A Carmaker’s Conundrum: The Robo-Driver Economics
The new era of transportation is not about owners but users, and this scares car manufacturers.
Sensors and cameras in a driverless car are prohibitively expensive. The number of sensors that you put in an AV is rather substantial, adding tens of thousands of dollars to the price tag of a personal vehicle. Individual car buyers would probably not be willing to pay this high amount.
This is the rationale that Malcom Glenn, Strategic Partnerships and Public Policy Manager at Uber, provides as to why ridesharing will be the first business model for self-driving cars. This also alluded to Uber’s competitive edge over OEMs (Original Equipment Manufacturer) in a robo-driver scenario.
As a car owner would you pay an extra $10,000 for an autonomous vehicle (AV) package in your sedan, when this will be driven only 13,000 miles per year? A cost model of an individual buying an AV is far from realistic. The economics just don’t make sense. Therefore, carmakers need to re-consider their commercialization strategy focusing on fleets for users rather than individual cars for owners.
Now, imagine the CEO of Giant Motors, as he starts to connect the dots in his shiny desk in a very tall Detroit building: If consumers will not be buying AVs from us then where do we, car manufacturers, fit into the mobility picture?
Car companies serve people who want to own a car. Their customer buys a car and may come back again for a new one after a couple of years. But realistically these companies don’t have consumers on a frequent-basis. They don’t really know you like a Google or Amazon knows you. You are not constantly communicating with the car company.
So how are these car manufacturers going to become someone who understands their customers-turned-users and ‘lures’ them in?
Anand Shah, global innovator and strategist for BMW and Audi, confirmed Malcom’s prediction that ridesharing would be the most immediate application for AVs:
In a TaaS [Transport as a Service] scenario, customers stop being owners to become users. More specifically, they become asset users, the asset in this case being the car. Since the asset is not owned by one individual alone, the users stop seeing the car as property but rather as a mechanism of shared transport.
TaaS is the notion that cars are not owned but rather used as transport and consumed as a service. And this new principle of mobility going from ownership of a vehicle that you make to the usage of an asset delivering a service, gives carmakers (as Anand describes it) a major conundrum. To gain a market position in the self-driving car space, carmakers need to transform into a mobility platform offering ridesharing services. However, they lack the business model and customer base.
This was a rough awakening for OEMs which thrived for decades in a traditional and monopolistic industry. In the new dimension, there was no longer three Detroit titans running the ‘next-generation of transportation’ show. Car manufacturing expertise and capital stopped being the unique value proposition and differentiator.
Anand provided a vivid example:
Let’s say you are hailing a ride in NYC. You hope it’s clean, it smells nice, and that comes with water bottles. You are not wondering which car model will pick you up. If it’s a Prius, you won’t reject it. This gets to the core of the problem. Car brands are built around premium vehicle attributes, which suddenly don’t matter anymore on the basis of usage.
Nevertheless, we do see luxury car brands that have overcome their denial de facto, and are launching their own ridesharing services in cities around the US. This is the case of BMW. The German brand is betting on their historical consumer loyalty to capture a target segment that still prioritizes a premium passenger experience. This represents individuals who prefer to rideshare in fancy leather seat BMWs as opposed to a Toyota Prius.
I wonder how large the market for this higher-end service is. After all, the ridesharing price tag does not compare anywhere to what the price tag of a premium luxury car is. How will this affect the car manufacturer’s profits? Surely, they want to surpass or at least keep them comparable to what they have been historically.
If we look at sales in terms of quantity multiplied by price, fewer cars are purchased as ridesharing cannibalizes car buying. In ridesharing, the price per ride will come with lower margins, and thus, a higher volume of rides is needed to make up for the loss revenue from the cars no longer purchased. I fail to see how in a ridesharing model, revenues will remain comparable as past figures for a carmaker. Therefore, developing a second-tier target segment (i.e. mainstream one) would be an attractive proposition for all car brands including the luxury ones.
The next challenge for car manufacturers in terms of launching their own ‘robo-taxi’ fleet has to do with competition. In the past, it was about a car company competing against another car company; same animal, same stripes, same behavior.
But in a self-driving ecosystem, when ridesharing fleets start competing for the most passengers, the conversation centers around digitalization. The strategy turns into one about hardware, connectivity and mobility. And this is the result of tech companies jumping in and claiming their dominance of the self-driving market.
Sorry to burst your bubble dear OEM executive but in this case, TNCs (Transportation Network Companies) have the upper hand.
A TNC like Google is omnipresent in the virtual world of the internet. Was Waymo, Google’s self-driving subsidiary, winning the user race in comparison to its peers? I thought about myself as a user and how I interacted daily with the G-Empire. I enter their search engine at least 5 times per day, check the map app constantly to find my way around. Google’s search engine processes about 40,000 queries every second, 3.5 billion searches per day, and 1.2 trillion searches globally per year.
But Uber (Waymo’s potential TNC archenemy) does not fall behind. The company has about 40 million users in the US and does about 15 million rides per day. I open the app daily. It knows where my home, my job, and my favorite bar in town are. Nowadays, it can also track my favorite foods. Remember, it’s not only about the number of users but also the amount of data that every user shares with the company. Tesla, the idiosyncratic OEM, caught up fast and apparently, it holds the most data on its car owners.
In this context, could usership be leveraged as a secret weapon to win the race toward AV deployment? If such is the case, we will soon enough see Amazon jumping in and snatching a large piece of the pie. It is no surprise then to see the e-commerce giant forging partnerships in the self-driving world by recently investing in the driverless startup Aurora.
And so, companies are fiercely facing each other, preparing to enter the market with their self-driving technology. The name of the game today is: How to attract more users with the idea that tomorrow such ‘fan-base’ will adopt my AV business model over the next guys’? The more users one has, the more rideshares one can make.
OEMs have realized of their user disadvantage, probably had a panic attack, and now they’re trying to catch to the Apple’s and Google’s of the world. They will have to find creative ways to attract more of you and I, and our friends.
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I hope you enjoyed this post related to my book, Autonomousity: Autonomous Vehicles & Emerging Business Models. You can order a copy via this link: https://www.amazon.com/dp/B07QDM7HTX
I’d love to continue the conversation about self-driving cars! You can either leave a comment in my Medium page or connect with me via email at BejaranoAPaula@gmail.com or LinkedIn.
And if you’re in the San Francisco Bay Area on May 15th, make sure to check our “AI & The Automation of Moving Goods and People” speaker event.
