Navigant Research Blog

The Demise of the Uber Leasing Program

— August 22, 2017

Recently, Uber announced that it will discontinue the vehicle leasing program it has offered to drivers for the past 2 years. Average losses of $9,000 per leased vehicle were cited as the reason, but this only serves to highlight the problem that independent transportation network companies (TNCs) like Uber, Lyft, and Didi are likely to face as the transition to automated vehicles (AVs) begins. Companies that currently operate with minimal physical assets, relying instead on independent contractors, will face a huge challenge surviving as standalone businesses when confronted with building or buying massive fleets of costly AVs.

The leasing program was designed to provide drivers operating on the Uber platform with access to new, well-maintained vehicles at a relatively affordable price that also included unlimited mileage and free maintenance. For passengers, knowing that a ride won’t be a broken-down rattle trap makes using the service much more appealing. Many of the drivers operating on these services don’t have the financial wherewithal to get a loan or a lease on a new vehicle, so the program seemed like a great path toward earning more money.

Since Uber doesn’t manufacture vehicles, it has to acquire them before leasing them to drivers. Wall Street banks loaned the company $1 billion in 2015 to get the program launched, but Uber’s lack of vertical integration means added costs at every level in the value chain. Losses originally projected to be about $500 per leased car increased 18-fold. This is not a formula for a building a sustainable enterprise.

Not Just Uber

Uber is not the only company acquiring cars. Following General Motors’ (GM’s) $500 million investment in Lyft in early 2016, the automaker launched Express Drive to provide low cost rentals of GM cars to Lyft drivers. Unlike Uber, GM has a ready supply of relatively new off-lease vehicles available. GM tapped this supply for Express Drive as well as its more traditional carsharing service, Maven, that also launched in 2016.

Like most other automakers, GM has a captive finance arm through which it could fund the program at lower cost than Uber. Repurposing off-lease vehicles for these mobility services reduces the supply of used vehicles in the market, helping residual values. Having these relatively new vehicles in the field also exposes people to contemporary GM products that may have a marketing benefit. The network of thousands of GM dealers can provide maintenance and repair services, something for which a TNC would likely have to pay a premium. In spring 2017, GM added Maven Gig, which provides similar low cost rentals to drivers on platforms beyond Lyft.

Vertical Integration Is Key

GM may be losing some money on the current Express Drive and Maven Gig programs. However, unlike the TNCs, the automaker is profitable and can afford to subsidize this effort. Doing so also helps to reduce potential losses in other parts of the business. For a TNC without this level of vertical integration, it’s unlikely such a program would aid in reaching net profitability in any realistic timeframe.

The same factors that benefit an automaker in this regard also come into play when looking at the deployment of automated mobility services. If Uber has to pay Volvo or some other automaker for very expensive vehicles, plus cover insurance maintenance and fuel, even eliminating the cost of drivers may not lead to profits. It’s likely that only acquisition by an automaker can save TNCs from extinction. Yet, that may only happen if their inflated valuations collapse.

 

The Race to Control the Automated Vehicle

— June 14, 2017

Since the birth of the automobile, manufacturers have raced to claim the most power and best performance. The continuing evolution of the internal combustion engine has been a key component in that competition. That’s all about to change. As we begin the transition to automated and electrified vehicles that are programmed to obey speed limits and play nice with other road users, the performance benchmark for satisfying those in the vehicle shifts from the propulsion system to the computing platform, with both old and new players trying to grab a slice of the prize.

The situational awareness needed by highly automated vehicles (HAVs) requires data from sensors and communications links to be fused into a coherent, real-time 3D image of the space around the vehicle. Current semi-independent systems such as stability control, adaptive cruise control, and lane keeping assist each use discrete sensors, electronic control units (ECUs), and related software. More limited feature set and sensor inputs allow them to work with relatively low powered processors by modern computing standards.

Old Processors Aren’t Good Enough

Those aging, low power processors simply aren’t up to the task of managing HAVs. Thus, we have the integration of these systems under a single umbrella computing platform with more input signals than ever. During early development of automated driving, vehicles were packed full of server racks to handle the necessary processing. Production viability requires that to be condensed down to a much smaller package that consumes far less electrical power than the kilowatts used by those servers with reduced heat generation.

Best known for its graphics processors used in video games and editing, Nvidia has grabbed headlines with its Drive PX2 development platform. At just $10,000, this is an ECU for automated driving development utilized by many of the companies working in this space. It is currently too expensive for mass production. At the 2017 CES, supplier ZF announced that it would commercialize this platform as the ProAI ECU in 2018. Bosch made a similar announcement in March, but it will use a repackaged version that combines the graphics processing unit (GPU) and CPU into a single unit. Toyota recently announced that it too would use the Nvidia platform.

Intel Is Continually Making Strategic Acquisitions

Meanwhile, Intel is moving aggressively to expand its footprint in the HAV space. In 2016, BMW announced that it was building its automated driving technology using Intel CPUs and chips from Mobileye for sensor processing. Supplier Delphi is using the same combination with its own software in its multi-domain controller ECU. The current market leader in vision systems for lane keeping assist and collision warning, Mobileye’s next-generation chips are considered so capable that Intel decided to acquire the company for $15 billion. This follows Intel’s 2015 acquisition of Altera for its powerful field programmable gate array (FPGA) processors. Combinations of Intel CPUs, Altera FPGAs, and Mobileye sensor processors are now being made available to manufacturers as the Intel Go platform.

The traditional automotive chip suppliers don’t intend to be left out of the competition either. NXP, which was spun off from consumer electronics giant Philips, acquired Motorola spinoff Freescale in 2015 and is currently in the process of being acquired by Qualcomm as part of a larger effort to power HAVs. Japanese supplier Renesas already provides processing power for many driver assist systems and wants in on the HAV action as well.

With performance, reliability, and thermal management more important than ever in HAVs and the market projected to grow into the tens of millions of vehicles annually by the late 2020s, don’t expect to see any slowdown in the evolution of these computing platforms anytime soon.

 

Preludes to Premium Mobility Services

— May 22, 2017

Moving toward a world where individual vehicle ownership gives way to automated mobility services, automakers and service providers run the risk that their differentiated products will become commodities. In an industry that already runs relatively thin margins on top of high capital costs, the thought of becoming a commodity is a nightmare scenario. That is why companies like Ford and General Motors (GM) are experimenting with models that could feature different price points and margins.

Differentiation Necessary

If you use one of today’s basic ride-hailing services, it doesn’t matter if you use Lyft, Uber, Gett, or one of the numerous small services that operate regionally. Using luxury tiers like Uber Black gets users a premium vehicle, but otherwise the service is essentially the same and the prices are usually close. In order to charge a premium price that can generate the profits needed to sustain a business, companies will have to find ways to differentiate.

In a world where the car you ride in becomes random, the overall customer experience of the service will become crucial. That may include being able to specify what type of vehicle you want, guaranteed shorter wait times, access to added services like picking up the dry cleaning or groceries, and more.

In January 2017, GM’s Cadillac division launched Book, a service that enables customers to pay a flat monthly fee and get access to any of the vehicles in the brand’s model lineup. A subscriber may opt to spend the week commuting in an XT5 crossover, switch to an ATS-V performance coupe for a weekend jaunt in the country, or get an Escalade for a family road trip. Cadillac takes care of insurance, detailing, and maintenance.

At the New York Auto Show in April 2017, Lincoln announced its Chauffeur service. As the name implies, Lincoln provides its customers with access to a professional driver when owners cannot or don’t want to drive—such as on a special date night or to pick up the kids from an event. Lincoln screens the drivers and they arrive at the customer’s location on request to drive the customer’s car. Lincoln Chauffeur debuted in Miami and is now expanding to San Diego.

An Automated Future

Hypothetically, 5 to 10 years from now when both of these brands (and others) are offering a range of automated vehicles, it’s easy to imagine a scenario where services evolve to take advantage of that automation. The Cadillac of your choice appears at your doorstep on demand; for certain models like the high performance V series, GM can offer the option for the customer to drive if they choose while others may be automated only. Similarly, Lincoln Chauffeur could be utilized with automation for vehicles that customers buy, lease, or subscribe to on a weekly, monthly, or annual basis. Tesla CEO Elon Musk has also articulated a vision where his customers could make their vehicles available for short-term rentals when not being used.

These and other varieties of services will mean dramatic changes for the automotive retail business, as well the automakers and customers. The choice of whether to lease or buy gets expanded into additional types of payment plans, including by the mile, hour, month, and more. The possibilities will be limitless for affluent customers. For example, a customer may not need to decide what color car they want in their garage; they can order one coordinated to their outfit for the evening. No doubt there will be many more experiments from automakers over the next several years as they seek to navigate their way through a changing transportation landscape.

 

Increasing Collaboration between Tech and Automakers Is Better for Everyone

— May 19, 2017

Over the past several years, there has been an ongoing narrative that a battle has sprung up between Silicon Valley and the auto industry. The tech industry hype machine wants the world to believe that venture capital-backed startups are going to appear with some magic technology that disrupts and destroys the century-old incumbents. The reality is likely to turn out quite differently, with some of the brightest minds in the valley coming up with cool ideas that become a key part of the transportation ecosystem.

Tech Has Saved the Automobile Industry Before

The fact that the auto industry has remained vibrant over the past 50 years can in large part be traced to innovations that have emerged from the San Francisco Bay Area, particularly the silicon microprocessor that gave the region its nickname. At the onset of environmental regulation at the end of the 1960s, most of the functional aspects of cars were mechanically controlled, and these vehicles consumed more fuel and spewed more pollution than they do today.

As engineers struggled to meet the new regulatory requirements, the industry entered what became known to car enthusiasts like myself as the malaise era. Attempts to better control engines through mechanical means like vacuum lines led to many terrible engines with weak output, awful drivability, and barely improved emissions and efficiency.

Silicon Valley saved the auto industry from being suffocated by regulations. As early microprocessors and sensors were applied to engine and transmission management as well as new safety systems like anti-lock brakes, it became clear that computers in the car would be the key to enhanced driving. By the mid-1980s, electronic controls were enabling engineers to extract more power while using less fuel and cleaning up emissions. As fuel economy regulations stopped climbing, car companies offered customers improved performance and capability without making them spend more at the pump.

After earning my degree in mechanical engineering, I spent the next 17 years working on improving vehicles through  more sophisticated software running on a series of cheaper, yet more powerful slivers of silicon. Today’s most sophisticated vehicles utilize anywhere from 50 to 100 onboard computers to manage everything from lights that follow the angle of the steering wheel to automatically maneuvering a truck to connect a trailer.

Looking Forward to More Industry Collaboration

Silicon Valley has been a key enabler of the modern vehicle for decades. As we shift toward a world where most of the driving is done by software instead of people, the tech and auto industries must continue to collaborate more closely. The auto industry has developed an immense base of knowledge in building complex pieces of hardware at high volume and with high degrees of reliability and durability. Those machines come in a huge variety of configurations to meet virtually every possible transportation need.

Meanwhile, the tech industry has an unrivaled set of capabilities in developing software and electronics and driving down costs while improving performance. There are great minds on both sides focused on how to make mobility safer, cheaper, and more universally accessible. The Navigant Research Leaderboard Report: Automated Driving scored automakers and tech companies on their likelihood of success in commercializing this technology.

Almost everyone recognizes that transportation will change in the coming decades. The collaboration between the tech and auto industries has yielded incredible results for nearly half a century. New partnerships are going to form on the way to fully automated driving. There’s no need to spin those relationships into a competition when greater collaboration will likely yield much better results for everyone moving forward.

 

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