June 2, 2014
Driverless Cars (Part 2): the Ripple Effects
by Chunka Mui
Auto insurance premiums will plunge, health insurance will take a hit -- and the whole insurance industry will be wide open for innovations.
While Part 1 of this series laid out the significant benefits in safety and savings that could come from a driverless car, there is an old saying: One man’s savings are another man’s lost revenue.
At the same time, the driverless car will create enormously lucrative business opportunities to serve new customer needs.
I’ll turn first to the revenue that is in peril and then examine the opportunities. (I invite you to offer your own ideas on potential business threats and opportunities. Please share them in the comments section below.)
While car sales might initially boom, as the fleet shifted to driverless cars, sales would then fall off a cliff — and new and used car sales add up to a $600 billion-a-year business in the U.S. Any drop in sales would also affect auto finance companies, which write loans for almost 70% of new car purchases and half of used car purchases. Many parts would disappear from cars: Who needs airbags if you aren’t going to crash, or backup assistance when the car parks itself? The amount of steel used in cars would drop, because cars wouldn’t need to be as massive and sturdy. Body shops would mostly disappear for lack of business.
Auto insurers, which collect more than $200 billion in personal auto premiums each year in the U.S, would initially see profits rise as accidents declined and payments to customers dropped. They would, however, eventually see something like 90% of premiums disappear. In fact, the U.S. model of mandatory personal auto insurance might become archaic.
Emergency Room by French-Danish artist Thierry Geoffroy (Photo credit: Wikipedia)
Emergency rooms would lose millions of patients a year, and hospitals would have hundreds of thousands fewer people who needed to stay overnight. Health insurers would have to give up revenue as car-related injuries plummeted.
Personal-injury lawyers would see car-related cases all but disappear. In fact, the trend is already moving in that direction because the spread of cameras and sensors in cars makes it much easier to document who is to blame in an accident and removes the gray areas where lawyers may get involved.
If cars are in nearly constant use and can come when called, the need for parking almost vanishes. One MIT study claims that, in some U.S. cities, parking lots cover more than a third of the land area. Other estimates are that there are as many as 2 billion parking spaces in the U.S., about the size of Connecticut and Vermont combined. Much of this valuable real estate could be reclaimed for more beneficial social and economic purposes. At the same time, property values, especially in cities, would decline as additional supply becomes available.
Governments would lose fines, because cars would all obey traffic laws. At the same time, though, governments would save by not having to pay police officers to write tickets. They would also save by not having to set up traffic lights or to light streets—the Google car can see in the dark. Governments could spend less on prisons, because there would be no such thing as a drunk driver. Any new roads could be narrower, and thus less expensive, than current roads, because driverless cars don’t need nearly as much spacing between vehicles as those with sometimes careless drivers do.
Governments could also cut way back on widening and expanding roads to reduce congestion, because the switch to driverless cars would make such a huge difference. At the moment, a freeway operating at maximum efficiency is about 5% covered with cars, but driverless cars can be packed together in platoons, with just inches between the bumpers — if the lead car has to slow down, it can simultaneously activate the brakes of all the cars behind it. The federal government spent $6 billion in 2009 on road widening and expansion, and state agencies spend more than $22 billion annually, so the savings on road work would be huge.
As government saves, though, utilities will lose as those traffic and street lights go away. Construction companies will lose as roadwork dives. Producers of cement and asphalt will likewise see business plunge.
Gasoline sales would tumble not only because of fewer cars but because they would operate more efficiently. Drafting behind another car can save more than 25% in fuel consumption.
Add up all the pieces — $450 billion related to crashes, $600 billion of car sales, $200 billion in auto-insurance premiums, the hundreds of billions of dollars of health insurance that plausibly relate to car accidents and so on — and you pretty easily get to about $2 trillion in revenue associated with cars each year in the U.S. Just about all of that revenue could be thrown up for grabs — the result might turn out to be true cost savings or, at the least, a major shuffle among competitors.
On the opportunity side, driverless vehicles will allow for the reconceptualization of cars, car-related business models and competitive dynamics.
Expect styling to come to the fore, as vehicle design is less influenced by safety considerations like visibility, window placement, strength and stiffness of materials, bumpers, crumple zones, collapsible steering columns, air bags, seat belts and padding. In the short term, driverless cars will look much like today’s cars. Over time, as driverless cars dramatically reduce human error (which is the No. 1 cause of accidents) and more people accept the concept of shared cars, the possible car designs will explode.
Without having to worry about distracted driving, electronics companies and app makers could outfit cars with all the distracting entertainment they wished and earn billions off the now-free time in self-driving cars.
Lots of opportunities to coordinate use of cars would also appear. Companies could provide services to organize those platoons on highways or to share cars as part of a fleet — all while charging hefty fees. One study found, for example, that an average two-mile taxi trip in New York City costs $8 to $13, depending on traffic conditions. It estimated that a fleet of 9,000 driverless cars could replace the city’s fleet of Yellow Cabs and operate for an average of 80 cents for a 2-mile trip. A more than 10-fold difference leaves a lot of room for profit!
New financing opportunities will arise. For instance, some company might offer a shared car for free in return for a multiyear contract to have that company operate the car — an analogue to what mobile phone operators do now when they subsidize the purchase of phones.
New insurance models would arise, as insurers get smart about how to underwrite and distribute insurance in this new world. Imagine a day when a “driver” taps out his destination using Google Maps, and the system holds a real time auction for that trip. Insurers could, in real time, make their bids based not only on the driver’s risk parameters but also other significant factors including time of day, choice of route, weather conditions and who else is on the road. At some point, the liability model will flip — with insurance becoming more of a manufacturer responsibility than the car owner’s — because liability will be more dependent on the driving skills of the car than the owner.
In general, cars could be seen as a platform rather than as individual vehicles. Cars make for great antennas, and they have all the battery power they need for communication, so it would be easy to integrate them with each other. Car makers have long complained that they’re left selling the metal, while all the profits have migrated downstream to the people who provide the service, the repairs, the insurance and so on. If the car makers can position themselves as the fleet manager, they could recapture the profits because they would have control over the service, the repairs and everything else.
Car makers may also open their cars up in the same way that makers of smartphones have, so that lots of bright people could write apps that would make the use of a car more productive or enjoyable. A friend who works for a major car maker and who has access to its APIs has written an app that texts his wife and lets her know when he’s 10 minutes from home and is considering writing an app that will tell him when his wife’s gas tank is down to one-quarter full, so he can fill it for her. He has also written an app that texts his teenaged daughter and lets her know when she is 10 minutes away from having to leave wherever she is if she is to make it home before her curfew. (He says she appreciates the reminder.)
Thinking about cars as a platform raises the prospect that someone could produce a sort of operating system for that platform and capture a huge share of the value, as Apple did with its iPod and iPhone and as Microsoft did with personal computers. It also opens up vast potential for new products and services that ride on top of that operating platform — an opportunity that is, no doubt, not lost on Google.
These thoughts are just the start of the changes that will come with driverless cars.
The bottom line: Driverless cars provide an opportunity to either make or lose an awful lot of money. The companies that understand and best prepare for this new world will win over those that don’t.