In the Hunt for the Holy Grail
Reaching profitability is the Holy Grail for the ride hailing companies. The narrative today is that autonomous vehicles (AV) will eliminate the biggest cost component in the ride sharing equation (driver commissions), thereby increasing the take rates and moving the companies closer to profitability. As we noted in our earlier articles, the software for AV is not yet ready and will take some time until it is ready for deployment. But once the software is completed, there are other recurring costs to AV technology, and these costs rely on the hardware that has to be fitted into regular vehicles. Current hardware is expensive and has to be replaced over time, and this replacement could prove to be the largest cost component by the time the autonomous fleet rolls out.
There is a Lot of Hardware Involved
The required hardware has three main purposes: situational awareness, geolocation and computation of decisions made by the AV software.
The eyes of the car are made up of a combination of LIDAR, radar, and cameras. LIDARs are sensors that emit millions of pulsed lasers that reflect on objects and create a 3D map of the surrounding area, with the more lasers employed the better the car understands its surroundings. The industry tends to implement a 64-laser lidar, which costs around $70,000, and two 16-laser lidar for $7,000 each. However, lidars are computationally expensive and provide erroneous results in bad weather conditions, leading to the simultaneous use of radar.
Radars are less precise, but are necessary since they are less computationally expensive, reliable during bad weather and more importantly — cheaper. AVs typically have 6 radars, 4 short-distance and 2 long-distance, for a total price of $10,000. Lastly, AVs are also equipped with at least 12 HD cameras that can cost up to $6,000. These cameras are extremely detailed, but pixels require a relatively long processing time, making it virtually impossible and or dangerous for an AV to depend solely on cameras.
After the eyes of the car are in place, the car still needs to know its location. In order for the car to know where it is, it needs a 3D GPS and an Inertial Measurement Unit (IMU). The 3D GPS has pre-built maps of its surroundings to navigate through the city, and the IMU constantly checks that the location provided by the GPS is reliable. Both components cost $1,000 and $4,000, respectively. The last hardware piece is the brain of the car (the computer), which requires fast chips to process all the data obtained by the rest of the hardware allowing the software to make a driving decision. An AV computer can cost up to $6,000. The total current price of all this hardware sums up to $118,000.
The hardware for 1 million-unit AV fleet would cost $118 billion, but where would all that cash come from?
Profitable in the Long-Run
It would take a big investment to transform a regular car to an AV, so how long will it take to recoup that investment? To come up with an estimate, let us assume that trip prices are going to stay relatively stable. According to Lyft’s S-1, the average length of a trip is 4 miles and costs $13. Since paying a driver is not required anymore, we would only discount maintenance costs (we are ignoring ownership costs). According to AAA, the maintenance cost for a medium Sedan is 8.58 cents a mile, plus fuel costs. An AV uses about 40% more fuel than a regular car since it needs to provide electricity to the added hardware. An electric AV’s fuel consumption would be around 5.6 cents per mile. The total operating cost is 13.78 cents per mile or about 60 cents for the average trip, leaving $12.40 of operating profit per trip. At that rate, it will take a little over 9,500 trips to recoup the investment, which could be done in a year taking 26 trips a day. Switching to an AV fleet, therefore, requires a massive investment that will not turn any profits in the first year of operation.
After the AV breaks even, it would only provide profits for a year. The current state of the technology limits the ability to continue generating profits much longer since hardware replacement would be needed every two years. Lidars are the most expensive component ($84,000 in total) and they currently have a life span of about 2 years. At those rates, if an AV takes 26 trips a day for 2 years, it would yield a profit margin of 47% (not including ownership costs). The model would allow ride-sharing companies to be profitable, but it would also be a considerably capital-intensive affair.
Apart from the high development costs that ride hailing companies have to incur for developing AV technology, which is estimated to be a decade away, they also have to bear the elevated hardware cost to switch into the AV fleet. The hardware for 1 million-unit AV fleet would cost $118 billion, but where would all that cash come from?
As a result of these high costs, these firms are going to have to increase their fares in order to keep up with the development and hardware costs of the technology. Additionally, companies are also focusing on developing cheaper and longer-lasting lidars to reduce the upfront cost of switching to a profitable AV fleet.
As a result of these high costs, these firms are going to have to increase their fares in order to keep up with the development and hardware costs of the technology.
AV technology offers attractive margins and would allow ride-sharing companies to be profitable, but requires a massive investment before a profitable path is viably set forth. Current hardware prices are expensive, and further development to lower production costs will allow companies to bear the expense of switching to an AV fleet. Though operating profits are considerably high and AVs will eventually pay for themselves; ride-hailing companies will struggle to obtain the cash needed to afford the development costs.
One thing to note is that the aforementioned calculations did not include ownership costs since the AV’s ownership is uncertain, but even if taken into account, the resulting profit margins of an AV fleet would still allow ride-hailing companies to be on a long-term profitable path.
