Thesis: Driverless cars will forever change the auto industry and create a more efficient system with less private ownership of automobiles.
Driverless cars are coming, and there is no stopping this massive new industry. The implications and potential impact of this new industry are so large that one could write a hundred blog posts. I will however, due to time, only focus on the personal ownership decreases that driverless cars will cause. This will disrupt the auto industry and completely eliminate some large automakers, unless they jump on board with this new technology, and fast.
As discussed by Chunka Mui in his Forbes article, “Personally owned cars are parked, on average, almost 95 percent of the time, so there is plenty of room to better utilize them through person-to-person car sharing or taxi-like car services.” This astonishing fact on the inefficiencies of current personal car ownership was astounding to me. It really opened my eyes as to the implications and how big this transition really can become. In the current day United States of America, it is almost a necessity to own a car, unless you live downtown in a large city. This is because public transportation is not widely available and easily accessible to all the little towns around. This could be changed by car sharing companies. I picture an app (much like, or possibly Uber) that allows an individual to schedule a car to come pick them up and drop them off at any time of the day. The costs that would be saved could be huge, since individuals won’t have to pay for auto insurance or make car payments every month. As mentioned later in Chunka’s article, “The same studies found that the cost of taxi service could be reduced by 50 to 80 percent by reducing labor cost and increasing operating efficiency through network coordination.” These cost savings will be enough to convince many people to not buy their own car, and instead rely entirely on car sharing services such as Uber.
While opponents to this argue that “The analysts write that “the average driver seems to like personal ownership over the alternatives, and the suburbs still dominate. 80% of people drive themselves to work alone. If people wanted more carpooling or mass transit, we could already make those choices, and we don’t.” This however could be overcome with car sharing. People may not choose carpooling or mass transit options currently because they like the solidarity and alone time of the commute to work. This will still be largely available to individuals to call their own car to take just them to work. A combination of Uber and driverless cars presents a whole new innovation that is ripe to disrupt the automobile industry entirely.
Thesis: Tesla lofty growth expectations may be unrealistic.
Tesla founder, Elon Musk, recently tweeted about when Tesla is going to reveal a new product line which instantly caused shares to gain a few percentage points. This got me thinking about how Tesla is valued and it’s market capitalization. Tesla has a $24 billion in market capitalization, which compares to General Motor’s $58.8 billion and Ford’s $63.4 billion.
Ford has been around since 1903 while GM was founded in 1908, so both have survived the Great Depression as well as the Great Recession. These are old reliable companies that have proven their stability over the years. Tesla, on the other hand was only founded in 2003. As noted in the Wall Street Journal, “In 2014, Tesla delivered 31,655 vehicles.” Ford and GM on the other hand, sold 220,671 & 274,483 vehicles in just one month (December 2014). If you look at the market capitalization per each car sold in a year, Ford and GM are about $25.5 thousand, while Tesla is trading at almost $760 thousand. This is because of the fast potential for sales growth that Tesla offers. However these goals might be a bit too lofty to be reasonable. Elon Musk “has set a target of 55,000 deliveries in 2015, and 500,000 by 2020. If met, these targets would transform the Palo Alto, Calif., auto maker’s profile in the cutthroat car business. While its sales are a fraction of what is sold annually by most auto makers, the targets are audacious goals for a company that started mass-producing automobiles less than three years ago.” While the 55,000 deliveries in 2015 is a realistic goal, scaling this business all the way to 500,000 by 2020 seems almost too lofty of a goal.
A big question concerning Tesla’s growth is if the demand will be there for that many electric cars. This demand will have to grow exponentially to make Tesla’s valuation justified. A big concern that could halt this fast demand growth would be if Ford or GM (or anyone else) keeps increasing the fuel efficiency of their automobiles with advances in MPG. If they do, as I suspect they will raise the MPG to well above 50 for almost all vehicles, then the demand for these electric cars might not come about in such great numbers. The potential savings of these electric cars would be much lower if the fuel efficiency increases at a reasonable rate. These are all reasons that I think Tesla’s stock valuation, based on these lofty estimates for exponential growth may be too lofty to be reached.
Thesis: Auto makers should get government credit for autonomous cars leading to reduced emissions.
Large auto makers are teaming up to try and persuade the government to give them credit for the cleaner environment and fuel efficiency that autonomous cars will create. This credit will be to count towards the corporate average fuel economy requirements that the government is forcing upon auto makers to try and reduce carbon emissions. These auto makers remain a long ways away from the stringent requirements that the National Highway Traffic Safety Administration and the Environmental Protection Agency set to be reached by 2025. As Tom Krisher wrote in his article, Fuel Efficiency Standards, “The rules mean that all new vehicles would have to get an average of 54.5 miles per gallon [by 2025]… The requirements will be phased in gradually between now and then, and automakers could be fined if they don’t comply.” As Mike Spector wrote in the Wall Street Journal in his article, Self Braking Cars Are Safer, but Do They Boost MPG?, “Through the first two months of 2015, the average fuel economy of new light vehicles sold is just 25.2 mpg.” This means that these auto makers will have to more than double the current mpg standards in just ten years. This seems like a far fetched goal, which is why auto makers are fighting for these credits on autonomous cars.
Auto makers are arguing that “as safety features like automatic braking and adaptive cruise control become more widely available, traffic accidents are expected to fall. Fewer accidents will lead to less congestion and better traffic flow—factors that, when combined with speed management, could cut vehicle emissions by as much as 30%.” These improvements in the safety of driving cars will in turn lead to reduced emissions, which is why car companies should get credit. The entire purpose of the Obama administration’s decision to impose such strict measures was to reduce emissions, which will occur through these autonomous cars. While it may be a different, non-direct, route to reduced emissions, it is one that has many societal benefits. Not only will these autonomous cars reduce emissions, they will save lives! The government should encourage auto makers to make as much autonomous as possible to both reduce emissions and make cars much safer to drive. The government can should be doing all it can to encourage these auto makers to develop as many autonomous safety features as possible to achieve both ideal goals. The biggest argument against giving these auto makers these credits is that the government “contend auto makers are simply trying to get around meeting tougher mileage targets. They point out the auto industry has met requirements in previous years and shouldn’t get extra credit on fuel economy for making vehicles safer.” This viewpoint is confusing the underlying purpose of the regulations. As Tom Krisher wrote, “the regulations, will change the cars and trucks sold in U.S. showrooms, with the goal of slashing greenhouse gas emissions and fuel consumption.” Autonomous cars increasing safety leads to decreased traffic congestion are accomplishing the underlying purpose of these regulations. This is why the government should start giving credit to automakers for these contributions autonomous cars are making for society.
Everybody remembers the first time they get behind the wheel. They can feel the adrenaline start to pump, hands clenched at ten and two o’clock just like dad said. Finally after listening to a long-winded speech about being safe driving and how “the car is no toy” you put the car in drive and are off! This is a once in a lifetime type feeling, but sadly one that kids in the future won’t get to experience. This is because the future is going to consist of driverless cars. This experience that has been such a big part of people’s lives for generations, is becoming automatized. This is going to bring about a big cultural shift as people adjust to not driving anymore, but being driven everywhere.
This transition has already been underway and is starting its long evolution to full automation at UPS to help make deliveries more efficient. This computer software has been the work of millions of dollars over years to try and save UPS money by creating the most efficient system of delivery packages, while maintaining some of the autonomy for delivery drivers. As mentioned in the Wall Street Journal article by Steven Rosenbush and Laura Stevens, At UPS, The Algorithm is the Driver, “Orion…is not an endgame; it is part of a platform,” Mr Abney, UPS’s CEO, said…UPS Engineers are already enhancing Orion so it will update delivery schedules while drivers are on the road, useful in a situation in which a driver might abandon Orion’s instructions because of an unexpected road closure due to an accident, but want to resume using Orion late in the day.” This self adjusting automation will save UPS millions of dollars a year in shipping costs, and is the type of software that self driving cars will eventually utilize. This will revolutionize many industries such as UPS’s as the need for delivery drivers dissipates.
One big concern with driverless cars is if they will be safe. This should not be of any concern because as Ray Massey writes in his article, Self-driving Cars hit UK Roads, “Many experts say that driverless cars could actually reduce the risk of accidents as computers are able to react a lot faster than humans.” He also notes “94% of road deaths and injuries involve human error.” This statistic alone is a reason advocating for driverless cars. Humans make mistakes, and while people may argue that computers do too, if we can even reduce the amount of accidents and traffic deaths by 20%, a very modest goal, we will save ~250,000 people’s lives. Which is reason enough to continue this movement to driverless cars.
The auto industry is always a good indicator of how the economy is performing. Household consumption is up and with that, so are auto sales. In January, GM, Ford, Chrysler and Toyota all saw double digit percentage increases. In a time where credit is not too difficult to obtain and interest rates remain low, consumers are taking advantage by buying new vehicles. According to expert reports, US auto sales are expected to be up 15% from a year ago. GM sales chief Kurt McNeil said, “Consumers feel good because more people are working, the U.S. economy is expanding and fuel prices are low.” http://www.wsj.com/articles/chrysler-sales-jump-in-january-1422968401?mod=WSJ_hp_LEFTWhatsNewsCollection. Low fuel prices are key as this represents a major expense post purchasing a car. While numbers can be skewed by weather patterns and other one time occurrences, it appears as if the fundamentals of the industry remain strong. After 2008, many car companies dove into a dark place. Major internal changes and restructurings appear to have worked and are starting to pay dividends. According to WardsAuto.com, factory utilization is at an all time high. Many companies were forced to close production plants in 2008 due to massive losses. This has ended up working out well and has led to more efficient uses of production space. I am concerned with this recent trend of new car sales for a couple reasons. Where have we heard easy credit before? This trend of lending to potentially subprime borrowers is exactly what got banks into trouble in 2008. If lending remains easy and interest rates remain low, who knows if we will see a 2008 repeat itself. The economy is cyclical by nature but fluctuations do not need to be as extreme as they were in 2008. Many experts in the industry do not believe that we have anything to fear. According to a recent article that examined the recent industry sales spike, “The latest sales spurt, coming after the “stellar” figures for December 2014, has scotched fears that growth in the US auto market might be abating after years of strong recovery from the market’s near-collapse in early 2009.” http://www.ft.com/cms/s/0/aa4c8326-abb4-11e4-b05a-00144feab7de.html#axzz3QilwUwoy. The fact that all fears are gone is a little concerning. Once oil prices being to increase and the Fed beings to raise rates, what will these car companies do to remain profitable. Consumer spending remains strong which is a good indication that sales could remain strong. However, these companies need to figure out ways to remain profitable and never relax just because they has a few good months. Leaders of these companies need to remember where they were a few years ago.