The Threat, and Promise, of Ride-Sharing & Autonomous Vehicles

An excerpt from Baum & Associates Quarterly Report.

Unless you’ve been living under a rock, you know that there’s a ton of buzz around both ride-sharing and autonomous (or driverless) vehicles. A deal has been inked between Google and FCA to collaborate on an autonomous Google-badged version of the Chrysler Pacifica minivan, many or all of which will be plug-in hybrids. Ride-sharing services such as Uber and Lyft (and especially Uber Pool and Lyft Line, in which drivers may pick up multiple passengers going to multiple destinations) have already been hugely disruptive to traditional taxi and shuttle systems, and in doing so have moved more than 50,000 units that would have been sold to taxi fleets to individual buyers that drive for Uber or Lyft. The jury is still out on whether any of this makes the new vehicle market larger or smaller or leaves it the same size. The critical issue in that regard is whether these services are so convenient that people that previously would have bought cars and trucks will now decide they don’t need to own their own vehicle (or two-car families will become owners of only one vehicle).

Automakers, for their part, are not waiting to find out the answer. Instead, they are both cooperating with, and going up against, Uber/Lyft-type services by launching their own ride-sharing services. If you are Ford, it’s better to have non-buyers pay you to use your shared vehicle than to have you buy a Toyota instead. One analyst has calculated that an automaker that fields a shared fleet can expect a $30,000 car, van, or CUV to net about $45,000 over its three-year, 210,000-mile life, earning Ford $15,000 or $5,000 per year profit. Fielding a 200,000-unit fleet earns it an extra $1 billion a year, and almost none of the 200,000 units competes with a regular retail sale.

Then there are the ownership economics. For the US as a whole, regardless of what the IRS allows, it costs the average vehicle-owner about 90 cents a mile to own, operate, insure, and repair their car or light truck. On average over the vehicle’s life, it is driven 12,000 miles a year at an average speed of 30 mph. That means that it’s in use for about 600 hours a year, or 6.85% of the 8,760 hours in a year. In other words, it sits idle 93.15% of the time. Using taxis, Ubers and Lyfts costs passengers about $3 per mile. So why does anyone use these services? The answer is that they mainly use them in cities, where the cost of private car ownership isn’t 90 cents a mile but – thanks to parking fees, high insurance costs, and the time lost finding a parking place and then walking to the destination –almost exactly the same $3 a mile that taxis and Uber/Lyft charge them. Indeed, a recent Deutsche Bank study estimates that 13.7% of current vehicle owners would be better off not to own.

But now, let’s eliminate the Uber or Lyft driver. The $3 per mile cost to the passenger drops to about $1.50.1 And that’s only step one. Now integrate the driverless shared vehicle with real-time information about traffic and parking spaces, and instead of sitting idle for an average of 13,000 miles, perhaps it can be idle half as long and therefore in use, earning fares, for 6,500 more miles, reducing the $1.50 per mile to about $1.20. Finally, have the vehicle use algorithms to sync data on where multiple passengers want to go, and there’s a very real possibility that services like Uber Pool and Lyft Line can break below the 90 cents per mile that private car owners pay.

These possibilities, however, still don’t answer the question about whether these services, especially when made driverless, will increase or reduce the total number of units sold each year. Let’s decompose the question into more manageable subparts:

  • First, services like Uber and Lyft are almost sure to remain urban phenomena. Much of the breathless coverage of them draws on examples from only the densest of cities, notably New York and San Francisco. Indeed, in New York City, 90% of Uber/Lyft miles are logged just in Manhattan and Brooklyn, and only 10% in the other boroughs that are home to half of New York City residents. Nationally in the US, there are 260 million vehicles in use, of which 101 million are owned in the 20 largest metropolitan areas. So there are at least 150 million that seem sure to continue to be personally owned. In fact, it’s probably really more like 220 million, because two-thirds of metro area residents live in suburbs and not cities. So we’re talking about something like 40 million vehicles in the fleet that are in play. (Note: On trend, a 260 million fleet is associated with about 16 million new units sold, i.e., a 6.15% annual replacement rate.)
  • Second, if some of those 40 million vehicles are driven 40,000 rather than 12,000 miles a year, they will need to be replaced every 4-5 years rather than every 12-16 years. Following this line of reasoning, what really counts are vehicle miles traveled, regardless of who owns the vehicles. Every time a vehicle hits about 160,000 miles (though some die at 100,000 and others make it to 250,000), it gets scrapped and needs to be replaced to keep the size of the fleet stable. So what may really count is simply how many total miles are driven in a year. Those data exist, but no one has been able to figure out yet whether the figure is made higher, lower, or left unchanged by Uber/Lyft-type mobility services.
  • Third, when autonomous vehicles are stirred into the mix, it is easy to come up with stories that predict higher, or lower, car and truck sales. On the plus side, fans of driverless cars claim, millions of older and partially disabled (e.g., blind) people will be able to buy and be driven around in smart autonomous vehicles. On the negative side, the suburban family that owns two cars can now perhaps get rid of one. The autonomous car takes person #1 to the train station and returns home on its own, where it is used by person #2 and then at the end of the day goes to the train station to pick up person #1. The occasional conflict (person #2 needs the car at the same time as person #1) can be handled by calling a cheap, driverless Uber Pool or Lyft Line ride. And note that the remaining single car now drives two “empty legs” that it didn’t used to, increasing miles traveled per year and therefore shortening its life.

The implications for suppliers? First, don’t fall for predictions of plunging vehicle production levels. Even if (as seems unlikely to Baum & Associates) McKinsey is right that 30% of 2030 new sales will be autonomous, we still don’t know what the net impact would be on overall sales. Second, don’t doubt that there will be a lot of autonomy-enabling technology added to most new vehicles, regardless of who buys them. Even if only a small proportion of cars and trucks are driverless, most of those that aren’t will have to get significant new sensing content, from collision avoidance to unattended emergency braking to following distance management. “Detroit” is in competition with Silicon Valley on the development and testing of these autonomy-enabling technologies, so it behooves suppliers with a potential play in this space to stay current on which companies are pursuing which strategies. Automakers are building tech centers in and around Silicon Valley and buying into tech companies with promising technologies; but it’s a reasonable bet that if and when these technologies need to become part of high-volume subsystems the automakers will turn to the suppliers they know. Third, note that the probable increase in vehicle miles travelled by some of the in-use fleet will require that suppliers provide more robust product (particularly in powertrain, but also in electronics). In short, stay tuned.

No industry is immune to the growing pains of adapting to new technologies and the shifts in consumer behavior that inevitably follow. But challenges also create opportunities. Necessity, as the saying goes, is the mother of invention. Leaders in our industry are diversifying their fuel offerings, expanding their non-fuel business segments, and partnering with affinity marketing and sustainability groups in order to continue generating value around existing and new products. Keeping up-to-date on the trends and technologies that shape consumer behavior is key to finding interim solutions that address the challenges we face. Addressing these challenges today, through the lens of the retailers annual strategic planning process and review of initiatives, ensures staying relevant tomorrow.

If you would like to read the full report and more, please contact Baum & Associates directly.

Read more from the May Issue of our Fuel for Thought newsletter.

1 The typical ride service vehicle is in use roughly 30 hours per week (many drivers are part-time) and is driven about 40,000 miles a year. About one-third of those miles are driven without passengers. At $3 per mile in gross fares, the vehicle earns about 27,000 x $3 = $81,000. Of that, about half is depreciation, insurance, and repair and half is the driver’s wage. Pull that $40,500 wage out, and the cost per mile is cut in half.