Impact of fully autonomous driving on new business models

Numerous stakeholders look set to gain from autonomous car business models – but who will move first? By Arunprasad Nandakumar, Frost & Sullivan Mobility Team Leader

Beyond petri dish projects and road tests, automated driving has now taken centre stage from tech shows to automotive research labs. While some race to be the first, others are looking at alternate pockets of opportunity this technology could produce. According to Frost & Sullivan’s recent research, by 2030, one in seven cars will have level-3 automation or higher, and thus, the technology is no longer confined to the realms of science fiction. With a prospect of reaching a market value of over US$50bn in the next decade, autonomous driving is at the cusp of transforming and redefining the boundaries of the automotive industry.

What the car did to the horse is what autonomous technology will do to drivers. The wave of autonomous driving is set to impact many segmented industries within and outside the traditional automotive domain.

Those outside the current ecosystem, like logistics, are likely to be impacted at a much later stage of the technology evolution; others are likely to be disrupted much earlier into its lifecycle. But in the short to mid-term, two pillars of the automotive industry that have followed a very traditional structure for many years are due for an overhaul, thanks to this transformational shift in the way we commute.

The automotive insurance industry

The automotive insurance industry has a history of being operated based on commandments set in stone. The industry currently relies on risk assessment based on historical data, though usage-based insurance has brought about significant changes to the dynamics of the industry. But with the advent of automated driving, the cornerstones that define the architecture of this industry are set for a complete renovation.

There are two sides to the aforementioned overhaul: liability and data. With the latter, the philosophy is straight forward. As opposed to relying on historical crash data for assessment, insurers will seek to access real-time driving data and on-board diagnostics to assess the vehicle’s operation to set premiums, and by reducing reliance on the unknown (driver), the pattern becomes more decipherable and quantifiable. The aspect of liability, though, is not that clear. Between now and the future of driverless cars lies a vast timeframe of uncertainty, primarily revolving around control of the vehicle. Various levels of automation try to define this transition of control between driver and the vehicle more clearly, but the fact is that this transition, until established, will lead to uncertainties.

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There are multiple ways of tackling these changes for insurers. From pay-as-you-go insurance based on human-driven miles, to product-driven liability targeted towards OEMs, there are numerous ways that the insurance agencies of tomorrow can possibly keep their business afloat. Regardless of the path taken, there will be a drop in the total premium generated, but also the number of claims.

The smart systems of tomorrow will see this change and realign their business strategies to keep their margins high. Frost & Sullivan envisions these smart companies will ideally take one of the three possible risk assessment approaches:

  1. Brand-centric evaluation: the premium is reliant on the capability of the brand to provide the various levels of automation;
  2. Product-centric evaluation: the type of transport used decides the premium, e.g., a personal rapid transit pod could have a premium different to that of a private vehicle;
  3. System-centric evaluation: the type of automation and the diverse capabilities that it can handle defines the premium. With this system, we are likely to see the next wave of underwriters’ parametrising automated systems based on OBDs to better position the various automated driving capabilities.

Irrespective of the path taken, the insurance business model of tomorrow will need to address three key aspects: the changing stakeholders and their needs, importance of new technical risk-evaluation models, and improved reliance on on-board diagnostics.

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The mobility industry

In the extended global automotive industry, careful deliberation is being carried out in order to understand the evolution of transportation and mobility. This deliberation is being driven by the convergence of a series of industry-changing forces and megatrends, such as connected cars, Internet of Things (IoT), Vehicle-to-Vehicle (V2V) and Vehicle-to-Infrastructure (V2I) communication. Sooner rather than later, vehicles are expected to gain precise awareness about their surroundings and then charter out necessary steps, be it rerouting or taking pre-emptive collision avoidance actions.

While this revolution is happening within the automotive industry, millennials and urbanites are swiftly moving away from purchase of capital assets (vehicles) to a mobility model based on pay per use. This change in the mind-set of “Generation Y” fundamentally challenges the present-day model centred on ownership of vehicles. When all is said and done, an established ecosystem, which has been there for more than a century, is on the verge of a transformational change that will most certainly result in a new ecosystem of mobility revolving around shared mobility and last-mile connectivity.

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The future mobility solution offers a new perspective on personal commutes from point A to point B, which features on-demand, fully autonomous vehicles, and affects the way consumers commute. Some of the major changes envisaged by the change in the mobility ecosystem include:

  1. Seamless multimodal transportation becomes the new norm. Cities enable seamless multi-modality through public-private cooperative efforts; vehicle ownership is primarily business to government (B2G) or business to business (B2B).
  2. Spatial distribution management of demand: managing spatial distribution of vehicles in the ecosystem during demand fluctuation will be a challenge. The aggregator who keeps the supply and demand of vehicles in optimal balance across the ecosystem is likely to become the most profitable player.
  3. Fall in fares to bring in cutthroat competition: the automated taxi segment is likely to dominate the shared mobility space due to a drop in taxi fares, decline in vehicle ownership, and increasing mobility demand. Huge revenue potential and low entry barriers in the taxi segment are expected to bring in new market entrants, thereby oversaturating the already saturated taxi segment.
  4. No more proprietary solutions: in an ecosystem where consumers can demand seamless integration and a preference for a specific set of hardware and software, pure-play proprietary solutions will no longer play a part in the mobility space of the future. OEMs and aggregators will have to serve consumers according to their fancies.
  5. Intelligent demand-driven pricing: consumers in the future might benefit from negative pricing in order to move vehicles from a relatively low-demand location to a high-demand location.

Future mobility systems will have to be redesigned in order to keep pace with changing times. Firms will have to develop and manage vehicle operations and traffic network in order to control traffic movement of autonomous vehicles and shared fleets. Technology companies will face challenges from new entrants with new business models competing to capture metadata from passengers to provide an enriching commute. OEMs will have to redesign and develop vehicles to emphasise passenger experience and not drivers.

In context of re-alliance of business models, one key trend that we will see in the coming years is strong alliance with participants from parallel industries; the GM-Lyft collaboration is a key example. With a possibility of depleting vehicle ownership, GM’s aim at improving fleet sales through shared solutions is its best bet to stay afloat, and the technical knowhow of creating driverless cars helps Lyft eliminate the highest cost factor in the current business model – the driver.

Within this mobility ecosystem, there will be a convergence of the models being influenced by autonomous driving. With that, one of the challenges that exist today, which is the gap felt at the last mile of connectivity, will thus be addressed. A player like Google, which currently possesses the technical capabilities to develop autonomous mobility solutions and has aligned businesses that can integrate this solution with the transport needs of the commuter, would be best positioned to address all of the needs of tomorrow’s autonomous mobility market.

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Though these are the primary industries at the epicentre of the impact, the future impacts of autonomous driving on parallel industries are far more expansive. From completely automated fleet and logistic services to on-demand intelligent transportation systems, there are many other industries that can benefit by aligning their business structure to embrace the inevitable advent of this technology.

While the impacts on each of these industries are likely to be very diverse, the core elements are alike – a readily available mode of transport that is constantly connected to every node on its route and personalised to the commuter/commodity in the vehicle. Step one to this is enabling the connection, and that is where we are – the ground zero of the future. The future will reveal the numerous business opportunities that this one product can bring about.

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OEMs are likely to have the most to gain or lose from this change in dynamics. With mastering automation, they will likely have one of two ways to go: be a provider to the next generation of mobility solution, i.e., a supply node in the value chain, thereby owning a very small portion of the market value; or be the next wave of mobility integrators competing/allying with the disruptors of today to keep hold of the vast amount of data these services can generate and thereby the revenue that comes with it.

A macro view of the moving mobility space clearly defines this booming market opportunity. Moving towards a clean, autonomous and shared fleet of commuter vehicles will open up various opportunities in the future. The end result of this mobility trifecta might be quite a few years away, but the building blocks to this are falling in place fast. The ridesharing business case that currently addresses the concern of improving utilisation of vehicles through improved occupancy and reduced latency is the best example of these building blocks. The moment this form of commute is able to function autonomously, seamlessly integrating with the transport requirements for commuters and goods, the business case becomes far more enticing for new entrants and existing players.

This article appeared in the Q1 2016 issue of Automotive Megatrends Magazine.