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Saturday, October 1, 2016

Who Owns the Cars? The Billion Dollar Problem with Autonomous Taxis

Written by Maryann Keller, Principal at Maryann Keller & Associates
reposted with permission from a September 12, 2016 post on LinkedIn

The Uber business model is brilliant: private citizens use their own cars as taxis and Uber takes a piece of the fare for arranging the ride via the Smartphone Uber app. Uber avoids vehicle depreciation that piles up with miles driven, maintenance expenses (that can include damage done by passengers), and insurance. Although Uber now leases some cars to its drivers, essentially the company has been built on an asset-light balance sheet that has enabled it to avoid the messiness of buying, maintaining, and disposing of vast numbers of vehicles.

But how will that work with driverless autonomous cars that eliminate the people who are currently shouldering the responsibility for the majority of vehicles in Uber’s, Lyft’s and similar providers’ fleets? Even if these companies can avoid the inconvenience and investment of vehicle assembly, they, or another entity, would still have to own and maintain their fleets.

Having spent twelve years as a Board Member of Dollar Thrifty, the car rental company, I am well aware of the capital and operational investments required to manage a fleet of a hundred thousand or more vehicles. And those needs don't change even when the cars are driverless. In fact, the car rental model approximates what ride-sharing on a large scale requires. (For the moment we won’t consider the issue of why a rental company would take on the costs on behalf of the “app” company when they could probably build their own similar app.)

Cars, whether autonomous or not, cost a lot of money which has to be paid to the manufacturer before they go into a fleet. A small fleet of 100,000 vehicles at $40,000 per unit amounts to $4 billion that would have to be paid by some entity.

Dealers and private individuals purchase essentially all “out of service” rental vehicles which still offer many years of useful life. But who is the buyer for a used autonomous car that was probably designed specifically for the ride share company? There isn’t much demand for “out of service” taxis so we would have to assume that autonomous cars stay in service until they come to a mechanical endpoint.

The next issue would be maintenance. There is a myth among some tech geeks that electric cars don’t need service. Tesla has demonstrated that in fact they need maintenance. Despite all the sensors and millions of lines of code and a large battery, they still have wheels and tires, brakes and other mechanical parts and fluids that require replacement or adjustment. And the moment you put people into a car, even one devoid of controls that passengers can mess with, things will happen.

That’s why rental car companies are so diligent in assessing and charging for new damage done to the vehicle whether it’s the Starbucks coffee spilled on the seat or the new door ding from a runaway luggage cart. Before any car is re-rented, it is washed and checked and all cars in a rental fleet are always monitored for scheduled maintenance at the rental company’s service area. In today’s Uber world, that’s all taken care of by the driver as an owner/operator. But in a driverless world that means a depot of some kind where the cars are marshaled, serviced and cleaned which in turn requires land, personnel, equipment, and associated expenses. Even if this was outsourced, it is still a cost that has to be factored into the profit model of the ride share company.

So far, the autonomous car advocates have focused on whiz-bang technology and the ability to summon transportation with a tap on the app. But the economics of autonomous cars might limit their appeal only to major metro areas, like Manhattan, where the monthly rent for a garage space would pay the mortgage on a nice home in other parts of New York State. They are, after all, cars that have to be acquired, serviced, repaired, insured and depreciated thereby transforming the asset light balance sheet of an app company into something more akin to that of a rental car business.