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John Engle
John Engle
Articles (573) 

Autonomous Vehicles: Holy Grail or Poisoned Chalice?

The pursuit of self-driving tech has attracted billions in investment, but the cost may prove greater than the potential gains

“You must choose. But choose wisely. For as the true Grail will bring you life, the false Grail will take it from you.” - The Grail Knight, "Indiana Jones and the Last Crusade"

 

The quest for autonomous vehicle technology has no shortage of eager participants. In recent years, startups and established businesses alike have poured billions of dollars into developing a host of technologies that will, hopefully, one day unlock the secrets of level five autonomy, i.e., self-driving cars that are better and safer than human drivers in all conditions.

Unfortunately, for all the high hopes and big money involved, the technology may end up costing more than it is worth.

Not so profitable after all

Waymo, a subsidiary of search engine giant Alphabet Inc. (NASDAQ:GOOG) (NASDAQ:GOOGL), is broadly seen to be at the head of the pack, but that lead is hardly guaranteed to last. A number of traditional automakers are investing heavily in their own programs, such as General Motors (NYSE:GM) and Ford (NYSE:F), while others like Toyota Motor Corp. (NYSE:TM) have also invested in promising startups, as well as other companies focused on pioneering mobility technology.

One of the key focuses concerning autonomy is how it can be used to profitable ends in the future. Indeed, ride-hailing companies like Lyft Inc. (NASDAQ:LYFT) have essentially hinged their future profitability projections on the savings to be had from the inevitable rise of self-driving robotaxis.

A new MIT study throws these assumptions into serious doubt:

“Assuming current market conditions persist - HAV (Highly Automated Vehicle) technology struggles to achieve price parity with CDV (Conventional Driven Vehicle) ownership.”

According to the study, manually-driven taxis cost just 72 cents per mile to operate, while fully autonomous robotaxis would likely end up costing between $1.58 and $6.01 per mile.

For those dreaming of massive profits from self-driving, the additional costs of fleet management, ownership insurance, remote monitoring, AV hardware installation and maintenance serve up a rude wakeup call. Indeed, for robotaxis to stand any chance, they will have to either spur utilization rates upward by 30%, or accept a 37% reduction in profitability.

Read more here:

Real pain for dubious gain

A key question now facing companies in the autonomy sector is whether the pursuit is worth the prize. With experts almost universally tempering their expectations, adjusting their development timetables and guidance accordingly, it is unsurprising that industry leaders have begun to rethink their strategies, as Auto News recently reported:

“Automakers are finding the pursuit of fully autonomous Level 5 self-driving vehicles to be more expensive and technically complex than expected, Farid Khairallah, portfolio director of safety domain control units for German supplier ZF, said Tuesday at the 2019 CAR Management Briefing Seminars. Speaking of the industry's road ahead, Khairallah told an audience, ‘The perception in the industry was, a couple of years ago, that it is paved with gold. But now the industry is...looking at it from a more sober, practical point of view. It's not that easy to go there. The whole industry is rethinking their strategies and what they want to do with this,’ Khairallah said. Level 5 vehicles are fully autonomous with no pedals or steering wheel. He said Level 2 self-driving technology, in which the vehicle can steer and stop itself but requires a driver to be seated behind the steering wheel, is more achievable for most automakers. For a Level 5 vehicle to be 100 percent safe 100 percent of the time, it will need 1 million times more computer processing power than today's vehicles, to be able to recognize and react to every traffic situation. Installing that much computer capability could make a vehicle prohibitively expensive and technically unwieldy. Khairallah said the associated electronics would need their own cooling systems, for example. ‘The challenge is how do you validate and assimilate the system when you have 11 cameras and eight radars and five lidars?’ he asked the audience. ‘How do you collect and manage that data?’ Even getting to Level 2 has incurred high development costs and is forcing competing automakers to partner, he said. ‘A lot of players can't do it alone,’ he said. ‘Homologation is very expensive. Collecting and storing data is very expensive. They are joining forces to share the investment to launch these technologies.’”

Verdict

Companies are racing to achieve autonomy because they believe owning the technology will be extremely profitable. Undoubtedly, level five autonomy will open vast possibilities for industries the world over, but that still does not mean the current frantic levels of investment and expectation are warranted. Indeed, level five remains an essentially theoretical notion, as the technology -- even at the leading companies -- is far from ready for prime time.

In general, betting on the unproven applicability of an uncertain technology is a dangerous strategy. No investor, even one with an extreme long-term view, should bet on any company based on its potential future with autonomy.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

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