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May 16, 2014

Fasten Your Seatbelts: Driverless Cars Change Everything (Part 1)

Summary:

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In fact, the driverless car has broad implications for society, for the economy and for individual businesses. Just in the U.S., the car puts up for grab some $2 trillion a year in revenue and even more market cap. It creates business opportunities that dwarf Google’s current search-based business and unleashes existential challenges to market leaders across numerous industries, including car makers, auto insurers, energy companies and others that share in car-related revenue.

Because people consistently underestimate the implications of a change in technology — are you listening, Kodak, Blockbuster, Borders, Sears, etc.? — and because many industries face the kind of disruption that may beset the auto industry, I’m going to do a series of blogs on the ripple effects that the driverless car may create. I’m hoping both to dramatize the effects of a disruptive technology and to illustrate how to think about the dangers and the opportunities that one creates.

In this installment, I’ll start the series with a broad-brush look at the far-reaching changes that could occur from the driver’s standpoint. In the next installment, I’ll show just how far the ripples will reach for companies—not just car makers, but insurers, hospitals, parking lot operators and even governments and utilities. (Fines drop when every car obeys the law, and roads don’t need to be lit if cars can see in the dark).

After that, I’ll explore how real the prospects are for driverless cars. (Hint: The issue is when, not if—and when is sooner than you think.) In the last installment, I’ll go into the strategic implications for every company thinking about innovation in these fast-moving times.

To begin:

Driverless car technology has the very real potential to save millions from death and injury and eliminate hundreds of billions of dollars of costs. Google’s claims for the car, as described by Sebastian Thrun, its lead developer, are:

  1. We can reduce traffic accidents by 90%.
  2. We can reduce wasted commute time and energy by 90%.
  3. We can reduce the number of cars by 90%.

To put those claims in context:

About 5.5 million motor vehicle accidents occurred in 2009 in the U.S., involving 9.5 million vehicles. These accidents killed 33,808 people and injured more than 2.2 million others, 240,000 of whom had to be hospitalized.

Adding up all costs related to accidents — including medical costs, property damage, loss of productivity, legal costs, travel delays and pain and lost quality of life — the American Automobile Association studied crash data in the 99 largest U.S. urban areas and estimated the total costs to be $299.5 billion. Adjusting those numbers to cover the entire country suggests annual costs of about $450 billion.

Now take 90% off these numbers. Google is claiming its car could save almost 30,000 lives each year on U.S. highways and prevent nearly 2 million additional injuries. Google claims it can reduce accident-related expenses by at least $400 billion a year in the U.S. Even if Google is way off — and I don’t believe it is — the improvement in safety will be startling.

In addition, the driverless car would reduce wasted commute time and energy by relieving congestion and allowing cars to go faster, operate closer together and choose more effective routes. One study estimated that traffic congestion wasted 4.8 billion hours and 1.9 billion gallons of fuel a year for urban Americans. That translates to $101 billion in lost productivity and added fuel costs.

The driverless car could reduce the need for cars by enabling efficient sharing of vehicles. A driverless vehicle could theoretically be shared by multiple people, delivering itself when and where it is needed, parking itself in some remote place whenever it’s not in use.

A car is often a person’s second largest capital expenditure, after a home, yet a car sits unused some 95% of the time. With the Google car, people could avoid the outlay of many thousands of dollars, or tens of thousands, on an item that mostly sits and, instead, simply pay by the mile.

A study led by Lawrence Burns and William Jordon at Columbia University’s Earth Institute Program on Sustainable Mobility showed the dramatic cost savings potential. Their analysis found that a shared, driverless fleet could provide far better mobility experiences than personally owned vehicles at far radically lower cost. For medium-sized cities like Ann Arbor, MI, the cost per trip-mile could be reduced by 80% when compared to personally own vehicles driven about 10,000 miles per year — without even factoring in parking and the opportunity cost of driving time. Their analysis showed similar cost savings potential for suburban and high-density urban scenarios, as well.

Driving could become Zipcar writ large (except the car comes to you).

Looking worldwide, the statistics are less precise, but the potential benefits are even more startling. The World Health Organization estimates that more than 1.2 million people are killed on the world’s roads each year, and as many as 50 million others are injured. And the WHO predicts that the problems will only get worse. It estimates that road traffic injuries will become the fifth leading cause of worldwide death by 2030, accounting for 3.6% of the total — rising from the ninth leading cause in 2004, when it accounted for 2.2% of the world total.

If Google could give everyone a world-class electronic driver, it would drastically reduce the deaths, injuries and direct costs of accidents. The driverless car might also save developing countries from ever having to replicate the car-centric infrastructure that has emerged in most Western countries. This leapfrogging has already happened with telephone systems: Developing countries that lacked land-line telephone and broadband connectivity, such as India, made the leap directly to mobile systems rather than build out their land-line infrastructures.

China alone expects to invest almost $800 billion on road and highway construction between 2011 and 2015. It is doubtful, however, whether even this massive investment can keep up with the rising accidents and traffic congestion that the country endures. And road construction won’t deal with the issue of pollution, to which the massive car buildup contributes and which is becoming an ever more politically sensitive issue.

How might China and other developing economic powers’ massive car-related investments be redeployed if fundamental assumptions were viewed through the lens of the driverless car?

In sum, the Google driverless car not only makes for a great demo; it has worldwide social and economic benefits that could amount to trillions of dollars per year.

Insurers will feel major effects because hundreds of billions of dollars of reductions in losses obviously mean reduced requirements for insurance in all sorts of areas: auto, life, P&C, health and more; even workers’ comp needs will diminish because so many claims that would have stemmed from car accidents simply won’t happen. The locus of power in some parts of the insurance industry will shift, too. Why should a driver buy insurance if the car is doing the driving? Instead, car makers will likely take on the responsibility, and perhaps as part of their traditional approach to product liability, rather than working through auto insurance companies as they are currently constituted. I’ll look at those issues and others next time.

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About the Author

Chunka Mui is the co-author of the best-selling Unleashing the Killer App: Digital Strategies for Market Dominance, which in 2005 the Wall Street Journal named one of the five best books on business and the Internet. He also cowrote Billion Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years.

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