It is extraordinary to experience the conflux of three seismic disciplines as revolutionary as transportation, technology, and sustainability.
Ten years ago, the notion of sharing a ride with a stranger was taboo.
The future of transportation will face tremendous altercations in the next decade.
In fact, it’s happening as you read.
The advancement of autonomous cars, ride-sharing business models, and electric vehicles has entered unprecedented territory.
We have reached an inflection point.
Important questions remain unanswered. Safety. Intrusive collection of data. Consumer demand. Regulatory barricades.
But, the probable benefits seemingly dwarf the lingering concerns: energy efficiency, convenience, alleviated costs.
There was a time when the human population traveled by horse and movement was scarce.
In the 1928 presidential campaign, Republican Herbert Hoover took the throne by promising “a car in every garage”, long ingraining in America’s culture the notion that all drivers should possess his/her own dedicated vehicle.
The concept of each individual driving a personally-owned vehicle directly conflicts with an increasing economic and social burden: the real cost.
The real cost of vehicle ownership is multifaceted, and can be delineated as follows:
- Real Cost = Initial Cost + [Operating Cost or Cost/Mile * Miles Traveled], where cost/mile is comprised of fuel expenses, maintenance expenses, social costs, and negative externalities.
Both the initial fixed cost and the subsequent variable cost related to miles driven have associated social expenses, such as carbon emissions (otherwise known as negative externalities), vehicle mortality, pollution, and traffic congestion. While this linear model approximates the real cost of vehicle ownership, it is important to note that the exact relationship between real cost and miles traveled is, in fact, nonlinear. As more miles are driven in aggregate, the cost per mile rises disproportionately due to the cost imposed on our environment. An example of a similar nonlinear effect is traffic congestion: the incremental cost of the fifth car on the road is insignificant, while the additional cost of the hundredth car on the road is massive, as that one car could cause significant bottleneck.
Similarly, we have reached a tipping point with carbon emissions.
The potential of ride-sharing for both private and public transportation is a greater-than-linear impact on the real cost of a mile driven.
Interestingly, at the onset of the 20th century, one-third of all U.S. vehicles were electric, losing popularity to lower cost gas-powered vehicles as the latter became more efficient. A growing awareness around climate change, in tandem with the increased use of automobiles, has not only significantly heightened the real cost of driving, but also broadened the gap between the real cost of a traditional versus an electric vehicle.
And, thus, hybrid and electric vehicles have reemerged as the first real solution.
ENTER TESLA, GOOGLE, APPLE, AND UBER.
Brainchild of billionaire visionary, Elon Musk, Tesla Motors (TSLA) has exhibited a fair share of profit volatility. In May of 2013, TSLA posted its first-ever quarterly profit, shocking a number of analysts as just a few weeks prior the company had been teetering on the edge of bankruptcy.
Previously, Larry Page and the powers that be at Google had attempted to be part of the solution, negotiating a private arrangement to buy Tesla in 2013. A deal was sealed – only to later be broken as TSLA stock price skyrocketed and Wall Street was able to fund Tesla’s growth.
While hybrid cars such as Toyota’s Prius have initially gained the largest market share, the world may soon realize that an all-electric solution will be the ultimate winner.
A SECOND TECHNOLOGICAL WAVE: SELF-DRIVING VEHICLES.
What long seemed to be a fantasy – catch some extra z’s while your car drives itself to accomplish various errands – is becoming a reality.
The implications are tremendous.
To date, California, Florida, Nevada, Michigan, and the District of Columbia have enacted laws allowing autonomous cars to be tested on their streets, otherwise stated as “permitting current operation under certain conditions.” Although today’s legally protected application of autonomous cars is limited, the prospects for the future are vast.
The true revolution lies in the marriage between self-driving cars and electric vehicles.
Consider the following.
10 trillion vehicle miles are driven each year (Forbes, 2015).
Autonomous vehicles have the potential to widely impact shared-use driving: the cars can drive themselves to where they are needed next. Cost of service to companies like Uber and Lyft would drastically plummet without the need for drivers, creating a true substitution away from individually-owned cars, in contrast to the mostly supplemental use of shared vehicles today.
It should be no surprise that Tesla Motors, a company with significant goodwill and expertise in machine learning and autonomous technology, is well-poisitioned to capitalize on both self-driving and shared vehicles.
The implications extend beyond companies like Uber. Imagine a neighborhood in which every house on the street shares one autonomous car, scheduling times when that car self-drives to the grocery store, the bank, the post office, you name it. Business models would be forced to alter: the grocery store, for example, would have an employee waiting, ready to place your prespecified order in your car with no driver. Your autonomous car could then deliver your groceries directly to your house. Such a neighborhood would not only save a tremendous amount of time and money, but also emit far less carbon into our atmosphere.
THE ECONOMIC PERSPECTIVE:
The cost saved from an electric vehicle is directly correlated to the miles driven.
Electric cars today, as with past iterations, suffer from high initial purchase costs overshadowing the lower operating costs. This is precisely why Elon Musk is broadcasting the anticipated future lower price of Tesla vehicles: the current cost is simply too high for the average driver.
The more miles driven, the greater the impact of the lower operating costs.
In fact, it is this very recognition that led Tesla’s Co-Founder, Ian Wright, to leave Tesla and architect his own company, Wrightspeed, a for-profit initiative focused on zero-emission buses. Low operating expenses become utmost imperative as the average bus typically travels 10 times as long as a traditional vehicle.
THE RACE TO AUTONOMY:
Who will be first? Google? Apple? Tesla? Uber? GM? Ford? Nissan? Toyota? Is it possible any of the myriad of smaller companies’ self-driving attempts could surpass the titans’ current efforts?
“We believe in the industry that there will be a fully autonomous vehicle, probably within the next five years. Unlike our luxury competitors, when we do come out with an autonomous vehicle, we want to make sure it is accessible and affordable to everyone.” – Mark Fields, CEO, Ford Motor Co. [January, 2015].
The incentive is strong. Google and Apple stand to reap tremendous benefits by infiltrating a new industry. As aforementioned, if the human element is eliminated, and Uber cars can drive themselves, the company will experience a drastic decrease in costs as the need to hire drivers is eradicated. Existing players, such as GM, Toyota, and Ford, are encouraged with the following incentive: adapt or disappear.
The competition factor is of particular significance as urgency often drives efficiency.
But there is a substantial level of uncertainty that must be noted.
We are living in an imperfect world where the fusion between machine and human is far from seamless.
As published by The New York Times, September 1st, 2015:
It is not just a Google issue. One of the biggest challenges facing automated cars is blending them into a world in which humans don’t behave by the book. Traffic wrecks and deaths could well plummet in a world without any drivers, but wide use of self-driving cars is still many years away, and testers are still sorting out hypothetical risks – like hackers – and real world challenges, like what happens when an autonomous car breaks down on the highway. For now, there is the nearer-term problem of blending robots and humans.
The major impediment to widespread implementation of self-driving cars is that the behavior of an autonomous car far surpasses the behavior of the imperfect, impatient traditional driver: the human.
WALL STREET CHIMES IN:
During Tesla’s latest quarterly conference call (August 5th, 2015), Morgan Stanley analyst, Adam Jonas, posed a question that left the crowd’s ears ringing.
“Steve Jurvetson was recently quoted saying that Uber CEO, Travis Kalanick, told him that if, by 2020, Tesla’s cars are autonomous, that he’d want to buy all of them. Is this a real – I mean, forget the 2020 for a moment, but is this a real business opportunity for Tesla, supplying cars to ride-sharing firms, or does Tesla just cut out the middleman and sell on-demand electric mobility services directly from the company on its own platform?”
The conversation ensued as follows:
- Musk: That’s an insightful question.
- Jonas: You don’t have to answer it.
- Musk: I think – I don’t think I should answer it.
Barclays recently published a report, “Disruptive Mobility”, hypothesizing what our world would look like 25 years from now if, ceteris paribus, the majority of vehicles were fully autonomous.
- The cost per mile of a shared autonomous vehicle (SAV) is estimated to be $0.34 a mile, approximately 58% cheaper than that of traditional new cars.
- GM and Ford will be impacted the most by these changes and will have to restructure in order to adapt.
- Suppliers to traditional mass-market automakers will also be impacted – fewer cars equates to fewer parts.
Just as horses have become either true beasts of burden (e.g. on a cattle ranch) or a rich person’s play thing – we think of the Hampton Classic Horse Shows – we see a smaller auto market, with individually owned vehicles either for work purposes or for status/performance. For the rest, shared autonomous vehicles will replace individually owned cars, just as the Model T replaced the horse. – Barclays, 2015.
FACT OR HYPE?
The squawk on The Street must be regarded with a healthy degree of skepticism, as investment banks profit from sizable underwriting deals for companies of the likes of Tesla.
The vital question that must be asked is whether the valuation of Tesla is driven by Wall Street’s hunger for underwriting fees or if there is actual steak on the skewer.
“We have failed collectively as an industry to deliver value commensurate with the level of capital that is being consumed.”
– Sergio Marchionne, CEO, Fiat Chrysler.
Indeed, the performance of the automobile industry has lagged that of other industries, suggested by the historically inferior share price gains of automotive manufacturers.
At the extreme, one could contend the highly competitive automobile industry has consistently destroyed capital over time, failing to produce a sufficient return on equity for its shareholders.
The Dupont Model espouses three means by which a company, or industry, can augment return on equity: increase profit margin, decrease capital intensity, and/or increase leverage or debt. The major impediment is that automakers have become commodity assemblers, ceding value-add to suppliers. The result? Pressure on costs, contraction of margins, and an ultimate struggle for differentiation. Simply speaking, the efficacy of automobiles has become homogeneous.
And, thus, the race carries on at full force.
THE FUTURE OF TRANSPORTATION:
A world of complete transportation autonomy requires a deeper understanding of technology, an altering of the consumer mindset, and an acceptance – and perhaps encouragement – from public policymakers.
The key behavioral factor at work involves transforming the manner in which the (developed) world views transportation: can the average driver let go of the freedom of owning his/her own vehicle?
A fully autonomous world may be far in the future, but the race to autonomy spurs innovation.
This notion is of utmost importance. Competitive survival as a response to disruptive technology has the power to coerce existing successful companies to positively alter business objectives.
It is for this reason that technology is the single largest driving force towards a sustainable future.
Featured Photograph by TeamIsaacTec.