Before the Internet, before Google (GOOG), before Apple (AAPL) created the iPhone, the automobile stood out as a pinnacle of consumer technology. Over 30 years later, cars (though smaller, more fuel-efficient and perhaps more likely to come from east Asia than, say, Detroit) haven’t changed much, while technology certainly has. There may be a quantum leap for the automobile, however, coming up soon.
Cars look ready to shed their drivers. In fact, it seems highly likely that we will see driverless cars moving on roads near us soon, perhaps even within the decade. How could this paradigm shift change the sprawling auto industry?
There are several arguments for widespread proliferation of the driverless car. The primal one is the potential to save thousands of human lives. According to the product manager for Google's self-driving car project, "Every year we don't have this technology built, more people die." Indeed, most car accidents are the result of human error. It can also be argued that driverless cars have the potential to increase capacity on roads (by making closer driving safer), as well as to decrease traffic and pollution. Driverless automobiles can also help companies save on significant labor costs for drivers. Further, other forms of driverless transportation systems have been successfully implemented like the SkyTrain in Vancouver that runs on 42.7 miles of track. There is even a shuttle “bus” in Rotterdam in the Netherlands called the ParkShuttle that operates something like a vertical elevator. One of the benefits of the automated shuttle is that less additional infrastructure for public transportation is required than for say big rail projects.
What this all may mean is more profits and some new dynamism for car firms. Several firms have been working on the self-driving technology. Some features are already being implemented, such as in Ford’s (F) self-parking car. General Motors (GM) thinks its driverless cars could be on the road by 2018. Were the entire fleet of cars in the United States to be replaced, or even a fraction of it, the potential for revenue would number in the trillions of dollars. According to a recent survey, more than a third (37%) of those surveyed said they would be interested in purchasing a driverless car.
While traditional car companies may well stand to benefit, it is the Internet giant Google that seems to be taking the initiative in the driverless car endeavor. The Google Car has, in fact, logged several thousands of miles with no driver, with a clean safety record (except for one accident while under human control). The company also lobbied to legalize the driverless car (albeit with two passengers) in Nevada this year, which may one day be seen as a significant milestone in the driverless car initiative; the company seems intent on making the driverless car a thing of the present. Though the car is not yet ready for “productization”, as a Google’s representative put it, Google has spoken to all the car manufacturers already (the company is not really in the hardware business, anyway).
Google is working with the Toyota (TM) Prius for its driverless car project, so one may speculate that the Japanese automaker could then license technology from Google to market. Toyota is already working on an Intelligent Multimode Transit System, which can switch from automatic to manual driving. In Toyota’s home country, the Ministry of Land, Infrastructure, Transport and Tourism expects driverless cars by 2020, and is holding bi-monthly talks with Toyota, Nissan (NSANY), and Honda (HMC), among other Japanese heavyweights. Honda, for example, is working on creating a more relaxed living room style automobile interior to better complement driverless cruising.
Or it may be none of the companies mentioned above that successfully taps into the driverless car market of the future. Value Line subscribers may already have heard of the term Software as a Service (Saas) in association with decentralized cloud computing. A new development from the driverless car revolution may be transportation as a service, as consumers are charged for transportation as they are for a utility. ZipCar (ZIP), for example, already operates like this, and its business model may be readily adaptable to implement driverless cars on a large scale. (On a side note, another piecemeal transportation solution, ride-sharing, is becoming more palatable to consumers via social media and is also highly adaptable to automated driving.)
While it may be hard to tell who will capture the most revenue from selling driverless cars, one industry will be affected quite directly: the auto insurance industry. First, legally speaking, the blame for car accidents would probably shift from drivers to car makers, increasing the scale of customers. Second, the potential exposure to risk and hence premiums paid has the potential to drop significantly when considering the potential safety improvements of the driverless car. Auto insurance providers like GEICO, a Berkshire Hathaway (BRK/B) crown jewel, may be hurt.
Neither auto industry players nor long-term investors with money in the auto industry should ignore the potential implications of the driverless revolution. Big changes up ahead on the road are becoming discernible.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.