Autonomous Vehicles – The Compelling Business Case

The benefits of fully autonomous vehicles (AVs) are very well established, including the potential to improve safety, reduce emissions, capture lost time, improve quality of life, save money, improve equitable access to transportation, etc.  In the Canadian context, a report by the Conference Board of Canada, the Van Horne Institute, and the Canadian Automated Vehicles Centre of Excellence (CAVCOE) estimated that when fully deployed, AVs might provide an economic benefit of $65 billion per year for Canada.

But these estimated benefits are not necessarily directly related to revenue generation and profits for the private sector. Yet AV technology is being developed at an increasingly rapid pace within the private sector and more investments, partnerships, mergers, and new players are being announced on a regular basis.

What is the compelling business case that has prompted this acceleration in investment in AVs?  How big is the prize being fought for?

Within five years

First, it is important to understand how close we might be to seeing the first AVs on public roads.

When asked in January 2016 when we will start to see AVs on the road, US Transportation Secretary Anthony Foxx responded,

“I think we’re going to see it within five years. That doesn’t mean 100 per cent penetration; that just means market availability. But I actually think we’re going to see it within five years.”

However, we may see some form of a road-going AV even sooner than that. Astro Teller stated in April 2016 that the Google self-driving car project is "close to graduating from X." At this moment in time, we do not know what vehicle or service Google might initially deploy, or its capabilities, but we do know from past presentations that they anticipate both incremental deployment and improvements. Google currently has a fleet that includes modified Lexus SUVs and their own prototype two-seater electric pod that is limited to 25 mph, as well as a collaboration with Fiat Chrysler to create 100 self-driving Pacifica minivans in the near future.

If initial AV deployment is pods that are limited to 25 mph on public roads, this could still have a substantial impact on transportation within a geo-fenced area of a city. Here it is worth noting that New York City recently lowered the default speed limit from 30 mph to 25 mph for safety reasons, and in doing so has possibly created the ideal conditions for the first generation of AVs to prove their value.

Market size and opportunities

Second, it is helpful to understand how big a pie this new mobility market may represent.

The reason that Google (now Alphabet), or any other AV developer, might be keen to get to the market first is because of the scale of the opportunity. Adam Jonas of Morgan Stanley summed it up this way:

“The auto industry is a century-old ecosystem being ogled by outside players hungry for a slice of a $10-trillion mobility market."

“The car, on our estimates, is the world’s most underutilized asset.”

“We believe it's the most disruptable business on earth.”

However, we can only begin to guess at the new business models and additional value that AVs will generate. Such value creation will come from novel business models around the movement of people, goods, and services as well as the provision of new services by these vehicles. It is possible that the data generated by AVs could itself be a multi-trillion dollar market in addition to the mobility aspect.

AVs will take new forms

It is also worth noting that when considering an AV future, we move beyond a perspective that is limited to the possibilities of the current transportation paradigm. There will be new types of vehicles, new modes of transportation, and new opportunities and business models.

Once the incredibly challenging problem of safe autonomous driving has been solved, the technology can be calibrated to work on any vehicular platform. Future modes could therefore also include pods that physically combine into road trains as they enter higher density traffic flows to provide a similar passenger density to a conventional bus, or self-delivering bicycles that overcome the single biggest problem of current bike-sharing which is re-distribution of bikes following tidal flows, or sidewalk-friendly delivery robots that will be very efficient at delivering small packages locally and take much larger delivery vehicles off of the roads.

Key principles of money flows around AVs

The subject of AVs is so complex that we cannot forecast with any certainty what will happen, but certain key principles will likely dictate the general direction of deployment scenarios and the rate of market penetration. Understanding how the money might flow around this rapidly emerging eco-system might provide greater clarity on the likely deployment scenarios that may develop on our roads. Although municipalities and regional and federal policy will also play an important role in shaping the future of AVs, in capitalistic economies we know that money flows can, and often do, play a dominant role in market development.

Principle 1 – Avs will work and make money for their owners

Unlike conventional vehicles, which generally sit idle 95% of the time, an AV can be put to work moving people and goods and providing services. This will make money for the owner. We have never had a product like this before – an autonomous robot doing work outside of factories. Applying basic capitalistic principles, a product such as this one that makes money for its owner can reasonably be expected to be in very high demand and will therefore sell faster than it can be made, until the market is saturated.

Or, as Elon Musk stated in his Tesla “Master Plan – Part Deux”:

“Enable your car to make money for you when you aren't using it.”

This raises the expectation that just as higher net worth individuals buy houses to rent out as an investment, people will invest in owning multiple AVs.

But such individual ownership of AV fleets for hire will rapidly begin to compete with the major Mobility-as-a Service (MaaS) fleets that are also a logical result of market competition as described in the following.

Principle 2 – Mobility-as-a-Service

MaaS, limited in this article to the context of AVs for simplicity, is the ability to order a ride on your smart device right before you need it, pay electronically in advance, and then go where you want to. To avoid the dystopian scenario of this resulting in even more vehicles and congestion on the road, municipalities and service providers can promote ride-sharing of these AVs to increase average vehicle occupancy (AvVO) which is currently about 1.2 people per vehicle in peak periods. CAVCOE’s thought-development work estimates that achieving an AvVO of 1.8 would have a very significant impact on congestion reduction, network efficiency, and journey time reliability. An AvVO of 1.8 would also allow for some degree of induced demand, including an increase in usage from the 30% of the population who currently don’t have a driver’s licence, many of whom are disabled, senior, too young, poor, or medically-at-risk.

What MaaS does in terms of business models is to create fierce competition between mobility players that are currently rarely in direct competition. This can be explained by considering some of the mobility choices on offer to a visitor who flies into a new city.  The visitor has a choice of numerous distinct business models for how they might wish to move around, including taxi, car rental, car share, ride share, or Transportation Network Company (TNCs e.g., Uber, Lyft). However, once AVs are deployed, each of these business models will lose market share if they don’t have AVs, and possibly gain market share if they do. But the interesting thing is that once each of these different business models deploys AVs, they end up having the same virtually indistinguishable business model – that of the MaaS provider as described above.

Of course, automotive manufacturers (OEMs) have demonstrated an understanding that their revenues are also threatened by the evolution of MaaS.  Many OEMs have been active in developing strategic partnerships with companies in the car share, ride share, and TNC space, as well as bolstering their own AV R&D with the acquisition of AV development capability. For instance, GM recently invested in Lyft and bought Cruise Automation and plans to demonstrate their own fleet of AV taxis. Some OEMs like Ford and BMW have indicated an understanding that they may need to move from being car manufacturers to mobility service providers in the near future. It is quite possible that the OEMs would want to operate their own fleets and become the MaaS providers directly.

The Conference Board of Canada report also estimates that a household that gives up private ownership of a conventional vehicle and uses a MaaS service could conservatively save approximately $3,000 per year.

Competition

This new autonomous robot product that makes money for its owner will inevitably end up in fleets providing mobility as a service. Whether via private individuals choosing to hire out their own AV when they are not using it, via their investment AVs, or via the corporate fleet sector, there will be very strong competition to provide mobility services to the public.

It is therefore possible that initial AV production will go directly into large corporate shared fleets and not be sold to individuals at all. With so many businesses facing loss of market share and possibly going out of business, they will do all that is necessary to secure access to a technology that is expected to ensure their survival.

Rapid market penetration

With a product that makes money for its owner, and demand exceeding supply, then it would seem that market penetration will be a direct function of how quickly the product can be made. Except this will not be the case, as AVs actually have a leveraged market penetration.

It should be noted that a single AV that is used in a shared fleet will replace multiple private vehicles. MaaS related studies have shown a very wide range of replacement ratios, from approximately two (Kornhauser, Princeton), to 10 (OECD report), to 13 (Shaheen, UC Berkley). At CAVCOE, we have taken a more pragmatic approach based on the fact that during a busy peak period, approximately 20% of all private vehicles are on the road at any one time and a maximum replacement ratio of 1 to 5 is probably more realistic. However, a significant increase in AvVO from 1.2 to 1.8 would allow for the potential for this replacement ratio to be higher, although we must allow for a certain percentage of vehicles that are out of service for maintenance or charging/fuelling.

Therefore, with a highly leveraged market penetration, where a single AV is capable of replacing five privately owned vehicles, the impacts of AVs on the road network and various transportation business and operational models could be extremely rapid.

CAVCOE is developing a model to estimate how rapid this market penetration might be, which will be presented at the ITS World Congress in October 2016. However, early indications are that market saturation by AVs might not take multiple decades as suggested by other models from market analysts, rather a single decade or less.

Implications for government and businesses

The compelling business case for AVs that results in highly leveraged market penetration will have profound implications for most businesses and most governmental departments and ministries at municipal, provincial, and federal levels.

AVs present a highly complex problem with far too many variables, which makes it impossible to predict with any certainty whatsoever and no forecasting method can provide a sufficient degree of comfort as to its accuracy. However, we hope that by raising the possibility that the compelling business case could result in very rapid market penetration and resultant impacts on business and operational models in the public and private sectors, organizations will be encouraged to carry out their own due diligence and assess their level of risk exposure.