Opportunities for Driverless Car Companies

Luxury Driverless Car Header

February 6, 2018

Driverless cars solve a lot of problems as specified in my previous write-up; but what exactly are the opportunities for the 20+ companies entering the driverless car space by 2020/2021. And how will they change the ride sharing, car buying, and delivery industries? Companies that manufacturer driverless cars will suddenly be able to compete with the likes of Uber or Lyft because the service will have:

more predictable timing for commuters and people ordering delivery;
user control of the interior remotely (e.g. controlling car temperature, entertainment preference); and
sustainably cheaper fare since drivers will no longer take on average 75% of fees.

That said, opportunities are not limited to disrupting Uber. Below I rank and discuss the opportunities in eight key markets for driverless car companies:

The calculation for each ranking is based on U.S. 2030 market size, and can be seen in Appendix A of this write-up. For each market, I will cover:

Users, use cases, and basic features
The estimated market size and growth rate
The best positioned players

1. Long-Haul Trucking

a. Users, Use Cases, and Features. Freights of all types are shipped business-to-business via truck every year. According to trucking.org, the trucking industry employed 3.5MM drivers in 2015. Autonomous car technology will likely make a huge impact on the industry within four key areas:

Up to 3.5MM+ drivers and their wages might be eliminated
Insurance costs could decrease as liabilities from car crashes decrease
Fuel costs will likely decrease as gear changes become more predictable, using fuel more efficiently
Shorter, more predictable commute times couldlead to higher inventory turnover and greater profits for industries as a whole.

Driverless trucks will come equipped with apps that allow businesses to track shipments in real-time, and allow managers to be notified when a shipment goes off schedule.

b. Estimated Market Size and Growth Rate. According to IBIS World 2017 report, the long-distance freight trucking industry is a $185 billion fragmented market experience 1-2% annual growth.

c. Major Market Players. Uber has received notoriety for hauling cases of beer across Colorado. But many companies including Waymo, Tesla, Volvo, and Daimler have stated that they are actively looking into solutions for this space as well.

2. X2C Delivery

a. Users, Use Cases, and Features. Autonomous vehicles could profoundly affect anyone looking to send or receive packages of any kind. The product that will handle most U.S. X2C deliveries in 2030 should be a driverless vehicle with a variety of lockers, accompanied by an app that allows you to coordinate delivery and to unlock your locker within the vehicle. The app will have surveillance and tracking. I created basic designs of what the app could look like in Appendix B. Drones could also be used for these use cases, but I don’t think drones will win the lion’s share of the market because:

drones fly overhead introducing concerns on privacy and safety;
drones have size limitations on packages; and
leaving packages outside makes them susceptible to theft. According to Business Wire, millions of Americans experienced this in 2016.

Other services would layer atop this core autonomous vehicle delivery service (e.g. UberEats for ordering prepared meals or other on-demand apps). And so, upon delivery you could conceivably receive two push notifications: one from the layered delivery service (e.g. UberEats) and one from the courier that comes every time you receive a delivery.

b. Estimated Market Size and Growth Rate. According to the USPS 2017 report, the mailing industry the USPS pulled in $71.4 billion in revenue in 2016. Since it has 47% market share in volume and since the USPS is at the low-end of the cost spectrum, the total addressable market is well over $150 billion for deliveries alone in 2016. This number is expanding as eCommerce drives growth. According to McKinsey’s 2016 Parcel Delivery Report, eCommerce has shifted the market share from the B2B to the B2C segment. Where B2C once made up 40%, it now exceeds 50%.

c. Major Market Players. Due to the unique design of the car and lockers, this could be anyone’s market. Amazon could stand to benefit tremendously since they represent a large part of annual deliveries, but they have yet to announce their entrance in the driverless car race. The market belongs to whomever launches this driverless delivery vehicle, partners swiftly with government entities like USPS, and executes well.

3. Mid-Market Car Sharing

a. Users, Use Cases, and Features. I imagine this market similar to how we experience most ride-sharing today. This product would allow people to get to their destination faster and schedule rides ahead of time. I imagine three main use cases for a customer:

Urgent travel from A to B
Carpool to save money, while still adding convenience and speed
Matching riders for hour-plus commutes

For each of these use cases, the user would be able to set their preferences:

indicate their preferred car temperature;
indicate their audio entertainment (music/radio) preferences; and
indicate their visual entertainment (TV/Movies/Gaming) preferences.

These could be set in general on their profile and tweaked for any individual ride. When there is more than one person in the car, the car temperature would take the average of the preferred temperatures and compromise on any entertainment preferences. TV shows, movies, and games could be consumed similar to what we experience in flights today.

I imagine a subscription model for matching commuters, since many commute 5 days a week; rides could be bundled and pre-scheduled. People could request specific riders, be matched “permanently”, or be matched on a weekly basis.

I designed a few screens of this product in Appendix C.

b. Estimated Market Size and Growth Rate. According to Fortune, Uber booked $6.5 Billion in revenue in 2016. Since Uber booked $2 Billion the year prior, so it increased 225% year-over-year. Lyft generated $700 Million in revenue in 2016. If we assume a 10% growth rate (which is modest) for the $7.2 Billion revenue over the next twelve years, the two companies would have $27 billion in revenue in 2030. Since driverless cars are expected to make commutes both faster (i.e. no traffic) and cheaper (i.e. no driver wages), consumers will be expected to use the service more. To add to this, drivers currently take 75% of pay; that will change to 0%, quadrupling the company payout for a given rider fee. This means that if consumer prices were halved, companies would still take home double the payout while increasing demand for the service. With this in mind, we can conservatively quadruple the $27 billion in revenues to $108 billion. A portion of this $108 billion would be cannibalized by the low-cost and luxury markets as competitors offer products in the space. So, my final estimate as shown in Appendix A, is $92 billion.

c. Major Market Players. The competitive advantage here depends on how the product manufacturing process will scale. If software can be economically added to existing cars, then Uber, Lyft, and Waymo may have the advantage. However, if there is a deep advantage to designing and building the car from the ground up, General Motors and Tesla may have the advantage since they already have autonomous driving projects and manufacturer millions of cars annually.

4. Low-Cost Bus Sharing

a. Users, Use Cases, and Features. For users in urban areas who are particularly price-conscious, busses could fit up to 100 people at once. Rides could be purchased individually or bundled as a subscription. Bus routes would run predictable, yet re-programmable routes designed to stop at the most convenient pickup and drop-off points for riders. When riders input their desired to and from locations, the app would not only provide the times and places in which to be picked up, it would save the data to optimize routes in the future. Riders would be able to schedule rides ahead of time.

b. Estimated Market Size and Growth Rate. U.S. public transportation revenues in 2009 was $38 Billion, according to Statista. However, public transportation is notoriously bad. Mobile tracking has been non-existent and unreliable; and stops often are not customized enough for the diverse starting points and destinations of riders. If done well, this market could increase substantially and grow the car sharing pie. If we assume the market has a modest 4% growth rate (more than double the historical rate) until 2030, the market would be $87 billion.

c. Major Market Players. This market could be a sub-set of the mid-market where one player dominates both, but due to its unique vehicle type and routes, they could be captured by different businesses. Just like the mid-market market, the competitive advantage will depend on how the product manufacturing process will scale. However, route planning is even more important here since finding optimal routes for large groups of people could be incredibly challenging. For this reason, I think Uber and Lyft have a bit more of an advantage to capturing this low-cost market.

5. Consumer Car Purchases and Rentals

a. Users, Use Cases, and Features. While consumers in urban areas will largely shift to a ride-sharing model for cars, there will still be a market for buying and renting cars. A few of the reasons someone may still want to buy or rent an autonomous vehicle include:

(S)he wants to a custom ride to show off his/her status;
(S)he lives in a suburban or rural area where it is less efficient to “ride-share”;
(S)he wants to have a road trip, and doesn’t want to rely on summoning a car from a remote location; and
(S)he has a large family, including kids, and likes the control of being able to pile everyone in a high capacity vehicle (e.g. Van or SUV) for family trips.

For those who buy or rent an autonomous vehicle, although the price will be higher than a traditional car, the purchaser will benefit from:

self-delivery of the vehicle upon purchase;
cheaper insurance rates;
cheaper fuel costs;
the ability to perform tasks within the vehicle; and
the ability to control the car remotely.

Relative to the car direct purchases, I expect people to rent cars more because it will be far less stressful and exhausting to take a weekend road trip, and because renters will be able to “pickup” and “return” the vehicle with the tap of a button. Louis C.K.’s joke about leaving the car in the airport and getting on a plane will become a blissful reality. That said, I still hypothesize that car sharing through an Uber-like app will better serve a greater number of Americans.

b. Estimated Market Size and Growth Rate. As of 2017, IBIS World estimated the car manufacturing industry to be $95B, declining by 4% over the past five years. Also as of 2017, IBIS World estimates the car rental market to be $40 billion, growing at 2.5% annually. The rental market sits atop the manufacturing industry, and has been squeezed by increasing domestic air travel and peer-to-peer ride sharing. I expect the autonomous vehicles to have a large negative impact on direct sales and a smaller negative impact on the car rental market. Because delivery and insurance will be easier to manage with autonomous vehicles, I wouldn’t be surprised if driverless car manufacturers begin purchasing leading rental car companies. Overall, I project a 1% net annual decline across direct sales and rental revenue until 2030 as seen in Appendix A.

c. Major Market Players. If a traditional car manufacturer like General Motors becomes a large player in the driverless car market within reasonable time behind the leader, they still may dominate this space since they already have a strong distribution network of car dealers in place. If Waymo or Uber is first to market, it will take time to make those partnerships. That said, it shouldn’t take over a year to bridge that gap as driverless cars will be in high demand when they are ready for nation-wide distribution.

6. School Busses

a. Users, Use Cases, and Features. This product, a school bus taking students in the same neighborhood to school could chauffer kids between six and eighteen years old. As opposed to traditional car sharing, the product would have three distinct users:

Parents, who want to track the ride and receive notifications from their child.
Children, who may want to notify their parents
Sitters, who need to know all of the children they are accountable for during rides

Parents would receive push notifications when their child boards the bus, arrives at school, is safely within the school, and if their child sends them a notification manually (e.g. “help”). Parents and children would the ability to have a video call during the ride.

Also, note the concept of “sitters.” Today, bus drivers have the role of both driving and ensuring that children get out of control. Driverless vehicles removes the driving role, but I doubt that we will have an effective bot that can control and entertain the children. I propose here, that each bus has a “sitter” that oversees the groups of children, and that each child/parent has a “primary sitter” for bus rides where all parties can develop trusting relationships with one another. A few designs of the app can be seen in Appendix D.

b. Estimated Market Size and Growth Rate. According to IBIS World, the Public School Bus Market was $12B in 2016, growing 3% annually over the past five years. This market will likely become several times larger if a strong product takes over that allows for surveillance and tracking. In the past, school districts have subsidized school busses. The provider may be able to be subsidized by such districts. However, there has been a trend recently of parents paying an annual fee for the service.

c. Major Market Players. This is a bit of a niche market requiring a special vehicle, partnerships with school districts, unique software design for multiple parties, and recruitment of sitters. This is likely a product that will come to market after the basic driverless vehicle has been on the road for a few years. Incumbents could take this market, but I wouldn’t be surprised if a currently unknown startup pops up to compete in this market.

7. Luxury Car Sharing

a. Users, Use Cases, and Features. For those willing to pay a higher price, I imagine a luxury vehicle with features similar to the mid-market traditional car with added functionality:

Car type selection
Adjustable interior (rider-facing or seat-facing)
AR calls
VR gaming & experiences
Inclusion of food & drinks (e.g. champagne)

Customers will choose between buying autonomous vehicle(s) or renting luxurious ones. To capture this market, Uber will need to ensure a rental experience far superior than the convenience of buying and customizing your own vehicle(s).

b. Estimated Market Size and Growth Rate. According to Statista, Luxury Cars make up six percent of the U.S. Car Market, while crossover vehicles account for the largest segment at approximately 35%. These numbers, particularly the six percent, would seem representative of the autonomous vehicle market as well.

c. Major Market Players. Just like the low-cost market, the competitive advantage will depend on how the product manufacturing process will scale; however, brands already associated with high-end vehicles like Tesla and BMW, are best positioned to capture this end of the market.

8. Shuttles

a. Users, Use Cases, and Features. For uses in vast public places that need to travel predictable routes, slow-moving automated shuttles (i.e. enclosed golf carts) could be of help. Some of the venues shuttles could be used at include airports, school campuses, conferences, company campuses, resorts, theme parks, and the Las Vegas Strip. These shuttles need to be safe enough to navigate crowded, non-paved, sprawling walking areas. Shuttles would travel 15-20 MPH max and would transport 6-10 people each.

b. Estimated Market Size and Growth Rate. The closest name to these vehicles is “Golf Cart.” Based on my research, the U.S. market size for golf cars are $1-2B. However, these autonomous vehicles would not have tremendous value on the golf course. They would have more value in sprawling public venues and events. Thus, it’s tough to assess a willingness to pay and market size here. That said, in Appendix A, I estimate the market size to be $1B range today with a 5% annual growth rate.

c. Major Market Players. Navya, Keolis, and AAA are testing small shuttle busses in Las Vegas. These companies don’t seem to necessarily cover the above use cases, but they would be well positioned to do so. Because this market is niche, a startup has a fair chance of capturing the market.

Appendix A – Autonomous Vehicle Manufacturer Opportunities Ranked

Opportunities were ranked based on projected revenues in 2030. Although gross margins weren’t considered, in my opinion, gross profits will not materially affect the rankings. That said, I believe that X2C Delivery will have the lowest margins, while Luxury Car Sharing will enjoy the largest margins.

Appendix B – X2C Delivery App Designs

Appendix C – The New Car Sharing App Designs

Appendix D – School Bus Designs