Self-Driving Cars: The Building Blocks of Transportation-as-a-Service

September 19th, 2016 by Trefis Team
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The auto market has been experiencing rapid technological change over the last few years. The shift from internal combustion (IC) engine cars to electric cars has already changed the process of how a car is built, who builds the car and who supplies the parts to the auto company. (Read: Tesla’s Business Model Highlights: What The Shift To Electric Means For The Auto Industry) This process is only expected to accelerate further, as the technology inside cars becomes more sophisticated and ride-sharing service providers such as Uber, Lyft and Didi (in China) change how consumers think about transportation.

We’ve all become used to the idea that, in a typical car purchase transaction,  an automaker manufactures a car in a factory and ships it to its dealers across the country, where individuals purchase said vehicles from dealerships. The automaker invests in the hardware, the body, the chassis, the engine, the assembly line, while individual owners purchase the car and bear servicing costs, running expenses and over time incur depreciation costs. The concept of car-sharing apps and ride-shares opens a whole new world of opportunity for individuals to refrain from bearing ownership cost for a car. It also solves the problem of having to park cars, pay insurance and keep a track of maintenance. However, the constraint here is the number of available drivers to drive people around for money. With less than enough numbers, this becomes a less sustainable system.

The Rise of Transportation-as-a-Service

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A typical car-owner in the U.S. spends roughly 50 minutes commuting on a daily basis, according to U.S. Census Bureau data. [1] This means that over the time of ownership, cars are unused for over 90% of the time. This has led to a fewer number of driving licenses being issued and a corresponding decline in the number of miles driven per car in the U.S. over the years. [2] [3]

Ride-sharing services allow owners to convert the “dead capital” in to a potential source of revenue by leasing out their cars for public use. On the other hand, consumers not willing to make the fixed cost investment have an option to use a car with only incurring depreciation costs, running costs and maintenance charges as riding fees. This cost is still high, since labor cost (or paying the driver) is the largest component that riders shell out. When one adds the element of self-driving, it has three main advantages over the current ride-sharing system.

  1. Cost Efficient: It eliminates the labor cost involved in ride-sharing.
  2. Safer: According to data provided by Tesla, there has been one fatality in over 130 million miles of drive time on autopilot, while there is a fatality every 94 million miles in the U.S and one every 60 million miles worldwide. [4]
  3. Better Availability: It functions without the need of having a resource pool of drivers. For example, the entire volume of cars is available at all times (unless impaired) irrespective of driver availability.

The only question that remains is who owns those cars. As tech analysts at venture capitalist firm Andreessen Horowitz discuss, the answer to this question lies in where the equilibrium finally lands. It could be corporations with deep pockets that own fleets of vehicles that are driving around cities, carrying people – say Google (NASDAQ:GOOG), Baidu (NASDAQ:BIDU), Apple (NASDAQ:AAPL) or automakers such as Tesla Motors (NYSE:TSLA), Ford Motors (NYSE:F), General Motors (NYSE: GM). Or it could be more of an Uber model where people own cars that automatically get leased out when they’re not being used by the owners. [5] In either case, this offers a huge opportunity for a number of companies to step in this market to become integral parts in the entire self-driving car supply chain or to establish themselves as key players in the market.  For instance, graphics processor company Nvidia (NASDAQ:NVDA) has been active in this space to provide GPUs for the self-driving platform. It is also an important time for established automakers to keep themselves relevant given the changing dynamics in this industry.

In this series of articles we explore the changing dynamics of the industry and the cross-industry opportunities that open up for companies in software, hardware, logistics and transportation. In part two, we gauge the Transportation-as-a-Service market and available opportunity for players. In the third part we take a look at key components of the market and what forerunners in this space are actively doing.

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Notes:
  1. Average Commute Times, Project WNYC, January 2012 [↩]
  2. The Decline of the Driver’s License, The Atlantic, January 2016 [↩]
  3. U.S. car travel has been on the decline for a decade, Washington Post, January 2015 [↩]
  4. A Tragic Loss, Tesla Blog, June 2016 [↩]
  5. Andreessen Horowitz Podcast: When Software Eats Cars, SoundCloud, August 2015 [↩]