A new value chain for next-generation mobility

This post first appeared on 4/27/17 in O’Reilly’s site.

In my book, The Big Data Opportunity in Our Driverless Future, I make two arguments: 1) that societal and urban challenges are accelerating the adoption of on-demand mobility, and 2) technology advances, including big data and machine intelligence, are making Autonomous Connected and Electrified (ACE) vehicles a reality. ACE vehicles and on-demand 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, the value chain that is emerging as a result of these shifts, big data’s key role in the value chain, and the models being created around this value chain.

Shifts in personal mobility and technology open the door to ACE vehicles

Changes in personal mobility

Let’s begin by reviewing the most important challenges 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

At the same time, five technological advances are leading to the development of Autonomous, Connected and Electrified (ACE) vehicles. The first is the easy collection and management of data from sensors that are incorporated into the vehicle, and from specialized data providers, such as digital mapping companies.

Second, computing power is cheap and storage capacity is plentiful in vehicles, smartphones, and the cloud. 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. Finally, third-wave AI technologies, such as deep learning, combined with big data are at the core of intelligent autonomous systems that are employed to automate a growing set of well-defined tasks. Through these technologies, we are starting to perform tasks and achieve error rates that are as low as those associated with human performance accomplishing the same tasks.

Mobility in general and on-demand mobility in particular can greatly benefit from the introduction of ACE vehicles because such vehicles positively impact the economics of these services and enable their providers to better control the user experience.

Fleets will lead the adoption of ACE vehicles

ACE vehicles will first be broadly adopted by passenger and logistics fleets because they:

  1. Improve the economics of ride-hailing ($0.35/mile is the estimated cost of operating a driverless vehicle, versus the $1.6/mile average today in traditional vehicles).
  2. Address the driver shortage that logistics companies are facing while helping these companies alleviate the margin compression issue that is being created by the growth of ecommerce.
  3. Enable the fleet operator to offer to the customer a more consistent experience, devoid of driver idiosyncrasies and other issues, that often cause problems for the companies offering mobility services.
  4. 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.
  5. Enable fleet operators who exploit big data to 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).

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

ACE vehicles combined with on-demand mobility will lead to three major shifts: a consumer shift, an automaker shift, and an on-demand mobility service provider shift.

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 car access through on-demand mobility services. This hybrid model will be transitional and last for the next 10-15 years. It will then be gradually replaced by a model that centers on mobility-as-a-service.

Automaker shift

The consumer shift will require the automakers to transition from exclusively designing and manufacturing vehicles for consumers to lease or own, to also providing transportation solutions that address the consumer’s overall mobility experience. This transition will be done by combining owned vehicles, multi-modal transportation, on-demand mobility services, and other transportation-related services such as parking, fueling/charging, etc. Some automakers have already started to offer such on-demand mobility services as ride hailing and car sharing services through their vehicle fleets. Without making this shift, automakers run the risk of being disrupted.

On-demand mobility service provider shift

As on-demand mobility services become more prevalent, and companies offering these services adopt ACE vehicles for the reasons stated above, they will need to become fleet operators, similar to car rental companies (e.g., Hertz), and logistics companies (e.g., UPS). Today, on-demand mobility services are offered by Transportation Network Companies (TNCs), such as Uber and Lyft. TNCs rely on collections of individually owned conventional vehicles that are broadly available. To benefit from the advantages of ACE vehicles, the TNCs will need to create their own fleets of such vehicles since, in the short term, few consumers will own ACE vehicles and even fewer will make them available to TNCs to use.

A new value chain for on-demand mobility

The three shifts discussed above will result in a new value chain for on-demand mobility that will consist of the following:

  • Vehicle designer. This may or may not be the automaker, as is the case today. As stated above, it could be the TNC.
  • Vehicle manufacturer. This may be an existing automaker or one of the new outsourced automotive manufacturers (e.g., Foxconn).
  • ACE platform provider. Today, in addition to automakers like Tesla, Ford, GM, BMW, and others that are building their own ACE platforms, 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 an automaker’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 operating company. The company that operates the fleet of ACE vehicles offering the on-demand mobility services. Large ride-hailing companies like Uber, Lyft, and Didi will likely concurrently operate as both TNCs and as fleet operating companies. Specifically, I expect that in most cities, these companies will continue to operate as TNCs using privately owned vehicles. However, in certain megacities where the demand justifies it, the appropriate infrastructure exists, and the regulations allow it, they will also operate their own fleets of ACE vehicles. Smaller companies offering specialized services (e.g., last-mile package delivery, food delivery, or elderly transportation) may decide to be exclusively fleet operators.
  • Fleet financing and leasing. A fleet operating company will work directly with vehicle manufacturers and ACE platform providers to specify and place an order for a fleet of vehicles. Once delivered, the vehicles can be sold to a fleet financing and leasing company, and then leased back by the fleet operator for a number of years. This is common practice today in the airline industry. The fleet financing and leasing companies will finance the necessary down payment to order the fleet’s vehicles and will subsequently own the fleet’s leases.
  • Fleet insurance. Incumbent or new companies will offer equipment insurance policies to fleet operators and to fleet financing and leasing companies to protect the ACE vehicle fleet. These will be different from companies like State Farm Insurance or AAA that could offer rider insurance to the passengers of on-demand mobility services.
  • Fleet maintenance company. These are companies that maintain and support a fleet’s vehicles (e.g., cleaning, servicing, and repairing the vehicles). 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 maintenance to a specialist.
  • Global mobility systems. In the same way that global distribution system (GDS) companies like Sabre and Amadeus provide reservation systems to the airline and hospitality industries, global mobility systems provide reservations for multi-modal terrestrial transportation encompassing public transportation options (e.g., city bus, subway, light rail) and options offered by mobility services companies (e.g., TNCs, and private transportation). Early examples include startups such as Masabiand Rome2Rio. It may even be that some existing GDS companies will extend their systems to enable them to offer such services. Today, each TNC runs its own reservation system, much like airlines used to do in the past. Remember that American Airlines originally developed Sabre and later spun it off. The creation of global mobility systems may be followed by the creation of transportation solution specialists that fulfill an equivalent role to that of online travel agents like Expedia.

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. 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 ACE vehicle, including the autonomous driving platform, and offers mobility services through its own fleet operating company.
Examples: BMW + ReachNow; GM + Maven; Daimler + Movel; 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 ACE vehicle, including the autonomous driving platform, and partners with fleet operating companies (today, this is demonstrated by automakers partnering with TNCs).
Examples: Volvo + Uber; Daimler + Uber; 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 creates a connected, electric (CE) vehicle and partners with the provider of an autonomous driving platform and the fleet operator (today, this is demonstrated with the automaker partnering with TNCs).
Examples: Mitsubishi + nuTonomy + Grab; FCA + Waymo
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 two of the emerging models, new partnerships are being established among automotive industry incumbents as well as between incumbents and newcomers, including startups. This is important because it provides business opportunities for startups, but it also implies that as they consider these partnerships, startups must understand how they provide value and to whom they provide value.

Summary

The adoption of on-demand mobility is accelerating, but we have just taken the initial baby steps. The introduction of ACE vehicles is expected to have additional positive impacts on mobility services and will take us even further down the road of mobility-as-a-service. As I’ve discussed, this approach to personal mobility will in turn lead to three important shifts that will result in a new 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.

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