"You're so old you learned how to drive!"
A day is coming, much sooner than anyone realizes, when this absurd comment will become a painful put-down -- and a $10 trillion global industry will be placed on its head. I am the longest-serving healthcare analyst at the Motley Fool, and auto stocks, while a passion, are not my normal beat. But what I discovered after months of in-depth research, I had to share with our community.The more I dug in and thought about the implications, the more important it became. Fortunes will be made by the winners, and companies that are slow to adapt will not survive.
This article is the first part in a series about the autonomous revolution at hand. It is a primer for everything that will come after, with the goal of getting readers to start thinking about the broader implications of this coming megatrend.
Where we are, where we are going
Last year in the United States, drivers spent a combined 75 billion hours driving 3 trillion miles. Even with that monumental amount of usage, cars sit idle 95% of the time. It is both a highly inefficient asset and a widespread asset, with a global installed base approaching $20 trillion. These enormous numbers hint at the potential rewards for disrupting an industry that has been virtually unchanged for a century.
First there was cruise control, an ability to lock your car at a preset speed. That gave way to adaptive cruise control, allowing the car to adjust slightly by automatically engaging the brakes before resuming. The next phase is autonomous cruise control, and it is coming this year.
Tesla Motors (NASDAQ:TSLA) will debut a technology dubbed "autonomous steering" through a software update on its ubiquitous Model S. This will be followed soon after by Audiin its all-new flagship A8 sedan. These cars are rumored to handle low-speed, heavy-traffic highway driving without any human input -- as in, no contact with the steering wheel required. This is different from the Intelligent Drive system in the Mercedes S-Class, which currently requires drivers to hold the wheel for safety. The Model S and A8 are $100,000-plus vehicles, but that is where technological innovation happens in the automotive world; it then migrates down to the volume models.
The next leap will be from autonomous cruise control to pure autonomy. It will happen in stages as automakers add autonomous safety features, but it is also closer than you might think. Several automakers have working prototypes, and Mercedes-Benz just showed off the F 015 self-driving concept car at this year's Consumer Electronics Show. This isn't vaporware: It is fully functional, having successfully driven itself through ordinary Las Vegas and San Francisco traffic.
While a production vehicle may not have the exact same "future pod" look as the F 015 concept, car design will undergo dramatic changes as the way that consumer demands from and interactions with them change. One glimpse into the screen-filled concept interior should be a huge tip-off as to why Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is openly working on its own self-driving cars and allegedly Apple (NASDAQ:AAPL) is as well.
The New Paradigm
We are at a conversion point, where critical technologies and trends previously developing separately will come together and change human mobility: Climate concerns increasing pressure for low- or zero-emission vehicles and the emergence of viable electric powertrains. Perpetual around-the-clock connectivity to the Internet not just for people but for machines as software and sensors combine to create an Internet of Things. The rise of a sharing economy, based partially off efficiency and partially as a response to stagnating wages and increasing living costs.
How the traditional automakers react to this convergence and shifting consumer expectations will determine which companies survive. It isn't just the Germans and Tesla at the cutting edge: General Motors and Toyota are investing heavily in versions of autonomy. While no one is competing directly with Uber's touch-of-an-app ride-sharing service yet, you are seeing forays into the shared economy through projects like Daimler's Car2Go, and Ford CEO Mark Fields recently declared "We're a mobility company" -- which is a much different business than building and selling cars through dealer networks.
At the same time, Uber is teaming up with Carnegie Mellon University on advanced robotics, in what may be a precursor to the company building its own vehicle. On-demand ride-sharing is the niche that Google is gunning for, and the likeliest path for Apple to follow as well. Do not expect these tech giants to emulate the existing model of a carmaker. In fact, it is possible that the old-guard auto companies will be forced into the new paradigm -- a paradigm with drastically different logistical hurdles (managing massive fleets of vehicles) and income means (charging by the mile driven and not unit sold).
While new autonomous driving aids could fuel a huge adoption cycle for the traditional automakers, full autonomy could present a problem. In terms of ride-sharing, full autonomy should drastically reduce vehicle downtime, and on-demand rides will become cheaper, as currently about half of the cost of a ride goes to paying the driver. It is possible that on-demand services will become so cheap and ubiquitous that owning any cars, especially in an urban or suburban setting, won't make financial sense.
While the auto industry may be ground zero, other industries will feel the ripple effects of this shift. Remember the stat cited above?: Americans spent 75 billion hours last year inside a car. If we weren't actively driving, those hours would be spent doing something else, like answering emails or, more likely, consuming media. The fight over the interior of a vehicle will therefore be fierce and a key point of differentiation. New sales channels will open to semiconductor companies, software companies, and specialty suppliers critical for delivering safe autonomy. And the hidden benefit to the overall economy in terms of increased productivity and decreased accidents will be significant.
Now what you've just read may seem a ways down the road, and yes, some of it is decades away. But the first steps of this transition are happening right now. The huge amounts of profit generated from this transition will not be distributed equally, creating an opportunity for investors to find outsize returns. Stay tuned for continuing coverage on the autonomous revolution as we dive more deeply into specific aspects and important news items in the weeks ahead.