Driverless Cars: Revolution in the Automobile Industry and its Implications
By: Nikhil Bhandari
Tags: Insurance, Transportation, Automotive, Planning, Electric Car

There is a quiet revolution taking place in the automobile industry and it has the potential of disrupting several sectors of the economy. The driver-less vehicles and the technologies that are needed to make such vehicles work will change not only the automobile industry, but several other related activities. In this note, we delve into some of the long term implications of these changes.

We reckon that most of the active planning community have some inkling of what Google, Tesla and others are doing with the development of driverless cars. Google’s Waymo and Tesla probably are the best known proponents of these vehicles but other very important players are also quite active in the development of these technologies. At a basic level, the driverless car is a vehicle that can drive itself around, navigate traffic, park itself, etc. while not getting into accidents with other vehicles. While the concept is simple, achieving this is not. The cars rely on a range of technologies that allow the vehicle to “see” other vehicles and obstacles, determine the distance between itself and other objects, increase and decrease speed as needed, ensure that the vehicle remains within the lane markings, make the appropriate adjustments to speed while changing lanes or when coming to a stop, communicate with occupants and a central location, etc.

Several of these technologies have been in development for several decades in one form or the other; but only recently have they all been put together into a working prototype. As indicated earlier, Google has been experimenting with its car for a few years now in California. Mercedes is developing and testing driverless trucks in Europe, and Volvo, Audi and Tesla also have active research and development plans in place.

While it’s difficult to predict when the driverless cars will become widely available and used by public at large, many commentators and scholars see 2025–2030 as the period where the adoption of such vehicles hit the inflection point of the typical technology adoption curve when the early adopters make way for early majority.

Technologies

The implications of these technologies are becoming more and more apparent. The impacts will be significant and one can argue that we are about to see a similar paradigm shift in land transportation that happened when automobiles first came into use. The first thing to note that for a majority of the significant impacts, we do not need to evolve to the point where majority of cars are driverless. The different technologies involved can be organized into a few broad buckets (with some overlap):

Technologies that allow the vehicles to “detect” each other and fixed objects

Technologies that allow the vehicles to “communicate” with each other and with a central control station

Technologies related to energy production on board the vehicle (hybrid vehicles, battery powered and solar cells) and energy storage

Technologies that allow for system wide optimization of travel patterns

The detection technologies rely on some variant of a basic radar device to determine the distance, shape, speed (if the object is moving) and other characteristics of objects around the vehicle. These technologies are mounted on the vehicle itself and allow the vehicle to make decisions on whether to slow down, speed, stop, etc. These technologies once developed can be easily incorporated in vehicles with drivers and can help the driver in avoiding accidents (whether by over-riding the driver command or by providing warning indications is a matter that will evolve over time).

The communications technologies are also mounted on board the vehicle. These enhance the information provided by the detection technologies and if used in conjunction with data from other vehicles can be used in very interesting ways. Once the vehicles are able to “talk” to each other (either directly or via a central control station), then vehicles can decide amongst themselves when to change lanes or undertake other maneuvers like passing in a safe way.

These two sets of technologies once incorporated into majority of vehicles will have a major impact on how we drive and especially around the number and severity of accidents. One of the biggest causes of vehicle accidents is driver error (often combined with driver fatigue) and any technology that can slow a vehicle down or stop it from undertaking a turning or lane changing maneuver can reduce the number of such accidents or at least reduce the severity of such accidents.

Additionally, a very important impact of reduction in accidents is that it reduces the amount of time a travel lane is taken “out of circulation” and the bottleneck that it causes. A lot of travel congestion is due to fact that travel lanes get reduced by one or two (either by design because of space constraints or other reasons or for unexpected blockages caused by accidents). In such situations, human drivers are extremely inefficient about merging into the available number of lanes (often because they don’t know where the lanes are being reduced so they wait till they don’t have a choice). If the vehicles were able to communicate with each other, then the merging can be done automatically and efficiently to minimize the delay due to the lane reduction. The bottlenecks that are permanently in place (for example, where the lanes are reduced as a matter of design) can also be more efficiently handled if the vehicles could negotiate the merging activity much before the point of the bottleneck.

The other two technology buckets have much wider implications. The technologies that allow for system wide optimization are perhaps the most ambitious of all the technologies. Imagine a situation where a majority of vehicles can communicate with a central point, and the central control can determine the most efficient ways for vehicles to reach their destinations. This will allow for reduction in overall congestion levels, better use of existing highway assets and all the other benefits that come from the other technologies discussed earlier.

All of these technologies that we have discussed are essentially technological solutions to specific issues. The essential element that will bring all of these together is the change in human preferences. The success of Uber, Lyft and other on-demand car services will provide this critical final piece to the fast adoption of technologies that will take away a large part of the human decision making while driving. The on-demand car service firms have demonstrated that they can provide (within large cities for now and expanding rapidly to mid-sized and small towns) a vehicle when the user needs it. This helps address an important reason for owning the vehicle — “I have it when I want it.” Once individuals (especially in cities) shift away from owning their own vehicles, then the vehicle ownership will essentially pass to fleets. Fleet owners/managers will likely see the benefits of adoption of the vehicle detection, communications, and energy and storage technologies much more objectively. The next step in this evolution is the replacement of the driver with an automated vehicle that drives itself. It will be a matter of time when the likes of Uber (or even rental car companies) shift from providing vehicle + driver to providing just a driverless vehicles that come and drive the user to their destinations.

Implications

The overall implications of the combination of these technologies and shift in user preferences will be profound on a variety of industries. These implications can be categorized into two broad sets:

First level impacts: Industries affected directly will include the automobile industry, insurance industry, car rental firms, taxi cab industry, on-demand vehicle service providers, battery and solar panel makers, and software industry.

Second level impacts: Industries that will be affected indirectly include parking lot operators, toll road operators, city and municipal administrations.

As indicated earlier, majority of the impacts will play out over a period of the next 10–20 years. Traditional automobile manufacturers (like GM, Ford, Chrysler, Toyota, Nissan, etc.) will most likely face declining markets as non-traditional manufacturers such as Tesla, potentially Google and Apple and other new entrants start producing driverless vehicles. At some point the traditional manufacturers will adopt many of the detection and communications technologies (whether by choice or due to regulatory requirements remains to be seen) but the switch to driverless vehicles will not be easy.

Other industries to be directly affected include:

The insurance industry will have to adapt to the changes in ownership patterns from individually owned vehicles to corporate fleets. This may result in lower premiums as the fleets will have greater power to negotiate price and/or even self-insure up to a certain extent. Insurers with high exposure to automobiles such as Geico, State Farm, Progressive, etc. will be most affected.

The car rental firms can take advantage of this opportunity by extending their service model to include vehicles that drive themselves to the renter. These firms are already have a lot of the infrastructure built in place (parking lots, servicing, etc.) to include this service. In this respect, Enterprise is particularly well suited as it has the perhaps the best service coverage of urban residents among the major rental firms.

In addition to the car rental firms, the on-demand vehicle providers can expect to see their business impacted positively. For some of the firms, having a fleet of driverless vehicles changes their business model significantly (from having few assets to actually owning a large asset base) but we are confident that these firms will be amongst the first on the adoption curve.

The taxi cab industry is already seeing the disruptions in their industry due to Uber and others. This industry will continue to see a decline. Medallion holders in New York City and elsewhere can see the values of the medallions to continue to fall.

The providers of energy generation and storage technologies as well as the vehicle detection and communications technologies will be important beneficiaries of these trends. Some of these technologies will be developed in-house by the auto manufacturers or others but there will be plenty of opportunity for new entrants in this area.

The second level impacts are more likely to be distributed unevenly over time across various industries. As the number of driverless or on-demand vehicles increase, the need for self-driven vehicles especially into crowded city centers will decrease. The parking lot operators (Central Parking, Vinci Parking, etc.) that “house” the vehicles during the day time hours will likely see an adverse impact on their business. Toll road operators, especially the ones with exposure to urban networks, that charge a premium during peak periods will likely see a decline in their business; once the cities are able to optimize the transport networks at a systems level, there will be an overall reduction in congestion. Further, driverless vehicles can easily be programmed to pick up multiple passengers on their daily commute. This will reduce the amount of vehicles on the road, and thereby reducing congestion. The city and municipal administrations that can plan well in advance of the coming changes will likely benefit from better use of urban resources.