15 août 2018 On-Demand Mobility (ODM) – Why the Air Taxi (eVTOL) Market May Not Be In The Driver’s Seat RICHARD HIRES, MANAGING DIRECTOR, ACTIONABLE INTELLIGENCE On-demand mobility (ODM) promises a transformational future of seamless travel, for both land and air, that we will start to see widely offered in the US starting in 2019. Current ride and car sharing services have been merely prelude to the introduction of autonomy that will challenge our current approach to mobility and even car ownership. Although the auto industry will launch first, starting commercial services next year, the nascent urban air mobility (UAM) air taxi market will face a similar challenge as it considers the best path into this new urban on-demand mobility ecosystem. Automotive Autonomous ODM In recent years new transportation options that allow ride sharing, like Uber and Lyft, or car sharing, as with ZipCar and Maven, have streamlined options for travelers and allowed many to consider forgoing car ownership altogether. But with autonomy, and GM and Waymo are the closest to launch, having announced plans to offer at scale offerings starting in 2019, we are at the opening of a new approach to how consumers will evaluate their basic travel needs. Autonomy resets the competitive landscape in a unique way that, outside of Waymo, Baidu and the many others working on autonomy-as-a-service, promises to give automotive OEM’s a unique advantage they have not had, a direct connection to customers, but along with it comes significant drawbacks that will make success in this new market a make or break for the industry. Although GM and Waymo are furthest ahead, Diamler follows them closely with plans to launch a pilot in the 2nd half of 2019. Toyota hopes to launch in Tokyo for the 2020 Olympic games and Ford has consistently told the street it will have a fleet ‘at scale’ by 2021. In fact, as of this writing there are now over 100 autonomous vehicle pilots underway around the world and that will only accelerate. According to a 2017 McKinsey study, over $24 billion has been invested into autonomous vehicle since 2010 with most estimates projecting that it will double in the coming decade. Although ride hailing companies like Uber and Didi are active in developing the technology for their own platforms, they trail other active programs, but this may not ultimately matter, even if they were able to be first to market, as there are several emerging factors that appear to tilt competitive advantage toward the auto OEMs. The critical differences between what ride hailing services with autonomy and OEMs with autonomy can offer boil down to pricing and innovation cycle development. And it certainly doesn’t hurt that OEMs have already existed in this environment, unlike ride sharing companies of which none are currently profitable even in their core business. Ultimately, why would a manufacturer supply autonomous vehicles to a Lyft, DiDi, Grab or Uber? For GM and Ford the answer is already clear as they have committed to restricting their vehicles and autonomy services to their own fleets. To add to its commitment GM’s president Dan Ammann resigned from Lyft’s board in June, a company that they had invested $500 million in only two years ago, as they solidified their commitment to delivering their own service. Of course, there are mitigating factors like autonomy-as-a-service providers, and cross platform investors like Softbank’s investments in ride hailing services, Uber and Grab, while also investing in GM’s Cruise Automation, that may compel manufacturers to supply vehicles and autonomy solutions to other platforms – but the lines are clearly being drawn. The economics are a key driver for all OEMs and one of the primary reasons owning the whole system is very attractive. GM’s analysis from it’s platform work in this area provides a telling glimpse at their and many others OEMs current thinking. From themaven.net 12/2/17: GM last year earned about a profit margin of 7.5% on its $166 billion in annual revenue from global car sales. Chief Financial Officer Chuck Stevens said that the company believes a driverless-car service by 2025 will offer 20% to 30% margins and a “total addressable market of several hundreds of billions of dollars.” Mr. Stevens said GM could offer rides for less than $1 a mile by 2025—down from around $2.50 for driver-based, ride-hailing services today. That could generate profit margins roughly quadruple the profitability of GM’s core car-making business, which generated $12.5 billion in operating profit last year. The business opportunity is a significant motivating factor for OEMs, underlined by the core principle that such a fleet must work at scale given that, in the early years especially, electric drive and autonomous operations will add 30 – 50% to a comparable internal combustion vehicle. At scale, with high utilization, ODM autonomous fleets should be able to provide service at or below the cost of existing personal automobiles for individual rides – the US average is at $0.73 per mile (AAA, 2016) – and for the first time potentially a cheaper alternative to personal vehicle ownership. With a ride sharing autonomous fleet, most models actually show that we could expect a 50% savings as the network matures. Autonomous fleets need cities for their initial fleet development, the bigger the better for scale, where population density is relatively high and where it will be the easiest to achieve utilization that will deliver high margins. Hand and hand with location, is the kind of autonomy deployed, as no solution available in the near term will offer full autonomy – Level 5 – instead starting with Level 4. To a casual observer Level 4 may be indiscernible from full autonomy in that it will also be a vehicle without a steering wheel where the rider has no need for direct driving control. However, Level 4 is generally geofenced around a specific area mapped at a detailed level and has other operational limitations that could restrict operation such as heavy rain or snow. The benefits of an autonomous ODM system are not limited to OEMs alone, consumers will have more choices than ever before – from mobility-as-a-service (MaaS) to purchasing a personal autonomous vehicle or any variation on existing ride hailing options already in play. The real cleverness comes in that OEMs, because of network management, may be able to sell a monthly MaaS all you can ride service and benefit from its predictable revenue stream, while being able to use the same vehicle as part of a ridesharing service. If a customer has a MaaS contract it is conceivable that they would never need to hail a taxi again. For example, when traveling out of their home area to another city, they would have access to the same level of service – wait time, level of vehicle, and configuration such as office or entertainment – in the new locale. In fact, it is possible that traditional taxis may only be needed, as adoption spreads, for those who require infrequent rides or are visiting a new country without a reciprocating fleet service agreement. Infrastructure build out may be a concern for personally owned EV’s and, eventually, personally owned autonomous EV’s but, fleet owners will simply include this as part of the network calculation, installed at optimum nodes points, that maximizes network uptime. There are hurdles ahead, as most research to-date suggests that this will entail a significant drop in production for automakers. Sedans alone are estimated to see over a 50% reduction by 2030, according to a study on the impacts of autonomy released by KPMG earlier this year. Ride sharing network calculations use a baseline 2-3 minute customer wait time as an intuition on customer patience. MIT followed this line of thinking in modeling public New York City taxi trip data and came to the conclusion that 3,000 vehicles (23% of the current 13,000 NYC taxi fleet) with a 4 passenger capacity can serve 98% of the demand within a mean waiting time of 2.8 min and only a mean trip delay of 3.5 min all clearly underlining the potential of the autonomous ride sharing model. So while this does hold out a big carrot for sustainability and efficiency, ultimately adoption rates and the kind of autonomy chosen by consumers’ i.e. personal vehicles vs. car sharing vs. ride hailing are hard to predict, but increasingly hard to avoid if you want to ensure you are still producing cars in the future. Automakers are all in for autonomy because if they are late in the transition to ODM they miss out on how autos will be sold going forward. Yes, they will probably produce far fewer cars than their current approach, but the alternative if consumers shift to no longer owning a personal vehicle is obsolescence without an autonomy solution. The implications are quite interesting pushing the market into a service driven model with multiple new streams of income not only for mobility itself but on-demand entertainment, remote office connectivity and other mobility services as riders are no longer engaged with the task of driving. In lock step with these benefits are the potential to deliver critical network over the air (OTA) updates that will allow on the fly network changes, situational updates and a clear path to keeping the product ever new between hardware cycles. The core of autonomy provides all of the basic trip routing that current ride sharing services provides so the value they offer significantly narrows to fleet logistics, which is relatively easy to replicate (and it’s certainly hard to keep track of how many Uber clones there are right now). If you were say Hyundai, contemplating developing and running an autonomous ride sharing fleet would you sell the same vehicles to a competing ride hailing service at the same cost as your own fleet or at all? I expect the answer will be more widely a ‘No’ for the industry as they evaluate how to deliver a competitive autonomous vehicle given the stress that reducing production will cause if they are simply manufacturers alone. Uber, DiDi, Grab, and Lyft are all strong competitors and I suspect the diversification into other long tail transportation services such as scooters, food delivery, package delivery or even providing their logistics expertise to OEMs will continue to be part of next stage of partnerships and M&A, but it is also a key indicator of their own caution in their competitive position as the auto industry begins to stake out its territory in this new market. Ultimately, what will speed adoption of autonomous ODM is public acceptance, and outside of the promise of significantly safer transportation, pricing will be a big part of the equation and it is hard to conceive of consumers not at least trying a service that has the potential to deliver 50% savings for their everyday transportation costs. eVTOLs Place in an ODM World With auto industry progress on autonomy as prologue, the environment for a fully autonomous ODM platform will have existed for a full 5 years before air taxis enter the market, currently targeted for 2023 although perhaps longer, given an uncharted certification regime for the eVTOL configuration. Most auto OEMs will have been operating fleets for 2 to 5 years by the time air taxis launch, perhaps even having completed the first full turn of their fleets for early entrants (with current assumptions on expected fleet mileage at 70K – 100K per year, average vehicle life should be in the 3-4 year range), and will be delivering a second generation of autonomous vehicles that incorporate lessons learned from real world deployment. EVTOL air taxis, have from inception been a technology dependent on the same high utilization ODM platform, now styled as UAM, targeting consumers in the near term as piloted, ride sharing craft, with pricing nearer to conventional taxis. Uber forecasts $2 – $3 per mile, eventually approaching the cost of autonomous car sharing, estimated at $0.47 per mile, when manufactured at scale and part of a high utilization autonomous network. However, even these assumptions are changing as several of the leading eVTOL manufacturers have committed to full autonomy at launch, key among them Kitty Hawk and Aurora, with Sikorsky pursuing modularizing the technology given its progress with its existing autonomy program. With a shared urban geographic location, these air taxi services will necessarily cannibalize car and ride sharing. Fitting into a system where the existing players view success as an existential necessity, as OEMs have demonstrated by beginning the process of owning the entire service, is not guaranteed. It is reasonable to assume that the air taxi fleet’s focus on targeting the highest value customers in that same geography will be viewed as a threat to fleet profitability and sustainability. Auto OEMs will be sure to utilize the lessons learned over these formative years to emphasize the way around the expense of speed – the key driver for eVTOL savings – as all OEM auto manufacturers plan to offer services that allow a rider to begin their ‘office’ day with full connectivity as soon as they enter the vehicle. In fact, this is a key ancillary revenue streams that most manufacturers have touted as an offset to volume sales. Partnership has already been recognized as an opportunity for a few auto OEMs, notably Geely/Volvo with its purchase of the eVTOL developer Terrafugia, and Porsche with its commitment to the development of its own eVTOL vehicles. However, Audi and Airbus, in collaboration with Italdesign, have taken this to its logical conclusion with the development of their Pop.Up concept combining a modular mobility approach that delivers a full air and ground taxi service. Announced in June of this year the test network will be located strategically in Audi’s hometown of Ingolstadt and demonstrate Audi’s commitment to the partnership. Tellingly, ride scheduling will be provided by the Airbus/Audi partnership rather than an external ride hailing service. Given the uniqueness of this effort, in which both firms provide half of the solution, instead of marrying two different transport vehicles in one service, they have created a new model altogether that could offer a compelling third way. On-demand mobility will be a domain where the auto industry sets the pace for at least the next five years while awaiting the entry of the air taxi market. Partnership between these two industries has the potential to be a virtuous circle where the capabilities of each industry help to deliver on the safer, cheaper, faster, mantra promised by the switch to autonomy, but make no mistake, ground ODM will have a great deal of impact on the success of a fleet in the air. Autonomy is the great leveler in mobility and is tilting power back to auto manufacturers as they build their own fleets and enjoy the pricing hedge inherent in owning the full value chain. Aerospace has little experience in this arena and will land in an environment where their biggest competitors have real world expertise long before the first commercial air taxi flight. The encouraging news is that the opportunity for the automotive OEMs to be part of the air taxi network is compelling and could ultimately be the best path aerospace manufacturers could hope for in delivering on the promise of seamless on-demand mobility. Richard Hires is Managing Director at Actionable Intelligence Helping companies develop tactics and strategies to realize their on-demand mobility (ODM) and urban air mobility (UAM) goals. Areas of coverage include: corporate strategy, commercialization, operations, competitive intelligence and mergers and acquisitions.