It may be a surprise to some, but the leader in self-driving car technology is not a car company. Rather, it's mobile search giant Alphabet (GOOG 0.72%) (GOOGL 0.83%)

Alphabet generates massive cash flows and therefore was able to deploy large sums of money toward its own proprietary technology earlier than most rivals. Moreover, Alphabet never had to worry about making commercial cars for today and was thus able to go straight for Level 4 and 5 autonomous vehicles. Even other companies in the race admit that Alphabet's self-driving unit Waymo has the best self-driving technology today.

In late 2015, Alphabet hired John Krafcik, a former Hyundai North America executive, as the unit's first CEO, and in December 2016, it officially separated its self-driving research unit into its own company called Waymo. These developments suggest Waymo is becoming viable as a stand-alone business, rather than a mere research project. In fact, Morgan Stanley's Brian Nowak believes Waymo could be worth $70 billion.

Here's why and how Alphabet became the leader in this high-stakes race.

Drawing of Waymo car sensing objects around it.

Image source: Waymo.

Most miles driven

Alphabet began its self-driving experiment as early as 2009. The first-mover advantage has given Waymo the most self-driven miles of any company, with over 3 million miles driven on roads, along with over 1 billion miles in simulation.

This volume has resulted in big improvements. In fact, Waymo's disengagement rate -- the rate at which a human must take over the vehicle -- dropped to only 0.2 disengagements per 1,000 miles in 2016. For comparison, Nissan had roughly 71 disengagements per 1000 miles in 2015.

Waymo is also the first to put a fully driverless vehicle on public roads. In 2015, the company put a legally blind friend of a Google engineer in a self-driving car without a police escort on public roads in Austin, Texas.

That vehicle, "The Firefly," had no steering wheel or pedals, making it a full Level 5 autonomous car.  

Technological edge

Waymo has invested heavily in its own LIDAR system, a technology it believes is critical to the long-term success of self-driving cars. In fact, the company claims to have lowered the cost of its proprietary (and expensive) LIDAR sensors by 90%, down from the $75,000 it used to cost.

The Waymo technology stack incorporates three LIDAR sensors (near, medium, and long-distance detection), in combination with 360-degree RADAR and several proprietary camera-based sensors. The data from these various sensor layers is fed through an artificial intelligence system that processes the data and reacts accordingly.

As you can imagine, this requires serious AI chops, and Waymo has the benefit of parent company Alphabet's leading position in artificial intelligence as a differentiator over rivals.

Recent developments

Waymo is now looking to gather data on human interaction with self-driving cars. To that end, the company unveiled an early rider program earlier this year in Phoenix, Arizona. While not the first of its kind, it's the largest such program. Waymo outfitted 100 Fiat Chrysler Pacificas with its technology, with plans to make 500 more this year. Phoenix residents will be able to use the service for free, and each car will have an engineer aboard in case the car requires human intervention. The program's goal is to gather data on human reactions to self-driving cars, from motion sickness to route optimization.

In addition, Waymo recently announced a partnership with ride-sharing company Lyft. The partnership's goal is to bring self-driving car tech to the mainstream through joint projects and product development efforts.

The partnership could make life difficult for Uber, which is working on its own self-driving initiatives, as it believes a future self-driving platform could be an existential threat. In fact, Waymo is currently suing Uber, which Waymo says stole its technology when Uber hired former Waymo engineer Anthony Levandowski. Uber has since fired Levandowski, but the suit drags on.

Lyft should be able to fill some gaps in Waymo's capabilities -- namely customer usage data to determine ideal routes and connect drivers with passengers. Interestingly, Lyft had previously received funding from General Motors (GM 0.87%) on the condition it would partner with GM on self-driving initiatives. Could we one day see a Waymo-Lyft-GM joint venture where GM makes vehicles equipped with Waymo sensors that incorporate Lyft's data?

Foolish takeaway

Waymo is the current technology leader in self-driving cars, and it's making big investments and partnerships to solidify that lead. If the company becomes as dominant a mobility platform as it is a search platform, that $70 billion figure given by Morgan Stanley may be too modest.