it.
AVs could easily be programmed in this way. The other argument is of course that there will be less ‘jerks’ tapping their brakes many reasons to do so, like accidents and human unpredictability, will greatly diminish. The algorithms to ease traffic emerge from machine learning, from MIT Technology Review:
Inside a simple computer simulation, a group of self-driving cars are performing a crazy-looking maneuver on a four-lane virtual highway. Half are trying to move from the right-hand lanes just as the other half try to merge from the left. It seems like just the sort of tricky thing that might flummox a robot vehicle, but they manage it with precision. I’m watching the driving simulation at the biggest artificial – intelligence conference of the year, held in Barcelona this past December. What’s most amazing is that the software governing the cars’ behavior wasn’t programmed in the conventional sense at all. It learned how to merge, slickly and safely, simply by practicing. During training, the control software performed the maneuver over and over, altering its instructions a little with each attempt. Most of the time the merging happened way too slowly and cars interfered with each other. But whenever the merge went smoothly, the system would learn to favor the behavior that led up to it.
This is all well on highways in computer simulations, real life is likely to be much messier though. Here is Aric Dromi, consultant for carmaker Volvo (from Smart2.0):
He added that mixed traffic of autonomous and conventional vehicles might work well on country roads or highways, but not in city environments, because the algorithms that control self-driving vehicles are of defensive nature. They are programmed to avoid accidents and therefore will slow down whenever a human or conventional vehicle makes some kind of mistake. “This will lead to paralyzing the city traffic”
Another benefit is that AVs constitute a huge improvement in drivers commuting time, through several effects:
- More efficient traffic streams will mean less congestion, hence faster arrival times.
- Instead of driving, drivers can use the time productively, or consume entertainment.
- Less driving around in search for parking space in cities, cars can do this by themselves.
This could boost the demand for digital entertainment. Drivers could even nap, reducing the sleep deficit that seems to have gotten a hold of modern life, producing additional health benefits. A much smoother commuting time is also likely to reduce stress, producing further health benefits and perhaps even productivity increases.
It will be clear that with a dramatic reduction in traffic accidents and the number of cars on, the car insurance industry will face major retrenchment. Its clients are likely to shift from drivers to the car manufacturers, focusing mainly on technical malfunctioning, rather than human error.
The likely dramatic reduction in premiums is a net benefit to society, needless to say.
We will have more to say on the impact on car manufacturers in another article, so here just some points of impact:
- The number of cars sold will be impacted
- A changing nature of demand
- The value shifting towards electronics and digital platforms
- The required capabilities will shift
- The emergence of whole new business models and new players
- Fundamental changes in their supplier and customer networks (dealers, car rentals, etc.)
The biggest issue is of course what the position of the car manufacturers will be in a world where transport has mainly become a service. They risk being at least partly commoditized because others could easily control the gateway to the end customers.
Car rental companies are already a sort of TaaS company of sorts, but they face several disadvantages versus new upstarts like Lyft and Uber. Their business model is very capital intensive, and they risk being upstaged by larger digital platforms.
Taxi companies basically are also already TaaS companies, but they will have to equip their cars with autonomous driver technology or renew their fleet. It will be harder for the drivers which have invested heavily in taxi licenses, but insofar as they own or partially own their cars, they could let the car work for them and do something else instead.
The days of the independent car service shop might be numbered, according to McKinsey:
Given the safety-critical nature of AV technologies, customers might strongly prefer strict adherence to OEM service processes and the use of original service equipment when it comes to maintaining and repairing AV systems.
Car manufacturers are likely to be forced into taking more responsibility, but this also opens up a bigger after-market revenue stream for them.
Cars are idle 96% of the time, on average, and they take up a lot of space (from Medium):
In 2011, researchers estimated that there are at least 700 million parking spaces in the U.S. That means our country has more than 6,000 square miles of parking – bigger than my home state of Connecticut.
Insofar as we need less parking, this will be bad for commercial parking companies and others, like municipalities, that earn income from parking. For society, it frees up space, and parking costs are much less of a worry for TaaS customers.
It will also further reduce traffic in cities as a large proportion of city traffic constitutes of drivers cruising in search of elusive parking space.
No doubt that cities, more especially, American cities, are designed very much with cars in mind. Lightening the burden of traffic (and cleaning the air as a result of EVs) will open up the possibility that cities become once again more community focused, like in a distant past, when (according to John Zimmer in Medium):
people used city streets as public spaces. Streets were where children could play. A place for shopping, where you could stop at a cart on the way home to pick up everything from dinner ingredients to shoes for your family. People spent a lot of time outside on the street, making friends, seeing neighbors, and living their lives within a true community.
This is a fairly romanticized view of the possibilities, but that there will be some shift is pretty obvious, and it is already happening, at least in some cities, from Medium:
It’s happening in New York City, which is expecting a million new residents by 2030. Under Mayor Bloomberg, New York embarked on a plan to reclaim 180 acres of roads from vehicles – and turn them into things like bike lanes and public plazas. The parking lot below the Manhattan Bridge, is now a plaza where New Yorkers go to eat lunch and spend time with friends. Just five years after reclaiming this space from cars, retail sales in the surrounding area increased 172%
Or look at San Francisco, where the historic Ferry Building was blocked for decades by a two-level freeway. Since locals couldn’t really get there, it became a rarely-visited office building. But when the road was damaged by an earthquake in 1989, the city saw an opportunity. Instead of rebuilding the space for cars, it tore down the highway and reimagined the area as a place where people could gather. Shops, restaurants, and cafes were built, and before long the Ferry Building became the focal point of the San Francisco waterfront. Every weekend, almost 25,000 people visit its farmers market and support local vendors. As a result, new neighborhoods emerged, and within five years, there was 51% more housing available in the surrounding area.
And, this is just the beginning. Many megacities in the world are dominated by traffic and pollution, they could become fun again, with access (albeit not ownership) democratized.
- Consumer acceptance
- Data security and privacy
There are a considerable amount of costs involved. Today’s advanced driver assistance systems add between $3,000 and $6,000 per car (Roland Berger Pdf). Tesla’s (NASDAQ:TSLA) enhanced autopilot system costs $5,000 and add another $3,000 for full self-driving capability (The Verge).
Then, there is the Honda Civic LX Sedan (NYSE:HMC) that can be purchased with autonomous driving capability. The vehicle costs $20,440 (per WSJ), it has an autonomous driving capability (although for legal reason, it isn’t called that and it’s not a level 5 system, it needs lane markings and a car in front).
To a large extent, the success of driverless cars will depend on consumer acceptance of the technology. However, early surveys suggest a majority of the public mistrusts driverless cars. A March, 2016 poll by the American Automobile Association (AAA) reported that 75% of US drivers are “afraid” to ride in a driverless car. This number was confirmed by January, 2017 report released by Deloitte. A poll performed by the University of Michigan Transportation Research Institute in May, 2016 found that 84% of Americans do not want to ride in a fully autonomous vehicle, and that additional media coverage and awareness of driverless cars was having little influence on consumer acceptance.
It’s exactly with this in mind that Volvo started these autonomous car trials with people (Drive Me, mentioned above). However, there are also a number of arguments in favor of faster adoption:
- Increased urbanization where car ownership is less useful (cost and difficulty of parking, availability of alternatives).
- The emergence of ride-sharing apps further reducing car ownership requirements.
- Cities actively discouraging car ownership because of congestion and air quality.
And, it might not be all that bad, according to PWC (Pdf):
The self-driving car will be the most valuable contribution to automakers’ top and bottom lines in a generation. The share of drivers around the world who say they are looking forward to these technological miracles is growing rapidly, and these drivers say they’re ready to pay a premium for the convenience.
Another obstacle is data safety (from World Economic Forum Pdf):
“The possibility of cyber attackers to intrude in a system that is connected is much higher. The moment you connect a vehicle to the Internet, you expose it to more cyberthreats; that is a topic that needs to be addressed by automakers and policymakers but we are only at the beginning.” – Andreas Mai, Director of Connected Vehicles, Cisco
Without being exhaustive, but lack of infrastructure could be a big barrier for widespread adoption. For instance, traffic lights and street signs might have to be armed with cameras and sensors to communicate with self-driving cars, but who is going to pay for that? Here is Aric Dromi, consultant for carmaker Volvo (from Smart2.0):
In reality, autonomous driving is a gigantic infrastructure project which will take much time to be implemented. Dromi expressed his opinion that cars should not use the same roads as pedestrians. Instead, they need a separate and dedicated system of roads exclusively for this type of vehicles – an infrastructure they should no share with pedestrians, cyclists or even conventional vehicles. “In a couple of years, we will wonder how this could ever have been different,” Dromi said.
Upon the interviewer’s objection that the latest research of urban planners indicates that sharing the traffic infrastructure calms traffic and revitalizes urban environments, Dromi said that this effect won’t materialize with self-driving vehicles – for the simple reason that road hogs will make this mixed type of road traffic impossible. “Imagine what happens if all pedestrians know that the cars will always and under all circumstances brake for them as soon as they simply put their foot onto the street,” he argued.
All kinds of regulations are required if autonomous driving is actually going to happen. These vary from what kind of technology is required, to communication links, to remote access, etc. etc.. You can gauge what’s required even for a fairly small test program in California here. You can follow the state of US regulation here.
While proof of concept for fully autonomous cars already exists, widespread adoption, which has the potential to revolutionize many aspects of modern, and especially city life for the better, is still some time off. It is still facing technological and especially infrastructural and regulatory barriers which will only slowly dissolve.
This gives all the companies remotely connected to the business of transport time to rethink how this revolution is going to impact their business models and how they can capture value from new emerging business models, before their lunch is eaten.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.