This is the third article in our series on the Clean Transportation Revolution. We have previously covered the outlook for electric vehicles and for autonomous vehicles. We are now moving to the usage model, and business model, of those autonomous electric cars of the future.
Driverless cars will be electric, so they will participate in decarbonising transport and reducing air pollution – but will they make cities more habitable, or on the contrary will they lead to ever greater congestion? The answer to this essential question depends on the vehicles’ usage model: individually owned, or shared as part of a Transport-as-a-Service (TaaS) scheme.
By 2025, private car ownership will all but end in major U.S. cities.
John Zimmer, President of Lyft
The good news is that we see very strong economic reasons why TaaS will prevail. Compared to individual car ownership, TaaS can enable savings in the thousands of pounds each year for individuals and families, making transportation so much more efficient and environmentally friendly – potentially cutting energy demand by 80% and tailpipe emissions by over 90%.
Many different types of technological and commercial innovations are needed to make TaaS happen – and droves of start-ups are tackling hundreds of different problems, ranging from multi-modal route optimisation to vehicle-to-pedestrian communication.
A very interesting feature of TaaS is how it could potentially disrupt countless large sectors – from the traditional car manufacturers and public transport sectors, to the oil and gas giants or the electricity distribution utilities, but also the real estate and property sectors. As such, the successful start-ups will not lack potential strategic acquirers – and this certainly contributes to making TaaS an area where angel investment should be not only good for the environment but also highly rewarding financially.
This is the core of Green Angel Syndicate’s vision, and we are keenly looking forward to continuing investing in hardware and software start-ups cracking the Clean Transportation Revolution:
- Investee companies CPT and Vantage Power are great investments in the vibrant hybrid engine sector. We have no doubt that vehicle electrification and EV charging will see further innovation.
- In the autonomous vehicle and TaaS space, the biggest prizes will probably go to technologies which will become ubiquitous enablers of TaaS solutions (think ‘Intel inside’) and for those creating the best end-to-end customer experience (think Apple). These may include software for driverless cars or fleet management, as well as connected cars technologies which can become AV plays.
- Finally, exciting opportunities will arise from the sectors which will be disrupted by TaaS, including in ‘urban tech’, enabling new ways of organising cities to make them more liveable.
Three revolutions for the price of two
The clean transportation revolution encompasses three massive changes, potentially happening at the same time, and feeding into each other:
- Electric vehicles, an engineering development, electrifying the means of propulsion and helping to decarbonise transportation and to solve air pollution in cities. We have shown that there are very strong environmental, technical and economic forces pushing EV adoption. By 2040, EVs may represent half, if not more, of all car sales.
- Autonomous cars, a development in control systems with far reaching implications. Driverless cars are coming, bringing greater safety and mobility for all. Billions are being invested in the field; the first models could be available for purchase within two years and some predict that by 2030, 95% of passenger miles travelled in the US could be in on-demand autonomous vehicles. Children born this year will probably never drive a car.
- Transport (or mobility) as a service (TaaS or MaaS), a fundamental change to the commercial relationship with the user.
Heaven or hell?
As Robin Chase, founder and former CEO of Zipcar, has asked as early as 2014: “will a world of driverless cars be heaven or hell?”. By hell, she meant a world where individual ownership of self-driving cars would lead to more cars on the roads, more vehicle-miles travelled, a more inefficient use of resources, worse congestion and more urban sprawl. For example, individually owned self-driving cars could be used by their owners for errands that are currently done on foot, or replace buses.
In heaven, she foresaw vehicles operated as part of fleets and hence shared, as part of a broader ‘Transport-as-a-Service’ (TaaS) or ‘Mobility-as-a-Service’ (MaaS) scheme. This scenario would lead to fewer cars, less congestion and less parking in city centres, a vastly more efficient transportation system with lower greenhouse gas emissions, and more space for all other human activities in cities.
Which scenario will prevail? There are significant opposing forces, but we believe that the TaaS vision will ultimately win over individual ownership.
Common sense tells us that TaaS should prevail…
Using your own car to move around in a city is not an efficient use of resources. Just think about the following two simple points:
- To achieve mobility with a car, you envelop the passenger with something weighing 1,500kg, that is 20x the passenger’s weight, and then use energy to propel the whole lot. Can this be more efficient than carrying several passengers together in a bus or shuttle?
- Sharing versus owning: individual cars are parked 96% of time, so a car is an asset used only 4% of the time. Theoretically, asset utilisation can therefore be multiplied by more than 20x when sharing vehicles.
…and numbers speak for themselves
Several studies have been published, calculating the economic benefits of a TaaS model compared to individual car ownership. One of the most interesting is “Rethinking Transportation 2020-2030” by RethinkX (May 2017). It concludes that relying on TaaS will be 2-10 times cheaper than owning a car – or more precisely 2-4 times cheaper than using your existing car, and 10 times cheaper than buying a new car.
For a typical US household, in 2021, using TaaS would cost $3,400 per year, a saving of $5,600 saving compared to the average cost of almost $9,000 for buying and using a new personal traditional car, and of c.$2,000 compared to continuing to use your existing traditional car.
The cost per mile is estimated at $16cts for TaaS in 2030, and potentially as low as $5cts when using a car-pooling model. This compares with $34cts for using an existing, paid-off car and at least $65cts for buying and using a new internal combustion engine car.
The key assumptions of this study make sense to us:
- The vehicle utilisation is estimated to be 10x higher in the TaaS model than for a privately-owned car, i.e. 40% vs. 4%.
- The vehicles’ lifetime usage would reach 500,000 miles, versus today’s 140,000 miles for privately-owned cars in the US.
- The TaaS model based on autonomous, electric vehicles would lead to savings in operating costs, including maintenance (EVs will be simpler than ICEs) and insurance (fewer accidents).
- The fuel/energy cost is modelled to drop by 70-90% compared to the existing model.
- Today, AVs are obviously much more expensive than traditional EVs, but in the medium term it could well be the opposite, with AVs requiring less moving parts (e.g no steering wheels or pedals).
- Interestingly, all this does not account for other potential incremental revenues for TaaS providers, such as entertainment and advertising, or electricity grid backup support – which could help make the equation even more favourable.
What could possibly go wrong?
Clearly, a key barrier to a massive adoption of TaaS is cultural, i.e. people’s well-entrenched love of owning and driving a car. Already today, many make the choice of buying a car and driving in cities whilst a simple calculation would show that they could be saving thousands each year by switching to public transport and existing car sharing schemes. Why would that change?
We expect a combination of a generational effect and a growing economic advantage in favour of TaaS over the years, which will create a classic snowball effect.
The switch to TaaS is likely to happen first in high density cities and within certain demographics: those with the largest economic incentives, but also those who have the least attachment to the old model.
Essentially, this will start with today’s users of Uber and other car sharing services, notably those aged 18-34. In 1994 48% of those aged 17-20 and 75% of those aged 21-29 had driving licences. According to the National Travel Survey, these figures have dropped respectively to 31% and 66% in 2016. Many polls show that the appetite for ownership of a car is lower among the millennials than among previous generations.
Source: Goldman Sachs Data Story – Millenials
This represents a large population of early adopters for TaaS – and hence these services will rapidly benefit from large economies of scale. On the other hand, the traditional car ownership model will suffer from growing diseconomies of scale. This points to a reinforcing factor that will accelerate adoption of TaaS beyond the first segments. Adopting TaaS does not require any upfront cost or any lock-in, so it will be easy and costless for more and more people to test and adopt the model.
RethinkX estimates that from the moment TaaS is introduced, probably in 2021, the adoption will be exponential. This bullish study claims that within 10 years from this point i.e. by 2030, 95% of US passenger miles travelled will be using TaaS.
TaaS is good for the planet
As we highlighted in our previous articles, transport is a huge contributor not only to global greenhouse gas emissions, but also to air pollution in cities.
For example, New York City, where car ownership (per capita) is half the US average, has half the overall carbon footprint per person of Los Angeles and the transportation component of this total per capita carbon footprint for NYC is a quarter that of the Los Angeles resident (Source: the guardian).
According to RethinkX’s calculations, the move to transport-as-a-service using electric, autonomous cars would reduce the sector’s energy demand by 80% and tailpipe emissions by more than 90%.
According to RethinkX’s calculations, the move to transport-as-a-service using electric, autonomous cars would reduce the sector’s energy demand by 80% and tailpipe emissions by more than 90%.
Freeing space and saving time
Today 24% of London’s surface area is dedicated to roads and supporting infrastructure, and this is up to 40% in some US cities.
The UK has 11.3 million parking spaces, and in America, car parks make up a third of the space in some cities. Autonomous vehicles don’t need wide lanes, they don’t need to park in urban areas, they don’t require much signage or signals. A city where TaaS becomes prevalent will therefore be able to free a lot of this valuable space for other uses including housing, green spaces, cycling lanes or anything else.
The average Brit spends 32 hours a year in traffic jams. With driverless cars much better at preventing gridlock than us mere humans, traffic hot spots will disappear, and we will all be saving time. Last but not least, the beeping horns of enraged drivers will be silenced.
The risks, and how to avoid them: the return of congestion, urban sprawl and privacy issues
Depending on how TaaS is implemented, risks may emerge. “Too much regulation and the private sector may find it difficult to innovate or participate; too little regulation and the public interest is not served.”
Firstly, congestion. When Uber arrives in a city, it has shown that it initially contributes to reducing congestion, as customers switch from taking their own personal car to an Uber. However, beyond a certain point, more and more people start to switch from public transport networks (bus and tube) to Uber. This is inefficient, and it increases congestion. There is evidence that this has happened in cities like New York and London.
As such, for TaaS to deliver on its promises over the long term, it will be key for municipalities to have a strategic vision and move from operating fleets of buses and/or underground lines to managing multimodal transport systems, of which TaaS may be a key part. Cities will have to manage TaaS providers so that they offer equitable, low cost transportation solutions to all citizens in different areas. The ultimate implementation of TaaS is not a fleet of self-driving Ubers, but rather a successful, collaborative combination of different elements, including fleets of self-driving cars but also mass transit solutions such as buses and tubes.
Secondly, sprawl. Depending on how TaaS is implemented, it may lead to urban sprawl, as people seek affordable homes farther and farther away from where they work, opting for long commutes and cheap mortgages over proximity and more expensive real estate. Cities can prevent this by supporting compact development strategies around high-density transit corridors.
Finally, privacy. As with any digital-age platform, TaaS systems will collect huge amounts of data on how, where and when citizens travel in the city. There are some important benefits to collecting that data, including the ability to mitigate any congestion in real time, but also to better plan for the long term. However, this comes with risks for privacy and even for democracy. It is likely that there will be companies built entirely around that data, with new business models around the processing, sharing and usage of that data – but clear rules will have to be established to prevent abuses.
Where will value be created?
As we have seen, a city’s TaaS system will consist not only of different types of vehicles – autonomous cars, shuttles, buses, underground trains, trams etc. – but also of a platform integrating end-to-end trip planning, booking, electronic ticketing, and payment services across all modes of transportation, public or private.
How can innovative companies position themselves to create value in this complex space? We can already observe how different choices are been made.
- Many start-ups are focusing on building the vehicles, or parts, including the hardware (e.g. high-performance detection systems) and the software i.e. the self-driving systems and the vehicle’s operating system – and these will be part of (or interact with) the TaaS systems.
- Others are starting from the customer facing app and use this to operate a fleet of vehicles. This is the position of Uber, Lyft and others, but it would also be a logical move for car-sharing companies such as Zipcar, etc. and it could also be a logical step for apps providing multi-modal transportation information and advice to end-users, such as Citymapper.
- In the B2B software domain, TaaS systems will require powerful fleet management tech interacting with all different types of vehicles on the road. Companies like Bestmile are aiming at selling route optimisation algorithms and data to interested parties such as TaaS providers and municipalities. This involves solving mind-boggling route optimisation problems in real time, as the algorithm must calculate routes not just for one vehicle, but for all vehicles together, predicting how changing the route of one vehicle will affect the choice of the best route for all the other vehicles as well.
- Separately, there is large scope for innovation in and around road infrastructure such as traffic lights, signs or pedestrian crossings. Today, all these are optimised for human drivers. With AVs and TaaS systems, there will be the need to invent and design new forms of interactions between the different types of autonomous vehicles on one side, and, on the other side, the pedestrians and cyclists as well as the streetscape itself.
It is too early to tell which type of business model will be most successful, but clearly money may be made in different ways. For example:
- Tesla seems to pursue an Apple-like model, with an integrated software-hardware stack and a clear focus on creating the best end-to-end customer experience;
- Some aim at becoming a key ‘inside’ player, with similarities to Intel in the computing world;
- Many have a Google or Microsoft-like vision of becoming the operating system and/or the dominant customer-facing interface of TaaS.
The success, or lack thereof, of each type of model will influence how the sector will evolve, i.e. with value in the flashy hardware and emphasis on owning the device, or value in the software and the data generated by the customers. This will have consequences on how open the data will be, how well the customer experience and the cities’ transport system will be optimised and how effective the competition will be in the future transportation market.
Upheaval in many related and unrelated sectors: a key catalyst for future M&A
Beyond the opportunities directly related to the expected growth in TaaS, it is easy to see that this revolution will have significant impacts on many sectors.
The sector most obviously impacted is car manufacturers. RethinkX forecasts that the number of cars on American roads will drop from 247m to 44m over the coming decades, and there will be 70% fewer passenger cars and trucks manufactured each year. It may not end-up being that bad so quickly, but with the risk of such disruption ahead, traditional OEMs potentially need massive strategic pivots.
They are moving towards EVs and AVs, but many are going even further. For example, BMW is trialling becoming a TaaS player itself, enabling customers to rent free floating cars or hail a car with a driver (DriveNow and ReachNow services). Many large OEMs dip their toes in this field, through their own developments, partnerships or acquisitions.
As confirmed in a recent study by Crunchbase, large automotive manufacturers have already started investing in many start-ups in the AV and TaaS space, as well as acquiring a number of them. We would expect these trends to accelerate over the coming years.
Other sectors that will be impacted include:
- Oil & gas: half of oil production goes to gasoline and the move to EVs, AVs and TaaS will impact this. In a March 2017 study, the EIA foresees a reduction of fuel consumption by cars of 44% by 2050. In their TaaS scenario, RethinkX estimates that oil demand peaks as soon as 2020 and then drops from 100m barrels in 2020 to 70m by 2030.
- Electricity distribution networks, as EVs require recharging at home and at different types of destination points.
- Real estate and retail: the spaces that will be freed in cities can be reinvested in different ways, opening vast opportunities and potentially impacting positively or negatively on the value of different pieces of land and property.
And many others, from insurance to entertainment and advertising: the automotive sector is one of the largest spenders on advertising. What will happen to that spending in a TaaS world?
In conclusion, to Green Angel Syndicate’s experienced eye, TaaS-related start-ups look extremely attractive:
- They tackle a huge market opportunity, with a real problem to solve and many solutions yet to be invented;
- They can contribute to make a drastic positive impact on the environment;
- With so many large sectors likely to be disrupted by the clean transportation revolution, it seems clear that the successful start-ups will not lack potential strategic acquirers, contributing to making TaaS an area where angel investment should be highly rewarding.