Will the rise of self-driving cars be the end of automotive finance?Reading Time: 4 minutes
The global automotive industry was worth $2.3 trillion in 2015, but this number is likely to change significantly in the future. Boston Consulting Group, in their recent study, forecasted that partial autonomous vehicles, i.e. those that drive themselves on the freeway or take over in traffic jams, may be on the road in large numbers by next year and fully autonomous cars might create a $42 billion market for the technology by 2025. Self-driving cars, building on technology already available in many luxury vehicles, will be able to navigate crowded city streets by 2022 and may account for 25% of worldwide auto sales by 2035.
The leading car makers are all working on autonomous technologies – Mercedes, BMW, and Tesla have already released, or are soon to release, self-driving features that give the car some ability to drive. Renault and Nissan plan to release road-ready autonomous cars in the US, China, Japan and Europe by 2020 with Toyota, Honda and Hyundai not far behind. Google has already logged 1.5 million miles in testing its driverless cars. Recent rumors indicate that Apple could be working on its own driverless iCar. John Deere has been selling tractors that practically drive themselves for use on farms in America’s heartland for a long time. Volvo has made it public that it will conduct the ‘most ambitious’ trial of driverless car technology on UK roads. This follows on from their extensive testing of autonomous trucks – in fact, a dozen trucks from Volvo and Daimler recently completed a week of largely autonomous driving across Europe.
A number of countries are working to get the ecosystem ready. Legislation has been passed in four U.S. states and Washington D.C. allowing driverless cars. Chancellor George Osborne recently announced that driverless cars will be tested on Britain’s motorways by the end of 2017. After conducting Australia’s first driverless car trial in Nov 2015, South Australia has now become the first state in Australia to put laws in place to allow on-road trials of driverless cars. New Zealand’s Transport Agency announced commissioning a study of the country’s technical readiness for the deployment of automated vehicles.
It seems clear that autonomous cars will impact personal cars, taxis, buses and trucks. The most dramatic impact, from a finance perspective, may be on personal transport. Today, most personal cars sit idle for an average of 96% of the time. Why are people willing to pay for something that they only use 4% of the time? The key reason is convenience. If you own a car and need to travel, you just jump in the car and go. Put simply, the alternatives are less convenient. However, this is changing as companies such as Uber, BlaBlaCar and Hertz have increased the convenience in taxi services, car-sharing, ride sharing and car rentals.
Higher utilization rates of shared self-driving cars could dramatically bring down the number of cars on the roads. A study conducted by The International Transport Forum, showed that in a city serviced by ride-sharing TaxiBots (self-driving vehicles shared simultaneously by several passengers) and a good underground system, 90% of the cars could be removed from the city. Even in a scenario using AutoVots (cars which pick-up and drop-off single passengers sequentially) but without the underground system, up to 50% of all cars could be removed without impacting the level of service.
Fewer cars on the road would result in reduced congestion, fewer road accidents, less pollution, reduced travel costs, lower parking costs and potentially lower insurance bills. The implications of this scenario for car makers would be huge. From a car ownership perspective, a study by the University of Michigan estimated a 43% fall in car ownership, resulting from the car-sharing capabilities of autonomous vehicles. It is predicted that autonomous cars could bring down the cost of travel to one fourth of the cost incurred while driving your own car. If the alternative is as convenient, and cheaper than owning your own vehicle, why would you buy one? In fact, it may already be happening – a study in the United States showed that only 69% of 19 year olds had a driver’s license in 2014, down from 87% in 1983.
It can still be debated that people who love driving would simply not give up owning and driving cars, and in fact a recent MTV study showed that 75% of millennials would rather give up social media for a day than give up their cars, and 72% would prefer to stop texting for a week than surrender their cars. Clearly, there are locations where ride-sharing and car sharing is more appropriate – cities have the population densities required but rural locations do not. But it is certain that car ownership will take a severe hit and it will have long lasting repercussions on automotive financing and leasing. Automotive finance companies will have to find innovative ways to compensate for the loss in their business. They could use this period as an opportunity to become future-ready by using technology to improve agility, efficiency and customer centricity. As the business landscape is evolving rapidly, the ability to launch targeted products quickly, make better credit decisions faster, establish workflow based digitized processes and incorporate multi-channel approach can prove to be extremely useful. Leveraging analytics for identifying the best customer segments, preventing customer churn and improving collections can be vital for success.
We may have to wait for a few more years to see what effect autonomous cars have on automotive finance, but as the saying goes “the best way to predict the future, is to help create it”, so companies need to be planning their journey to the future.