The short answer to the question "Will Uber's autonomous cars reshape the economy?" is "No."
But probably not for the reasons you might imagine. When I think of autonomous vehicles, the first company that pops into my mind is not Uber. Instead, I immediately thought the Durant-Dort company. Durant-Dort was the largest producer of horse-drawn vehicles in the United States by 1900, and in the company's peak year of 1906, it produced approximately 56,000 horse-drawn vehicles.
By 1917, though, Durant-Dort had stopped making road carts entirely. In 11 years, in 11 very short years, the way people and cargo was transported had changed so radically that the company stopped making its namesake claim-to-fame product. That change took place over an extremely short period of time, and helped spur the kinds of dramatic economic growth that has only been seen a few times in history.
With that kind of radical change in mind, it becomes easy to see why the prospects of autonomous vehicle networks are so tantalizing. Seeking Alpha author Zack Kanter recently touched on these prospects in his article "How Uber's Autonomous Cars Will Reshape The Economy By 2025". Zack hits the nail on the head quite a few times, but I wanted to try and examine his article through the lens of history.
Back To The Future
Durant-Dort stopped making its horse-drawn road carts in 1917, not because the company slipped quietly into the night. In fact, it was because by 1917, the Durant-Dort Carriage Company had already financed the early destiny of Buick and laid the foundation on which William Durant founded the General Motors Holding Company.
Disruptive innovation does not take kindly to entrenched competitors... it is unlikely that major automakers like General Motors (GM), Ford (NYSE:F), and Toyota (NYSE:TM) will survive the leap. - Zack Kanter
Retrospectively, the last major transportation revolution shows us that many of the major players in the past became major players of the future. Certainly some companies didn't survive the last transportation revolution during the advent of the internal combustion engine, and certainly some will not survive the next. But looking closely, I can find dozens of examples where the same companies making axles, springs and wheels for the horse-drawn carriage companies were more than happy to make them for vehicle companies, and in many cases, became subsidiaries of automobile holding companies.
Fast-Forward To 2015
When people talk about the Internet of Things, we're not just talking about your Nest thermostats and drop cams. We're talking about vehicles as well. Thanks to things like Moors Law and the rapidly increasing number of sensors present in our lives, nearly every vehicle manufacture is looking at how to make autonomous vehicles. It is the growth in sensor technology, hardware and software analytics that drives these advances.
These advances save us money. When we use our Nest thermostat or Rachio sprinkler controller all connected to the Internet of Things, through analytics we save money. So it's no surprise that big companies are looking at the second most expensive things in our lives and applying the technology to make utilizing vehicles cheaper.
Morgan Stanley's research shows that cars are driven just 4% of the time, which is an astonishing waste considering that the average cost of car ownership is nearly $9,000 per year. Next to a house, an automobile is the second-most expensive asset that most people will ever buy. - Zack Kanter
By constantly using metrics at every step of our lives to do that we do, we can dramatically increase our productivity by decreasing the costs to conduct our lives. Big companies are just taking to the next logical step and applying it to vehicles.
Save Money, Less Cars
Larry Burns is the former corporate vice president of Research & Development for General Motors. Burns oversaw GM's advanced technology, innovation programs, and corporate strategy. He personally championed vehicle electrification and connected vehicles while there. He is also a Professor of Engineering, and in 2013, helped produce the "Transforming Personal Mobility" study for The Earth Institute at Columbia University.
In one case study, they looked at the area of Ann Arbor, Michigan. One of the conclusions drawn is that they were able to eliminate 80% of the current vehicles on the road and replace them with a connected transportation network that was both cheaper and provided more mobility for more individuals.
Within the Ann Arbor urban area, the analysis focused on the 120,000 vehicles that were driven less than 70 miles per day. They determined, with a fleet size of 18,000 vehicles, consumers would expect to wait less than one minute for a vehicle to arrive, and the vehicle fleet would be utilized 70% of the time on average during daytime hours. - Transforming Personal Mobility study
It is the reduction in vehicle numbers seen in the Ann Arbor case study that will help our environment and the world. It is also the kind of reduction in vehicles that might scare auto manufacturers.
The Future Of Car Companies
But car companies are not going to stand by and let this transportation revolution pass them by. They are already trying to figure out how they will be a part of the transition to a driver-less economy. They're asking themselves, "What is the role of the car company once people stop buying their own vehicles?"
Eventually, the car companies will move to from selling cars to individuals to selling them to network managers, and even to managing the transportation networks themselves. They may make the cars and manage the logistics. They will set up cooperatives with thousands of businesses, homeowner associations, city governments, and they will help them manage the big data of those public and private transportation networks. They will built-to-suit, custom vehicles with special features for these entities. They will manage the analytics to help those cooperatives, those companies, those city governments, utilize and manage their own autonomous vehicle networks, and increase their efficiencies. Those financial gains made through increased efficiencies can be shared with the producer of the vehicles in an arrangement where the financial gains of the customer are shared with the producer.
General Motors will be the Uber of tomorrow. BMW will be the Lyft of 2040. Because if the car companies don't make the changes, there are other companies that will. Google (GOOG, GOOGL), Samsung (OTC:SSNLF), and even the electronics and sensor companies will do it. IBM will be more than happy to. It's going to be a race for who can produce a vehicle that drives itself and manages the big data to provide a customer experience that works with the millions of people already participating in the car-sharing economy.
The Future Of New Problems
A shared driver-less car transportation network does have its own share of problems, however. In addition to the economics of building out these communication layers required for the networks, we're going to have to have a service industry that both grows and contracts in different areas, and we are also going to have to closely look at rural areas. We're going to have multiple layers of different transportation networks. The multiple kinds of single-purpose vehicles that already exist today are not going to be replaced by one-size-fits-all business transportation needs. Refrigerated vehicles, animal transportation, cargo transportation, heavy cargo transportation - we are still going to need specialized vehicles, specialized trailers, and specialized networks. The companies that make those specialized vehicles are going to look to the managers of these networks to help them.
Since vehicles in a shared transportation network are driven many more miles than a typical privately-owned vehicle, vehicle lifespan is determined much more by miles driven than by age of the vehicle. As such, depreciation, when calculated as a function of mileage, will occur at an increased rate. With vehicles in a shared network being used many more hours a day, their wear and tear is going to happen at a very accelerated rate. We're going to have to change from down-the-street garage repair to regional repair and tertiary service centers.
Then, there are the availability issues we still need to work out. No one is going to adopt personal transportation networks if they have to wait an hour for a ride. People want freedom of movement. Availability of autonomous vehicles is another problem that doesn't work quite right at certain scales. When we assume that trip origin and destinations are equally balanced over a city, it strongly suggests that the number of trip origins and destinations are roughly in balance in all areas within the city.
This is so that vehicles don't have to be moved very far to reach their next trip origin point after completing their last trip. The empty car time is reduced when things are in balance. When empty car time is increased due to imbalances in origin and destinations within a given area, things begin to fall apart.
For example, if a lot of people are traveling to a specific city for a large event, say the Superbowl or a massive trade show, there are going to be a lot of one-way rides from the airport prior to the event. This is going to be an imbalance that increases empty car time as empty autonomous vehicles drive back to the airports.
When you increase the size of an area covered by a single transportation network, the difficulties compound dramatically. Where trip origins and trip destinations are out of balance over a given area, the cost to operate those networks is increased, wait times become increased, and adoption of these networks will face increased resistance.
Resistance Is Futile
With all of the above said, my bet is that my great-grandchildren probably won't own cars unless it's as part of a hobby, much like how riding horses is a hobby today. Car ownership is more than a 100-year old idea. It's one that was born in the 19th century. The shift that took place more than 100 years ago will happen again this century, and you can try to resist it, but it's going to happen. It is this kind of revolutionary shift in transportation that is going to radically alter our economy, our employment situation. It will be the driver of new types of growth in 21st century and carry us all far into the future, all autonomously.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I looking forward to the driver-less vehicle industry. I plan to invest accordingly for it. Look to the next drivers of the future economy.