Originally Published in Seeking Alpha Mar. 2, 2020 11:22 AM ET
Summary
Autonomous vehicles will be launched within a year to provide autonomous ride services (ARS).
It now is clear that Waymo (Google) will be the first major company to bring this service to the market.
Waymo will have substantial first-to-market competitive advantages that will enable it to achieve significant market share in what is expected to be a very large new market.
The ARS market in the US is projected to be $100 billion by 2025 and more than $750 billion by 2030.
This has the potential of eventually valuing Waymo as a standalone business at as much or more than Google today.
I've been writing articles about autonomous vehicles on Seeking Alpha for almost two years, and I continue to believe that 2021 will be the year for the introduction of autonomous vehicles (AVs). It is now very clear that the first market opportunity for AVs will be Autonomous Ride Services (ARS) and not AVs sold at retail. It is now also clear that Waymo (NASDAQ:GOOG) (NASDAQ:GOOGL) will be the first to market and can establish substantial competitive advantages. In this article, I'll explain why ARS is coming within a year, refresh my projections of the ARS market, explain Waymo's strategy, highlight the strategies of potential competitors, and consider the significance of its first-to-market competitive advantages. First, let's review autonomous ride services and its market opportunity.
Autonomous Ride Services
Autonomous ride services is essentially Uber without a driver. It will be provided by fleets of autonomous vehicles based in selected metropolitan areas that offer trips to certain destinations along predefined routes. The autonomous driving technology used by these vehicles is based on LIDAR and high-definition maps that position the vehicle precisely on the map. Initially, the destinations and routes may be somewhat limited, but those will increase rapidly. A passenger will summon an autonomous ride using an app similar to Uber (NYSE:UBER) or Lyft (NASDAQ:LYFT), and the app will identify if that route is available.
The cost advantages of ARS over ridesharing are significant. In a previous article, I explained these cost differences: Uber Must Have Autonomous Ride Services. It's the classic case of a technology/capital-intensive business model replacing a labor-intensive one. Ridesharing companies like Uber and Lyft struggle to achieve breakeven on a typical trip at about $16, but ARS will be very profitable at about half that price.
Almost all companies developing autonomous vehicles have shifted their strategies to focus initially on developing autonomous vehicles for fleets providing autonomous ride services, instead of developing autonomous vehicles for the retail market. Most of these also intend to introduce their own autonomous ride services instead of selling fleets. The introduction of autonomous vehicles sold at retail has been delayed until 2025 or later.
The reasons that ARS will be the first market for autonomous vehicles are now obvious. The first generation of autonomous driving technology will be done using high-definition maps to place a vehicle precisely in its surroundings. This limits these vehicles to predefined routes and locations, which is perfectly fine for ARS. The app used to request an autonomous ride will be able to identify if the route can be served. ARS won't serve all routes, but will serve the 80%-90% most popular routes, and that works well.
ARS will be provided by fleets, most likely several thousand autonomous vehicles in each fleet, each serving a specific metropolitan area. This fleet-based strategy enables more control and increased safety. A fleet operations center will maintain the vehicles, work with local municipal authorities, and communicate with passengers when necessary. In the first stage (2021-2025), ARS will focus on selected municipalities, most like those in the Southern and Western parts of the country where the weather is favorable, road systems are easier, and local governments permit autonomous vehicles. Again, these favors ARS because ramping up these services will be capital intensive and require time to map local areas and initiate local fleet operations centers.
So, why do I believe that autonomous ride services are coming within a year? I realize that there are many skeptics who say that it will be a decade or more. First, the testing of autonomous vehicles has accelerated dramatically and has proven to be safe. For example, Waymo has driven its autonomous vehicles for 20 million miles without any significant accidents. Thirty-five companies did testing in California last year, driving autonomous vehicles 2.8 million miles, a 40% increase over 2018, without any significant accidents. Several companies are testing their autonomous ride services with actual passengers requesting rides, although they have a safety driver on board.
Secondly, there is a large pipeline of vehicles being prepared for autonomous ride services. Waymo has 80,000 vehicles in its pipeline, and Ford (NYSE:F) and GM (NYSE:GM) have stated their intentions to build tens of thousands by 2021.
Finally, Waymo is already providing autonomous rides to a limited base of customers without a safety driver on board. (See Video) I expect that it will expand this service this year and fully launch it in the Scottsdale area by 2021, if not sooner. GM has indicated that it will introduce its ARS in San Francisco next year, and Ford has recommitted to having its autonomous ride service available next year also.
Autonomous Ride Services Market
ARS will be a significant new market, perhaps one of the largest new markets of this century. This is why companies are investing heavily. Let's look at some updated forecasts.
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The projection is 30,000 autonomous ride service vehicles by 2021, generating more than $4.5 billion in revenue. For those of you interested in the math, here it is. Each ARS vehicle is projected to generate approximately $150,000 in revenue per year, based on 50 paid trips per day at about $8.75 per trip, operating 350 days in a year.
$8.75 per 7-mile trip is about half of the price of ridesharing today, so ARS can quickly take market share. ARS can be profitable at this price. I estimate profit contribution at about $2.25 per trip, while ridesharing is still not profitable.
These 30,000 ARS vehicles will generate about $4.5 billion in revenue. To put this into perspective, this equates to an insignificant percentage of total miles driven (about 0.1%). The ARS market will grow rapidly as more fleets are introduced into new municipal areas and the number of autonomous vehicles in each fleet increases. By the end of Stage 1 in 2025, approximately 750,000 autonomous vehicles will be in use to provide ARS, generating almost $100 billion in revenue. At this point, ARS will seriously cannibalize the ridesharing market and provide about 2% of the miles driven in the US, without expanding beyond more than 30-50 metropolitan areas in Southern and Western part of the country.
These limited metropolitan areas have the potential to provide a sufficient market for autonomous ride services in the first stage through 2025. For example, the greater Phoenix metropolitan area could support 100,000 autonomous ride services vehicles by providing only 7.5% of the miles traveled. Other metropolitan areas in Florida such as Miami, Collier County, and Orlando can support even more. Municipalities in California and Texas will enable many more metropolitan markets.
Waymo's Strategy
Waymo, Google at the time and now Alphabet was one of the first to work on autonomous vehicle technology. It has invested more and has made more progress than others. Waymo's autonomous vehicles have driven 20 million miles on public roads in 25 cities. Additionally, it has "driven" tens of billions of miles through computer simulations. Just think about that for a minute: 20 million miles of autonomous driving with no serious accidents. It's ready to release its autonomous vehicles.
Waymo is using 600 Fiat Chrysler (NYSE:FCAU) Pacifica hybrid minivans for its testing. It has also announced that it plans to acquire 62,000 more and also purchase 20,000 Jaguar I-PACE electric vehicles. It built a factory, along with Magna, in Southeast Michigan to retrofit these vehicles to be autonomous. If Waymo puts these 82,000 autonomous vehicles into service by 2023, it would represent more than 50% of the forecast in the table above.
The Waymo One app enables riders to request a pick-up and drop-off location, similar to Uber and Lyft. If it is a route that it serves, then it provides an autonomous ride. Waymo has been cautious in testing its ride services. It launched an early rider program in April 2017 for 400 people in Arizona, serving a 100-square-mile area. These rides were autonomous but had a safety driver on board. Waymo is increasing the number of people served and the area covered. At the end of last year, Waymo started providing autonomous rides without a safety driver.
Waymo has also continued testing in California. In 2019, it had 148 autonomous vehicles that drove almost 1.5 million miles without any serious accidents. It recorded about two dozen incident reports, but these were almost all caused by other vehicles at very low speeds, with only minor damage.
Waymo has also begun targeting other municipal areas. In September 2019, it announced that it would start testing and launching an ARS in Florida, beginning with Miami but also adding routes to Fort Meyers and Orlando. Then, it announced that it was developing detailed ARS maps for Los Angeles.
Waymo's ARS Competitors
Even though Waymo will have a first-to-market advantage, there will be a lot of competition. ARS is a very large market opportunity, and other companies also are targeting it. Let's look briefly at some of the other expected competitors for the US market and their strategies.
I currently rank GM Cruise Automation as the second company behind Waymo. It intends to launch its autonomous ride services in San Francisco. Cruise currently has a fleet of more than 200 autonomous vehicles in San Francisco, using its Cruise Anywhere app to schedule rides. In 2019, its autonomous vehicles drove more than 800,000 miles in California. Cruise recently unveiled the Cruise Origin, a six-person taxi purpose-built for autonomous ride services in urban areas such as San Francisco. Cruise is expected to launch its ARS in 2021. SoftBank and Honda have invested in Cruise Automation, giving it a value of approximately $15 billion (almost a third of GM's valuation). Most likely, Cruise will be spun off as a separate company.
Ford Autonomous Vehicles LLC has made it clear that its initial strategy is focused on ARS. It has been testing its AVs in Austin, Miami, and Washington DC. Some reports claim that Ford plans to build 100,000 ARS vehicles starting in 2021. Its original strategy was to provide AVs to companies who would provide ARS, but that changed when the major players in the industry realized they needed to have control over their customers. Unlike most other competitors, Ford expects to use hybrid autonomous vehicles instead of fully electric. It believes this approach works best because the autonomous platform drains battery life and AVs for ARS are more profitable with less downtime for charging.
Aptiv (NYSE:APTV), now a joint venture with Hyundai Motor Group (OTCPK:HYMLF), uses technology based on its 2017 acquisition of nuTonomy. In May of 2018, Aptiv launched its ARS service in Las Vegas with a fleet of 30 BMWs in conjunction with Lyft. Now, that fleet has completed over 100,000 autonomous rides with 75 BMW 5 Series sedans.
Uber's strategy is to build a very large, although most likely unprofitable, ridesharing business and then convert its customer base to a profitable autonomous ride services business. ARS will cannibalize ridesharing because of its highly favorable economic advantages. So, Uber has no choice but to move to ARS. Unfortunately, Uber is in an unsettling position for ARS. It is developing its own autonomous driving technology but suffered a major setback with a tragic fatal accident on March 18, 2018. It then suspended all testing but recently restarted its program. Uber's initial target markets for ARS appear to be Dallas and Washington DC, in addition to its testing in Pittsburg.
Like Uber, Lyft is at risk of cannibalization from ARS. Lyft's ARS strategy is different from Uber's in that it has a two-pronged approach: both developing its own technology and partnering with others. It has preliminary pilot partnerships with Waymo and Aptiv, but it remains to be seen how these partnerships will work out since everyone wants to control the customer. Lyft's investment in developing its own autonomous technology doesn't seem up to many of the others. Lyft started testing its AVs in California last year with 19 autonomous vehicles, which drove about 43,000 miles.
Apple (NASDAQ:AAPL) is the wildcard in this market. Apple has been very secretive about its autonomous vehicle program, code-named Project Titan, but as I've written previously (Deciphering Apple's Autonomous Vehicle Strategy), there is a lot of evidence that it will enter the ARS market. It has invested significantly and has filed hundreds of autonomous-driving patents. At the end of 2018, as part of legal action against a former employee, Apple claimed that it had 5,000 employees who were disclosed on its autonomous driving project. Most likely, Apple will be a follower, letting other companies create the market before it enters, and then come into the market with a high-quality service and second-generation autonomous vehicles. I now project that Apple will be a 2023 entrant into the ARS market.
Finally, I'm sure many people are wondering about Tesla's (NASDAQ:TSLA) promise of the Tesla Network, a fleet of customer-owned and company-owned Teslas to provide autonomous ride services. Even though I own a Tesla and think it is the best semi-autonomous vehicle, its autonomous technology platform works well for highway driving, but it is not yet viable for municipal driving where frequent turns are required. Also, the Tesla Network business model for providing swarms of autonomous vehicles for ride services is not workable.
Waymo's First-to-Market Advantage
The importance of a first-to-market competitive advantage varies. It can be substantial in some cases but not worth the early risk in others. With ARS, Waymo will have substantial first-to-market competitive advantages.
The initial obvious first-to-market advantage is the development of autonomous driving technology, primarily software. Autonomous driving software is very complex and takes time to develop and test. Waymo started development earlier and has invested more than other competitors. It has been testing its software longer and much more extensively. Waymo's 20 million miles of testing on public roads is well ahead of any others. While competitors may be able to learn a little from observing Waymo's AVs in action, there isn't much they can do to reduce the software-development cycle, short of stealing it (which Uber tried to do).
The second advantage, and maybe the most important one, is that ARS is a regional, not global, market with services provided in selected municipalities. This is very different from other high-tech products. Once a competitor enters a specific municipal market and captures a significant major share, others will be discouraged from entering the same market and trying to displace the incumbent. Waymo appears poised right now to enter several of the most lucrative municipal markets and could secure these markets before others even get started.
Ride-request and dispatch, as well as fleet management, are important operational functions for autonomous ride services. These are often taken for granted, but they are difficult to develop and perfect the customer experience. Here again, Waymo has a first-to-market advantage with its Waymo One app and its extensive customer experience in Arizona. Competitors, except possibly Uber and Lyft because they already have ridesharing apps, are behind in these operational functions.
Waymo depends on others to manufacture its basic vehicles, but its strategy compensates for this deficiency. It has ordered 80,000 basic vehicles from Fiat Chrysler and Jaguar to customize in its factory in Michigan. This enables it to get the first-generation of ARS autonomous vehicles to market faster, but this could be a competitive disadvantage when the ARS market shifts to second-generation autonomous vehicles designed specifically for autonomous ride services without any driver controls.
Experience really matters in this market. With more experience, a company's ARS will be safer and able to cover more unique situations. Also, it can scale the operations side of the ARS business more effectively.
There are always some risks to being the first to market. In this case, it's the risk of a fatal accident. While AVs will be much safer than human drivers, there still will be some accidents, and the early ones will be overblown by the press and those who are fighting AVs.
Waymo's Potential Market Share and Revenue
With its first-to-market advantage, Waymo could achieve significant market share in Stage 1 of the ARS market. Assuming it deploys the 80,000 autonomous vehicles by 2023, it would have about 50% of a projected $23 billion market. While that is not significant relative to Alphabet's total revenue, it could be a very valuable asset. At about $12 billion in revenue in 2023 and growing rapidly, Waymo would be similar in size to Uber today, which is currently valued at $60 billion. However, Waymo should be very profitable, and Uber is currently losing money.
By 2025, Waymo's share of the ARS market will most likely decline as competitors expand their fleets and enter into more municipal markets. With a 35% to 40% market share, its revenues could be $35-40 billion by 2025.
The ARS market will continue to grow rapidly through Stage 2, which goes through 2030. My projections are that the market could reach $750 billion. By this time, there could be 5 million ARS autonomous vehicles throughout the US that account for up to 15% of the total miles driven. Waymo could still be holding a 25-30% market share, giving it revenue of approximately $200 billion.
At some point during this growth, it would not be surprising for Alphabet to spin off Waymo as an independent company. This seems to be the trend with GM and Ford doing this as well as others. It makes sense because ARS is a very different business, and it will require a lot of capital.
I won't speculate on forecasting its potential valuation, but as the market leader with barriers to entry in a huge rapidly growing market, it could possibly be worth as much as the rest of Google.
Disclosure: I am/we are long GOOG, AAPL, GM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.