Self-Driving Cars, Part 2: Size of Opportunity Involved

by Trefis Team
Tesla Motors
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Auto companies currently build and sell cars. When you add self-driving capabilities to a car, the problem no longer remains restricted to designing and selling a car, it evolves into providing Transportation-as-a-Service (TaaS). The TaaS market has two key components:

  1. Making a self-driving car
  2. Getting the car to the passenger and moving them around

When you combine these two components, the market opportunity involved encompasses many industries and consequently, the scale is huge. In the first part, we explored the potential ramifications of technological changes in the car market and how players can position themselves to take advantage of the emerging trends as a result. In this part of the three-part article series, we try to gauge the market opportunities available in this space and how this market can evolve.

Self-Driving Builds on Electric Vehicle Technology

The development of self-driving technology and electric vehicle technology are independent of each other. It is possible to imagine a self-driving internal combustion engine (ICE) vehicle as well as a non-self driving electric vehicle. However, building a self-driving ICE vehicle is unlikely to be the route which the ” Apple (NASDAQ:AAPL) of the car industry” will take. (Read: Car Wars I: Lessons For The Auto Industry From The Ascent of The Smartphone) We have learned from the evolution of the smartphone industry that it is most profitable to be a white-box manufacturer rather than having a vertically integrated manufacturing model with razor thin margins. Similarly, as discussed in the previous article, it is safe to assume that non-self driving electric vehicles will eventually transition to self-driving vehicles owing to the unit economics involved. Below, we take a look at how big is the market opportunity in the self-driving or Transportation-as-a-Service (TaaS) market.

How TaaS Can Change The Way We Look At Transport

Land transportation can be broadly seen as a sum of the following parts: designing, manufacturing and distribution of vehicles, after-sale maintenance of these vehicles and fueling. Services built on top of car sales — such as insurance, loan-leases, taxis and public transport, storage or parking — are also integral to the industry. Many companies are looking to target various market segments that can spring up as a result of the technological advancement of self-driving cars. This behavior can be potentially as disruptive as it was by the smartphone market in the last decade.

Fundamentally, as consumers become accustomed to think of transportation as a service rather than a private good, the nature of products and services in this market will also change. For instance, the number of privately-owned cars per capita has fallen in areas (primarily cities) that have excellent public transport. [1] Given that the idea of TaaS is on-demand, more abundant and flexible than the current means of public transport, it is safe to assume that it can further the shift away from private ownership of vehicles. And in the long run, it may even completely replace the existing public transport infrastructure.

The range of products and services offered by players in new TaaS market will be spread out across various functions. At a first glance, one may assume that the total size of the TaaS market will encompass all products and services currently offered. The auto market in the U.S. is currently around $550 billion market a year, obtained by multiplying the number of vehicles sold every year (18 million) and the average unit price per vehicle (around $30,000). Similarly, the total cost of ownership over the life of an average vehicle (11 years) is roughly twice the purchase price or can be approximated to around $50,000 spread over the life of the vehicle. Every year all cars sold in the preceding 11 year period undergo maintenance and servicing, which leads us to roughly $800 billion spent by Americans in servicing costs in one year. Add to this, the money spent on taxis, buses, trains, cargo freight (primarily trucks), auto insurance, fueling, car leases and loans and other complementary services, we can assume land transportation to be a $2 trillion market in the U.S. alone and affects a huge proportion of the economy.

Given the size of the market and the potential to impact the huge number of people, it is a highly attractive market opportunity for any company to want to enter. The precise estimation of what the new market size will be is difficult. To take an example, the smartphone essentially replaced or deeply impacted various individual markets such as cameras, watches, calendars, alarm clocks, calculators, flash lights, telephone landlines, pagers, faxes, scanners and to some extent even the desktop computers. But, the total addressable market for smartphones is not the sum of these individual markets. Similarly, the advent of search engines has cannibalized the need to purchase maps, encyclopedias, telephone directories, yellow pages etc. but the market for search engines is not equal to the sum of all replaced markets. Regardless of the exact size of the market that results from self-driving cars, it is clear that its scale and potential to impact people is huge. In order to capture this market, companies must master three key technologies: operating system to drive cars, routing services and mapping technology. We explore these areas in depth in our third part of the article.

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  1. End of the car age: how cities are outgrowing the automobile, The Guardian, April 2015 []
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