As the bull case goes, Tesla (NASDAQ:TSLA) and electric vehicles are a bridge to a green future. However, one can't help but see conflicting ideas in Tesla's business plans.
"You will also be able to add your car to the Tesla shared fleet just by tapping a button on the Tesla phone app and have it generate income for you while you're at work or on vacation, significantly offsetting and at times potentially exceeding the monthly loan or lease cost…Since most cars are only in use by their owner for 5% to 10% of the day, the fundamental economic utility of a true self-driving car is likely to be several times that of a car which is not." - Elon Musk Master Plan Part Deux
If Tesla is to justify its market cap, it is going to need to sell millions of cars. However, if it is to follow the path of autonomous vehicles, it will drastically reduce the demand for cars. It is clear that autonomous driving is the way of the future. The knock-on effects of autonomous vehicles are uncertain, but one can propose those effects.
When true autonomous driving becomes the norm, it does not stretch the imagination to expect cratering vehicle demand. The utilization rate of personal cars, which Elon admits is 5%-10%, will rise dramatically. Subsequently, demand for cars will drop in lockstep with rising utilization rates. Why would low-income families post a year's salary to purchase a car when they can rent one as required for a fraction of the price - with an automatic driver to boot? At the end of the day, personal cars are one of the most underused assets in the modern world. There are few high-cost items today that can boast such wide acceptance despite such terrible utilization rates. Despite that, it would be foolish to shy away from the technology for fear of disruption.
A Look Back At Kodak
As Tesla's business model moves forward, it is bound to change and adapt. To prevent becoming the next Kodak, Tesla and other car companies need to be part of the disruption rather than to fight it.
Despite arguably inventing the digital camera in 1975, Kodak went on to shelve the project for fear it would cannibalize its film sales. Whether the shelving of the digital camera resulted in more sales over time is impossible to gauge, but we do know that Kodak eventually succumbed to bankruptcy in 2012. At this point, we can see autonomous vehicles will eventually become a substantial part of our everyday lives. The when is the difficult part.
For Tesla and the auto industry, autonomous vehicles will become an inevitability. The size and scale of the autonomous driving fleet and how quickly it will cannibalize personal auto sales is where the uncertainty lies. But, eventually, I don't envision the average consumer owning their vehicle. If automated vehicles raise utilization rates to an easily achievable 50% (mining companies often achieve utilization rates as high as 70% in far harsher conditions), then the volume of car sales would plummet by a factor of 10. As cities redesign for fewer vehicles and roads, and toward pedestrians and bicycles, traffic will fall and the hours spent in traffic will decrease. A further hit to demand.
This readjustment isn't going to come soon. But the tide is coming in. As of February of this year, Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) autonomous driving car received approval to be treated akin to a human driver. The NTSHA also moved to rewrite guidelines for self-driving cars this year. All of these are strong steps forward. This brings us to the argument on safety. Are autonomous vehicles safer now? And will they be in the future?
Safety In Autonomy
I can't get through a discussion of autonomous vehicles without addressing the death of a Tesla driver this year. The death of the occupants of autonomously driven vehicles is an inevitability. Whether the numbers show that Tesla's autopilot experience was better or worse than self-driven cars, it was clear that the product was in beta. However, the product has performed arguably well. (For a counter argument check out Matt Brady's article here.)
"This is the first known fatality in just over 130 million miles where Autopilot was activated. Among all vehicles in the US, there is a fatality every 94 million miles. Worldwide, there is a fatality approximately every 60 million miles." - Tesla Motors
However, statistics are not what matters. What is important is public perception. Comparing autonomous vehicles to self-driven cars gets the same reaction I get when comparing nuclear power to coal. People don't like what they don't understand. Thus, despite nuclear power being a substantially safer form of producing energy when you look at deaths per unit of energy produced, the public perception is that it is dangerous. Nuclear is almost 100 times safer than coal in the U.S. and over 1000 times safer than coal globally. Again, facts don't matter here, public perception does.
In my view, autonomous driving will need to prove itself to be many times safer than traditional driving. People feel unsafe when they are not in control. This is again the same reason people feel less safe in airplanes despite them being several hundred times safer.
Source: Fearflying.Net (Data from NTSB)
Safety concerns are the main reason I see autonomous vehicles being delayed to at least 2030 before they gain widespread acceptance. Technology for automated vehicles will need to surpass the current safety benchmark by at least ten times. At that point public perception may start to turn, utilization rates of vehicles can begin to skyrocket, and overall demand for cars will plummet. Here is when today's vehicle manufacturers will need to re-invent themselves and where the battleground will take place for the future of driving. A discussion about demand destruction for cars brings about a new question
When Autonomous Driving Takes Over
Let's put ourselves in the year 2035. Autonomous vehicles have been around in small and growing scale for ten years, and fewer and fewer people are opting to own cars instead of ride sharing of autonomous vehicles. The cost to take a Taxi/Uber has dropped by a factor of 5 from 2016, and economies of scale have driven the costs of ride sharing down while drastically increasing the availability. Now, 50% fewer vehicles are needed on the roads.
Cratering of demand for vehicles brings about a cratering of demand for gasoline and diesel. Demand destruction in the oil industry will bring the cost of oil down to the marginal barrel, and thus make the economics of the electric vehicle weaker when compared to its ICE brethren. At that point, does it make sense to buy an electric car?
What if gasoline (NYSEARCA:USO) costs $1.00/gallon at the pump - can an electric car powered by wind compete on cost? I doubt it.
To be sure, government intervention will play an influential role in the future of both electric and autonomous vehicles. If the goal is to remove dependence on fossil fuels, then demand destruction would serve this aim. If the objective is to eliminate the consumption of fossil fuels, then electric cars are one of the few economic means to do so.
Autonomous vehicles will come eventually. When they do they will collapse the profits of today's car companies if they do not adapt. Tesla will not be exempt from the business challenges caused by the technology because it is part of it. But at least it has a head start. Ford (NYSE:F), General Motors (NYSE:GM) and Toyota (NYSE:TM), to name a few, have some catching up to do.
Regardless of the outcome, the technology that Tesla and others develop today will result in lessened demand for their vehicles in the future. That doesn't mean they should put the technology aside and ignore it. If anything they should embrace it and grow with it. Perhaps then they can ultimately avoid becoming a modern day example of Kodak in an MBA case study.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.