Autonomous Economics: Can OEMs Make More Money Selling Fewer Vehicles?

William PeatmanBlog

Auto sales are expected to fall to 16.8 million units in 2019 in the United States, down 1.1 percent from 17 million in 2018. “U.S. auto sales are tumbling further and further away from record highs hit just a few years ago,” CNBC reported. Researchers at McKinsey predict that private autos will account for about 10 percent of passenger miles by 2030 as shared services—public and private, autonomous and human-driven—will make up 85 percent of passenger travel.

More Money from Fewer Vehicles?

OEM automakers are preparing for this future by cutting production. General Motors followed Ford and announced plans to dramatically reduce new car manufacturing, prompting Wired magazine’s transportation reporter Aarian Marshall to write, “If America’s biggest automaker’s crystal ball is working, the future of cars has way fewer cars.”

It’s no secret that automakers are investing heavily in an autonomous future. The question many ask is how will these companies monetize vehicles? Can they make more money selling fewer vehicles?

Doing the Math

According to Auto News, the average transaction price of a vehicle is about $30,000. That means in a year when 17 million vehicles were sold, the auto industry was about a $510 billion business in the U.S. On the other hand, AAA estimates the average car costs a total of approximately 60.8 cents a mile to own. It also calculates that there are 260 million cars on the road traveling an average of 15,000 miles a year. If automakers could charge for vehicle utilization by the mile, that could make the auto industry a $2.37 trillion business.

That’s simple math and a 4x bigger business with the same number of vehicles-miles, assuming people would pay as much or more per mile (Uber starts at $1/mile). But they can get that revenue while making fewer vehicles. If predictions are accurate, shared services will provide the bulk of miles, moving more people with fewer vehicles.

By the way, these revenue figures don’t count the additional services that automakers might offer in connected vehicles such as entertainment, mobile office services, and data aggregation to sell to advertisers. And they don’t take into account that the vehicle will be operating constantly, as much as 24 hours per day. There will likely be higher turnover of vehicles—the average life of New York City taxi is just three years—leading to more sales.

Islands of Autonomy

This revolution is likely to begin in cities and form what KPMG calls “islands of autonomy,” where services will be in higher demand due to high levels of traffic and congestion. Cities are expected to continue to grow, making current mobility practices less and less desirable or sustainable. Personal vehicles will be more common in rural areas where there is less need for shared services.

The Future is Fleet

PwC estimates that 80 million “highly automated” vehicles (lever 4 and 5) will be on roads by 2030, and it is expected that 92 percent of them will be sold to fleets. If OEMs own and operate their own fleets, they stand to capture the bulk of the revenue from mobility services. If, on the other hand, they sell or lease vehicles to other service providers, automakers’ share of the financial pie may be smaller.  As is the case today, there may be different types of fleets for different passenger services—commuting, evening entertainment, and longer distance travel. Some estimate that driven miles will increase overall as autonomous travel becomes more attractive and convenient than air travel for medium-distance trips.

Follow the Money

If investments are an indication of the potential for greater profits, it’s clear that automakers see plenty to be earned in an autonomous world.  A Brookings Institution report found that from August 2014 to June 2017, a total of nearly $80 billion was invested in autonomy by the auto industry and venture capitalists. That doesn’t count the likes of Google, Apple, and Uber—each has invested billions in their own autonomous mobility businesses.

Will all of these predictions come true by 2030? So far, predictions of the arrival of fully autonomous services have proven overly optimistic. Though that doesn’t seem to have dampened the enthusiasm of stakeholders to stay at the forefront of the industry to be able to capture the opportunities as they arise.