Rethinking Transportation: Are we seeing a death of the industry as we know it?

At CTG’s European Advisory Board meeting last month, we welcomed James Arbib from the think tank RethinkX to discuss a recent report that predicts severe disruption within the transportation industry. The report states that we are standing at the cusp of one the most important transitions in human history, away from internal combustion engines and car ownership, and towards vehicle electrification and a new model of mobility: transportation-as-a-service (TaaS). Here, we’ll have a look at some of the report’s conclusions, and what this could mean for the future of the transportation and oil & gas industries.

What do they say?

Whilst most researchers in this area anticipate a slow shift to an electric-vehicle powered TaaS-driven future, the rate of change that RethinkX anticipates is a much quicker transition. In the report, the disruption point for the introduction of TaaS is 2021, and by 2031, TaaS services will provide 95% of US passenger miles. The report argues that the prime driver of this change is simply the economics of TaaS – which can fall well below the cost-per-mile cost of other types of transport.

Source: RethinkX

For many (especially in the US), car ownership represents more than moving from A to B. It is the freedom from the suburban isolation of home/parents in our youths. It is Springsteen’s Born To Run. It is Steve McQueen racing his 1968 Ford Mustang GT-390 Fastback (or his 1956 Jaguar XKSS, for our friends across the pond). In short, it is the American dream. However, with RethinkX’s analysis putting the price-point so low, TaaS may well make this type of ICE vehicle ownership a pastime only for the rich and famous – the benefits will massively outweigh other considerations.

Is driving your own petrol car (and looking cool like Steve McQueen) a thing of the past?

How is it so cheap?

A brief run-down of the economics in the report is as follows:

  • Individually owned cars are rarely used – today they are used only 4% of the time. Compare this with TaaS vehicles, which are available 24 hours per day, and will be utilized 10x more than independently owned vehicles.
  • TaaS-plus-EV is very synergistic, as EVs can drive much farther than ICE vehicles. For example, CA-based startup Tesloop estimates that its vehicles travel 17,000 miles per month. To date, some of the company’s Tesla vehicles have clocked up to 500,000 miles, and the company believes that the cars can go up to anywhere between 1-1.5 million miles.
  • Due to lower operating costs, TaaS EVs offer significantly lower cost-per-mile.
    • 90% decrease in finance costs
    • 80% decrease in maintenance costs
    • 90% decrease in insurance costs
    • 70% decrease in fuel costs

RethinkX argues that these collective improvements will lead to a 10x cost differential. This change will lead to a ‘vicious cycle’ of car sales falling, revenues shrinking, and profits collapsing. Revenue will drop 70% for passenger miles, falling from $1.5 trillion in 2015 to $393 billion in 2030, despite a 50% increase in passenger miles. A ‘vicious cycle’ will lead to shrinking of vehicle OEM industries.

Source: RethinkX

This is just a brief run-down of the economics in the report, which I encourage readers to dive into to explore the full economic picture. Although some of the assumptions may appear heroic, since the report came out in mid-2017, Mr. Arbib believes that the 2021 disruption date appears more accurate today, as we move into 2018.

What would it mean?

Although we can challenge the RethinkX report regarding the imminence and pace of transition, it seems highly probable that the change is coming. When EV and TaaS deployment reaches a tipping point, we will see disruption of several huge industries, as well as the emergence of radically different business models.

But who wins, and who loses? The report suggests that up to 80% of vehicle OEM profits will be cut, drastically changing the industrial landscape that we have become used to over the last century. But as we’ll see below, more recent incumbents also face significant threat in this new mobility landscape.

Source RethinkX: Several industries could be radically changed by an EV/TaaS revolution.

Pre-TaaS mobility winners, such as Uber and Lyft, will face difficulties in this new TaaS environment. Although today’s platform network effect may enable a monopoly, the report argues that monopoly pricing will not occur once autonomous vehicles are introduced. Barriers to entry will fall and no recruitment is needed, therefore no network effect can be gained – value will accrue from volume, not margin.

Let’s jump into the example of Uber – an argument well illustrated in a blog post by Justin Waldron back in 2016. The majority of Uber’s resources today are spent on the network effect of drivers – simply put, the fastest arrival time and best price attracts users.

Back of a napkin explanation from VC David Sacks, illustrating the network effect advantage for today’s pre-TaaS mobility companies

But once TaaS arrives, the network effects are lost, because low arrival time will simply need a fleet of cars, rather than a network of drivers. The billions of dollars being deployed by Uber and rivals such as Lyft could be mitigated by simply spending money on manufacturing a vehicle fleet that drives itself.

This could provide an opportunity for the potentially embattled vehicle OEMs not only to survive, but to thrive. As well as manufacturing fleets, developing connected car hardware and software is also a key future-proofing part of this survival mission. Such a transition is being attempted by many large vehicle OEMs today, reflected in the string of autonomous and connected car venture investments that some players are making via CVC units at companies such as Daimler, GM and Delphi.

In looking at potential winners, one must also consider the increasingly influential Chinese vehicle manufacturers who are integrating advanced manufacturing and connected car technologies into their business models at a very early stage, and expanding globally at a rapid speed. For example, WM Motors is in the process of raising up to $4 billion in capital, and is building a high-tech manufacturing facility that will have twice as many advanced manufacturing robots than Tesla’s facilities, and a 1/3 faster production time (presumably, this is not comparing to Q3 2017…). The company is also utilizing data in preparation for a TaaS future, collecting petabytes of data on the road for its internal autonomous driving technologies.