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Introduction

Patrick Ayad and Lance Bultena

Hogan Lovells

Friday 28 June 2019


Are you still in the driver’s seat? Are autonomous vehicles really going to happen? Is the industry really changing?

We do not know whether you are still in the driver’s seat; we hope you are, given the disruption and transformation all over the automotive industry. But what we know is, yes, autonomous vehicles are going to happen. Not as quickly as some over-hyped press reports suggested, but the march to autonomy is real. The timing is in question, not the direction. The industry is ‘pushing’, irrespective of whether consumers want it; in fact, consumers still don’t quite trust the technology. And, yes, the industry is changing rapidly and autonomy is not the only change. The vision of the future is sufficiently established that there are competing acronyms derived from the same four descriptive terms: autonomous, connected, electric and shared (vehicles) – ACES or CASE, the vision is the same.

The business press almost daily reports some action or development as industry players prepare and position for the future. But technology and businesses are not the only factors. Consumers and government regulators are also playing significant roles here and are therefore, from an industry perspective, ‘pulling’. Governments are demanding the shift to electric vehicles as a response to concerns about global climate change. Greater connectivity and the sharing economy are global consumer trends also greatly influencing this sector. Consumer desire is creating demand for connected and shared vehicles that many businesses are rushing to meet. Governments, of course, will also work to shape these developing markets. Governments will want to advance economic growth but regulators will also develop new rules on safety, cybersecurity and privacy.

To see the scope of the mobility future one must understand how much is changing. The global automotive industry has for decades been significant for both economic and emotional reasons. A car is often the largest purchase a consumer makes other than his or her home. Estimates suggest there are about 1.2 billion cars in service globally valued at about US$20 trillion. By any standard the global automotive industry is a colossus. We are ‘attached’ to our cars. They are marketed and sold as much through emotion as their operating specifications. For many, the car is a marker of success, provides a sense of independence or is a symbol of who they are. The driving experience, not merely the transportation function, is greatly valued by many. At the same time, commercial vehicles further underpin the importance of the global automotive industry.

These economic and societal factors have not changed for at least the past 75 years. While car styling changed regularly, capabilities expanded, and quality improved at a fundamental level, the motor vehicle was a constant – an internal combustion engine provided propulsion and a well-known array of mechanical devices gave the driver control of the vehicle. The dramatic advances in safety, comfort and the technical capacity did not change the core essence or function of the motor vehicle. The economics of the industry has also been predictable. The vehicles were made by a few large companies that are well-known brands. Those vehicles are heavily advertised and then sold or leased to individuals. Once the vehicle is sold the manufacturer has, except for aftersales services, little additional revenue from that vehicle. Vast industries exist for individuals to maintain, fuel and even park those vehicles. Public transportation systems reflect the dominance of this mode of individual transportation.

But the automotive industry will transform quickly over the next decade or so. The technology coming into vehicles will fundamentally alter not just the vehicle itself, but the ownership model and the many commercial enterprises associated with the automotive industry. Almost all analysts believe the autonomous drive vehicle, and even the flying car, will be a part of our future. Estimates vary on how soon human drivers will surrender completely to machine-driven vehicles, but few doubt the transition will occur. Already many models have technology that assists the driver in the driving function. The modern motor vehicle is also increasingly ‘connected’. That connectivity can not only enhance the vehicle’s capacity, but it also allows the collection of data and the sale of services to car occupants. The data and services are tantalising new revenue streams.

These technological and capacity advances and the prospect of new revenue streams associated with the motor vehicle have many hurtling towards the automotive industry. Well-known technology companies are working on driverless cars, as are the incumbent manufacturers. A host of companies are developing hardware and software platforms to facilitate that development. New economic relationships and corporate deals are reported frequently as companies position themselves for the future. Electronics and computer code are already an increasing part of the cost of a vehicle and all expect that percentage to increase. The potential gains are astounding. Well over 90 per cent of accidents are caused by human error. Autonomous drive vehicles are expected to eliminate nearly all of those accidents and mitigate the damage in those that do occur. The carnage on roads that claims millions of lives may be vastly reduced. But there will also be software failures.

The prospect of truly driverless cars that are connected will also fundamentally alter the ownership model. On average, cars are driven under an hour a day. In other words, globally, US$20 trillion in assets have a utilisation rate of about 4 per cent. If the driverless car is owned by car services and summoned on demand by those needing transportation services the utilisation rate could increase substantially and the cost per unit of distance or time should drop dramatically as utilisation rates increase. Dramatic savings are achieved because a human driver does not need to be paid.

If fleet ownership displaces a significant percentage of sales to individuals that will not only change the marketing and distribution model, it should change the car itself. A fleet owner with a high utilisation rate is less sensitive to entry cost and will care more about durability and low running costs. Many believe this dynamic operating in conjunction with strict rules for fuel economy and greenhouse gas emissions will lead electric motors to displace the internal combustion engine. If car ownership shifts eventually to a fleet model built around electric vehicles, so many of the industries built on car ownership by individuals will change. That list includes everything from gas stations to aftermarket parts sales, car repair and even businesses such as car washes.

Many expect driverless cars will change infrastructure needs as well. When driverless cars are the dominant vehicles in service, road capacity should increase substantially and that will impact on infrastructure needs and design. A great deal fewer parking spaces and services will be needed as, rather than a driver parking a car, the car will drop off the driver. Driverless cars offer the prospect of cheap, safe, individualised transportation with less environmental impact. This type of transportation could transform lives. The aged, young and disabled will have new transportation options that could be highly advantageous. Many also believe that transportation options for the world’s urban poor will greatly improve.

Changes of this magnitude do not happen instantly or easily. The technology will have to continue to improve. While early gains are coming fast, solving all the technological problems to enable truly driverless cars is a daunting task.

Regulatory changes will be needed as well. Many regulatory structures and liability rules are based on the assumption of a human driver. Safety rules mandate equipment for a human driver. Even now some of that equipment is not needed – for example, screens may be more effective than mandates for mirrors. Eventually rules for everything from the steering wheel on will need reconsideration. Before full autonomy is achieved regulators will want to evaluate when humans drive and when the car drives and how that exchange occurs. Current safety rules are designed around crash survivability. When cars seek to avoid accidents rather than survive them the intellectual framework for the rules will need to shift. And there will be ethical challenges. Cars that are at least as much computer systems as mechanical devices may require new certification procedures. And, as these vehicles will be always connected, their cybersecurity will need to be protected and the privacy of the data generated controlled.

Ultimately, the public will also have to learn to trust autonomous vehicles. Individuals naturally assign higher risk where they do not have personal experience and where they are not in control – both contexts are present with autonomous cars. Many worry that early stage accidents will disrupt the testing of these vehicles and inhibit the regulatory developments needed. While public acceptance may also be a hurdle, most believe that challenge will be overcome as individuals gain experience with the technology. One day it is expected that individuals will see and emotionally accept the benefits foreseen by those who analyse current accident and fatality rates and evaluate the advantages of greater machine involvement in the driving function.

Although there are technological, regulatory, and public acceptance hurdles to overcome, it is evident that almost all industry participants foresee fundamental transformation in the future. The deal flow within the automotive industry already reflects this expectation. This trend will continue and accelerate.


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