A New Value Chain For Next-Generation Personal Mobility

This post first appeared on 4/27/17 in O’Reilly’s site. It has been revised since it first appeared.

In my book, The Big Data Opportunity in Our Driverless Future, I make two arguments: 1) societal and urban challenges are accelerating the adoption of on-demand personal mobility, and 2) technology advances, including big data and AI, are making next-generation vehicles, and specifically Autonomous Connected and Electrified (ACE) vehicles a reality. ACE vehicles and on-demand shared personal mobility will cause three major shifts that can lead to the disruption of the automotive and transportation industries: a consumer shift, an automotive industry shift, and a mobility services shift.

In this post, I examine what is causing these shifts, one of the value chains that is emerging as a result of these shifts, big data’s and AI’s key roles in the value chain, and the models being created around this value chain.

Opening the Door to Next-Generation Mobility

I define next generation mobility as the movement of people and goods using a combination of intelligent and often autonomous, connected, and electrified (ACE) vehicles, and of transport services such as ride-hailing, car sharing, ridesharing, and others that are offered on a short-time, on-demand or as-needed basis.

Changes in personal mobility

Several important challenges are contributing to changes in personal mobility. One key challenge is the fact that urbanization is increasing, and more megacities are being created. According to a UN report in 2014, 54% of the population lived in urban areas, and by 2050, an additional 2.5 billion people will be added to these areas.

Another challenge impacting personal mobility is traffic congestion. Particularly in megacities, congestion is severely impacting individual productivity because the transportation infrastructure has reached, or is reaching, capacity. We spend too much time commuting to work or home, and when we arrive at our destinations, we aren’t productive.

Pollution and climate change are also impacting the quality of our lives, particularly in cities (and here). Transportation contributes 28% of greenhouse gases (50% of that coming from passenger cars and light-duty vehicles). Transportation now regularly emits more earth-warming gases into the atmosphere than any other sector, according to the federal Energy Information Administration. Last year, transportation surpassed the electric power sector for the first time since the late 1970s in terms of polluting culprits. Traffic-related pollution is negatively impacting the quality of life in megacities, as cities in Asia and Europe are finding out.

Population is another factor affecting personal mobility. The population of many developed countries is aging fast. These populations will require constant assistance in various forms, including transportation assistance, in order to continue functioning properly. Lastly, the socioeconomic conditions of certain population segments lead them to adopt the sharing economy to address many of their needs, including their transportation needs. Millennials are leading the way in this adoption.

On-demand mobility services—specifically services such as ride-hailing, ridesharing, bike-sharing, car-sharing, and various forms of car rental—are seen as a particularly promising way of addressing these challenges.

Changes in technology

Technological advances are leading to the development of Autonomous, Connected and Electrified (ACE) vehicles. First is the broad availability of data. This data is the result of the multitude of sensors that are incorporated into next-generation vehicles. Big data is also provided by specialized providers, such as digital mapping companies, and traffic monitoring companies.

Second, computing power and storage are plentiful and are becoming cheaper. This means that collecting the big data has become cost-effective even for startups.

Third, broadband Internet is everywhere through Wi-Fi, 4G, and (soon) 5G connectivity.

Fourth, we’re seeing increased charge capacity and reduced charging time from a new generation of batteries. This means that electric vehicles begin to match the range and re-fueling time of vehicles with Internal Combustion Engines (ICE).

Finally, third-wave AI technologies, such as deep learning, combined with the big data being collected are at the core of autonomous vehicles and mobility services. The combination of these technologies is resulting in systems that perform tasks and achieve error rates that are as low as humans doing the same tasks.

Fleets will lead the adoption of ACE vehicles

Autonomous vehicles, with various forms of electrification, will first be broadly adopted by passenger and logistics fleets for the following reasons:

  1. Improve the economics of ride-hailing services ($0.35/mile is the estimated cost of operating a driverless vehicle, versus the $1.6/mile average today in traditional vehicles).
  2. Enable the mobility service provider  to offer a more consistent rider experience, devoid of driver idiosyncrasies and other issues, that often cause problems for the companies offering mobility services.
  3. Enable the consumer to select the best vehicle to address a particular need—e.g., commuting to work, taking the family on a vacation, or transporting materials for a weekend project.
  4. Enable fleet operators who exploit big data to control and coordinate their vehicles and deliver vehicles to the right place, at the right price, in the right condition, and at the right time. Getting vehicles to the right place and charging the right price will become table stakes. The competition will be for the right experience (i.e., providing a car that is in the right condition, in terms of cleanliness, maintenance, and safety, etc., and at the right time for the passenger’s needs). AI-based data exploitation can help in this area.

ACE vehicles and on-demand mobility services lead to three shifts

Autonomous vehicles combined with on-demand mobility services will lead to three major shifts that will drive personal mobility: a consumer shift, an automaker shift, and an on-demand mobility service provider shift. The application of next-generation mobility in logistics, will undoubtedly lead to different but equally disrupting shifts.

Consumer shift

Consumers are already transitioning from the notion that puts car ownership at the center of personal mobility to a hybrid model that combines car ownership with vehicle access through on-demand and scheduled mobility services. This hybrid model could be transitional and last for the next 10-15 years. It could be gradually replaced by a model that centers on mobility-as-a-service in certain settings.

Automaker shift

The consumer shift will require automakers to determine whether to remain exclusively vehicle manufacturers or transition to companies that provide personalized (insights-based), and trust-based transportation solutions that address the consumer’s overall ground mobility needs. Automakers that choose this transition will need to offer next-generation vehicles, on-demand mobility services, other transportation-related services such as parking, fueling/charging, etc., as well help the consumer with scheduled multi-modal transportation, e.g., various forms of public transportation. Some automakers have already started to offer such on-demand mobility services as ride-hailing and car-sharing. Without making this shift, automakers run the risk of being disrupted as their existing business models will come under increasing pressure.

On-demand mobility service provider shift

As on-demand mobility services such as ride-hailing become more prevalent, and companies offering these services adopt ACE vehicles for the reasons previously stated, they will need to become fleet operators, similar to car rental companies (e.g., Hertz), logistics companies (e.g., UPS), and even airlines (e.g., United Airlines).

Today, on-demand personal mobility services are offered by Transportation Network Companies (TNCs), such as Uber and Lyft. TNCs recruit drivers who supply their own vehicles, and riders. They use technology to coordinate rides by matching drivers with riders, set the price of each ride, manage each ride to assure timely arrival of the vehicle and of the passenger to the final destination, and manage ratings. By not owning the vehicles used for rides TNCs can easily and at low cost adapt the supply of drivers to the demand for rides which is at the core of their business model.

But to benefit from the advantages offered by ACE vehicles, (personalized cabin experience, route and price optimization, vehicle performance optimization, etc.) the TNCs will need to have full control of the vehicles they operate.  This means they will need to have full access of the vehicle and of the technology enabling its autonomy. This, in turn, implies that they will create their own autonomous vehicle fleets.

Over time we will see three categories of companies offering on-demand mobility services:

  • Category 1: The companies we know today, coordinating rides in vehicles owned by other individuals. As the cost of capital increases TNCs belonging to this category will need to determine in which cities they will be able to operate profitably, implying that they may need to constrain their expansion plans.
  • Category 2: Companies that use a hybrid (human/digital) model: in some cities they operate exclusively under today’s model, in others they operate both under todays’s model and by managing their fleet of autonomous vehicles, and, when possible, operate exclusively a fleet of autonomous vehicles.
  • Category 3: Companies that operate only fleets of autonomous vehicles. These TNCs will set themselves up once such vehicles become broadly available to offer general public transportation or specialized services, such as transportation of elderly or small packages.

A new value chain for on-demand mobility

The three shifts discussed above will result in a new value chain: the fleet-based on-demand personal mobility value chain. The new value chain can be thought of as blending the two value chains that characterize the car ownership model and were presented in my book. It will consist of the following components:

  • Vehicle design and manufacturing. This may be an existing automaker or one of the new outsourced automotive manufacturers (e.g., Foxconn). The design may come from the fleet operator. Many of the components that are incorporated in today’s conventional vehicles will continue to be part of autonomous vehicles. However, the hardware/software platform that makes possible autonomous (electrified or not) operation (the Operating Platform), the hardware/software platform that personalizes the cabin of an autonomous vehicle (the User Experience Platform), and the various types of data that will be used in autonomous mobility (on-demand or otherwise) will be completely new.
  • Operating Platform. Today, certain automakers like Tesla, Ford, GM, BMW, and others are developing proprietary Operating Platforms. In addition, we are also starting to see Tier 1 suppliers like Delphi, Intel (particularly now that it is acquiring Mobileye), and newcomers like Waymo, Renovo (one of my portfolio companies), and Drive.ai developing standalone autonomous driving platforms that can be incorporated into next-generation intelligent vehicles.
  • User Experience Platform provider. This platform controls the passenger’s transportation experience, including the in-cabin experience. It consists of the hardware, e.g., infotainment system, software, e.g., telematics, AI applications for cabin personalization, and data, e.g., public transportation schedules, infotainment content, passenger preferences, that address passenger needs while traveling in a particular fleet’s vehicles.
  • Data services provider. These are companies that offer content (e.g., entertainment, traffic, mapping, weather, etc.) that is consumed by the ACE platforms or the passengers of ACE vehicles.
  • Fleet creation. A fleet operating company could work directly with vehicle manufacturers  specify the configuration of the vehicles in a fleet, or lease vehicles from a fleet creation company, as it typically happens in the airline industry. Fleet creation entails the financing, and insurance of the vehicles ordered. Such services can be offered by incumbents or new companies.
  • Fleet operator. The company that operates and manages the fleet of ACE vehicles offering the on-demand mobility services, including taking reservations and manages each trip.

In the same way that global distribution system (GDS) companies like Sabre and Amadeus provide reservation systems to the airline and hospitality industries, mobility services fleet operators can provide reservations for multi-modal ground transportation combining on-demand with public transportation options (e.g., city bus, subway, light rail). Early examples include startups such as Masabi and Rome2Rio. Today, each TNC runs its own reservation system, much like airlines used to do in the past. However, one can envision that in the future Global Distribution System companies like Sabre and Amadeus may offer reservations to on-demand mobility services. Over time one may also envision the creation of transportation solution specialists that fulfill an equivalent role to that of online travel agents like Expedia.

Large ride-hailing companies like Uber, Lyft, and Didi will likely concurrently operate as both traditional TNCs and as fleet operating companies. Specifically, I expect that in most cities, these companies will continue to operate as TNCs using their existing model and utilizing privately owned vehicles. However, in certain megacities where a) the demand justifies it because of population characteristics, b) the appropriate transportation and electrification infrastructures exists, c) the regulations allow it, and d) the public is ready to adopt autonomous vehicles they will also operate their own fleets of ACE vehicles. Smaller companies offering specialized mobility services (e.g., last-mile on-demand package delivery, food delivery, elderly and handicapped person transportation) may decide to operate exclusively as ACE vehicle fleet operators.

  • Fleet service and maintenance provider. These are companies that service, maintain, and support a fleet’s vehicles (e.g., refueling/recharging, cleaning, repairing the vehicles, towing broken down vehicles, etc.). I am calling this function out as a separate part of the value chain because, as it is increasingly happening in the airline industry, the fleet operator may decide to outsource its fleet’s service and maintenance to a specialist.

As one can imagine, the participants of this value chain generate and consume big data. Data from across the entire value chain can be extremely useful by each of the participants when properly exploited. We will explore this topic in future posts. For example, as I mention in my book, the TNC or the fleet operator can analyze manufacturing data, maintenance data, and individual ride data to understand and predict a vehicle’s reliability and perform preventive maintenance.

In order for this value chain to be successful, the companies participating in it must be “interfaceable.” This means they must develop open, scalable, and secure APIs, and expose them to their partners participating in this value chain. The participants can then access and exchange data. Partnerships will be important, as will flexibility. APIs are one expression of this flexibility. Here, Uber and Lyft have already started making such APIs a reality. Of course, the design and implementation of such APIs is only one aspect of a company’s interfaceability. Its business processes, and ultimately its culture, must be properly designed, or redesigned, to achieve this goal. I will talk about this aspect of the new value chain in a future post.

Models for implementing the new value chain

While this value chain has not yet been formalized, we are already observing the emergence of three different models that attempt to implement it:

Model 1 Vertical integration model: The automaker designs and manufactures the next-generation vehicle, including the Operating Platform, and the User Experience Platform and offers mobility services through its own fleet operating company.
Examples: BMW + ReachNow; GM + Maven; Daimler + Moovel; Volvo + Lynk
Pros:

+Full control of the transportation solution experience

+Full control and ownership of the big data
+Full control of the IP
Cons:

-High overall investment

-Automakers lack data exploitation expertise
-Automaker’s corporate culture inhibits fast implementation and roll-out
Model 2 Partnership Alternative 1: The automaker designs and manufactures the next-generation vehicle, and partners with fleet operating companies (today, this is demonstrated by automakers partnering with TNCs). The Operating Platform may be provided by the OEM, the fleet operator, or a third-party supplier, including a Tier 1 supplier. The fleet operator finances the fleet. Fleet servicing and maintenance will be provided by separate companies.
Examples: Volvo + Uber; Daimler + Uber; Ford + Lyft; GM + Lyft
Pros:

+Balanced investment between automaker and fleet operator/TNC

Neutral:

+/- Most of the transportation experience comes from the fleet operator/TNC

+/- Co-ownership and control of the big data
+/- Co-ownership of the IP
Cons:

-Automakers lack data exploitation expertise

-Automaker’s corporate culture inhibits fast implementation and roll-out
Model 3 Partnership Alternative 2: The automaker provides the vehicle and partners with the provider of an Operating Platform, a provider of the User Experience Platform, and the fleet operator (today, this is demonstrated with the automaker partnering with TNCs). The fleet operator finances the fleet. Fleet servicing and maintenance will be provided by separate companies.
Examples: Mitsubishi + nuTonomy + Grab; FCA + Waymo + Avis + AutoNation; SAIC + Baidu + Grab
Pros:

+Low automaker investment

Cons:

-Automaker doesn’t control the transportation solution experience

-Automaker doesn’t own or control any of the important big data
-Automaker owns little new IP
-Small innovation opportunity

As we see in the emerging models:

  1. Incumbent OEMs that want to be part of next-generation mobility may not be certain whether to just product vehicles or also to offer on-demand mobility services and participate in the new value chain.  For this reason, they are experimenting with both Model 1 and Model 2.
  2. Models 2 and 3 show that we are entering an era of innovation-driven collaborations between industry incumbents and newcomers, including startups. In many instances these collaborations have the form of partnerships, e.g., Waymo partnering with AutoNation, while in others they involve investments, e.g., GM investing in Lyft, or co-creation, e.g., Uber with Volvo.

Summary

The adoption of next-generation mobility is accelerating, but we have just taken the initial baby steps. The introduction of ACE vehicles will positively impact on-demand shared personal mobility services and will take us even further down the road of mobility-as-a-service. Next-generation personal mobility will drive three important shifts that will result in the fleet-based on-demand personal mobility value chain. Even in this early stage, we are already seeing different models for realizing this value chain that are being shaped by different visions for the future of personal mobility and for the automotive industry, as well as different investment models used by corporations, venture investors, states, and city governments.

3 thoughts on “A New Value Chain For Next-Generation Personal Mobility

    • As I had stated in my book, it appears that the automotive industry is starting to realize that the combination of autonomous vehicles (electrified or not) combined with on-demand mobility services has the potential to disrupt their existing business models and completely alter the use cases they serve. Even though the number of test vehicles will increase over the next few years, as more automakers, internet companies, and ride-hailing companies become involved in trials. However, for the broader adoption of consumer transportation using autonomous vehicles it will take several more years. I am more bullish on the broader adoption of such vehicles for logistics and specialized use cases.

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