Actively Speaking Podcast

The Future of Autonomous Vehicles

July 22, 2019 Epoch Investment Partners Episode 3
Actively Speaking Podcast
The Future of Autonomous Vehicles
Chapters
Actively Speaking Podcast
The Future of Autonomous Vehicles
Jul 22, 2019 Episode 3
Epoch Investment Partners

Listen in as guest and Epoch Analyst Jérôme Van Der Ghinst  discusses the future of autonomous vehicles, who are the likely winners in the space, and the externalities this revolutionary technology could have on other industries and infrastructure. (July 22, 2019)

Show Notes Transcript

Listen in as guest and Epoch Analyst Jérôme Van Der Ghinst  discusses the future of autonomous vehicles, who are the likely winners in the space, and the externalities this revolutionary technology could have on other industries and infrastructure. (July 22, 2019)

Speaker 1:

[inaudible] .

Speaker 2:

Hello and welcome to actively speak it. I'm your host Steve Bleiberg. Join US each episode as we discuss current issues concerning capital markets and portfolio management from the perspective of an active manager.

Speaker 3:

Hi everyone. Welcome to episode three of actively speaking. Uh, last episode you may recall, it was just me talking about a, a white paper I had written and the response was overwhelming and that response was bring back some guests. Uh , so today we do have a guest and I'm joined by Jerome Vander against an analyst here at epic. He's been with the firm for over five years and we're going to talk about driverless cars. Uh , so let's start out. I'll let me sort of set the stage. I am, I would classify myself as somebody who is a bit skeptical about all the hype that we've seen in this field. And it seems to me that it's been several years now since we were told that within several years we would be surrounded by driverless cars everywhere. And that hasn't happened. So let's start off with a discussion of where do things stand, how, you know, what should we expect? Realistically about when we're gonna start to see , um, driverless cars in larger numbers on the roads.

Speaker 4:

Well, thanks Steve for , uh , having me as a guest. It's a, it's a lot of fun to be able to talk about this to a broader audience than just internally here at epic with the portfolio managers and some of the analyst team. As you can imagine , uh , autonomous vehicles always elicits and opinion. Everyone has a thought. And like you said , uh , I think there's been a lot of hype. A lot of , uh, ink , uh, has flown over the topic. Um, and , and we've seen a lot of debate. I think we've made a lot of progress in terms of , uh, some of the timetables , uh, on our path to autonomous vehicles. That said, I think there's a , an important bifurcation in terms of when we'll see this in some form , um , on the road , uh , as we currently see in certain geo-fenced areas in certain cities , uh, with certain projects that, you know, the way most of the world, for example, have, have undertaken. And then thinking about a world where all of a sudden we see autonomous, autonomous vehicles on every road , uh, in, in, in, in the world at that's a , uh , a much longer timetables . So I think for now, progress continues to be made. Um, I think we're seeing it in small scale settings. Um, some, some meaningful progress, but in terms of seeing this in a more ubiquitous way, I think it will take quite a bit of time , uh, possibly , uh , a decade or more , uh, where we will, we will see this in a, in a much more significant way.

Speaker 3:

Uh , it seems to me that you could, you could think of the challenges in two broad categories. One is the technological challenge. So my first question would be, but Libby , let me ask a second one as well. The first one is gonna be, is there a , how, how far down the road are we, no pun intended to the technological

Speaker 4:

challenge. And then the other challenges are all things like legal, regulatory, insurance challenges, and how , how far have we progressed in that area? Yeah. On the technology side, we've, we've made a lot of , uh, important advances. And I think if we think about solving the safety aspect, we're probably, you know, by, by some experts, we're , we're probably 80% of the way there in terms of solving chest that problem , uh , from a technology stand point . So a lot of the technologies that we see , uh, in some of these more advanced projects, you know, would allow us to get pretty far along the way in terms of truly having an automated vehicle. There's still some challenges with corner cases , um, uh , particular settings and scenarios that, you know, caused significant problems and, and we'll take , uh , some additional time to solve. But in terms of the technology, we're well on our way in terms of everything else you've just got asked . I think unfortunately there were , we're still in the very early stages of figuring out what this means , um, in terms of the insurance industry, in terms of, you know, the various , um, infrastructure that would be required to implement some of these things on a large scale as well as just the business models that exist around , um, you know, autonomous vehicles, how to monetize some of these technologies and thinking about it. So from, from a technology standpoint , like I said, we're well on our way. I think from an everything else standpoint in terms of , uh, operationalizing this in a, in a large scale way where we're in the very early stages, it seems to be that , uh, when people talk about this, they, they envision this kind of almost utopian world in the future. Almost like the Jetsons where, you know, you need a car, you press a button on your , on a device, like a phone and a thing just rolls up almost immediately. And that every, every vehicle on the road is autonomous. But obviously to get to that world, if we ever do that , who knows? Um, there has to be this long intermediate stage where there's, there, there are autonomous cars on the road, but they are also human driven cars on the road and that seems like a very messy world. How's that gonna work? No, absolutely. I mean, if you think, if we just take the United States alone, we have a slightly over 270 million cars on the road. If we think about, you know, 17 million or so cars being sold, at least on an annualized basis, as of as of some of the more recent numbers, if you just think mathematically how long it would take if every autonomous vehicle every year we're sold, even by that metric alone, it would take, you know , uh , over a decade to replace the existing vehicles on the road. So we're going to have, you know, this environment where you will have both autonomous vehicles and , uh , vehicles that are still completely operated by human drivers. I think the way we'll see this emerge , um, at least the way I think it's being , uh , both by the existing players that are developing those technologies as well as , uh , regulators , uh, in some instances pushing for, for the advancement of, of, of some of these technologies to solve some real life problems , um, in cities like congestion, pollution and so forth. I really think initially we will start to see some of this emerge in , um, very , uh , specific , uh, settings with specific , uh, where specific needs need to be met. So we will see this in , you know, geo-fenced areas that are, you know, mapped in high definition where point to point solutions are being offered. You know, you could think about, you know, this in terms of, you know, airport shuttles in terms of, you know, college campuses, areas where , um, you know, the needs are , are, are, are fairly specific and redundant and also in areas, like I said, that will have been mapped in high definition and , uh, that are geo-fenced and limited in terms of the , the sheer area of coverage. I think over time that will evolve to cities , uh, more broadly as cities tried to solve these, these real problems of pollution, congestion and so forth. And I think that also makes sense because the business models there can make sense. It's a lot easier in an urban setting where the demand , um , for, for some of these, these vehicles , uh, would be necessary that the business case is much stronger. I think one thing that I is probably implicit in my response to is this assumed some level of sharing or pooling. Um , this would not be individual ownership , um, where I think that will take a lot longer a will. I don't think we'll see, you know, autonomous vehicles, truly autonomous vehicles for individual ownership until much later, much further down the road. It's not that they won't be available, but I think people will be able to pay, you know, for them if they so choose and have some of those features. But in, in terms of truly , um, having them become ubiquitous, I think that that will come much further down the road. We'll see the, the, the ride sharing , uh , and ride hailing applications. Just uh , first,

Speaker 3:

right. It's easy . It seems to me that a , a number of issues have gotten conflated whenever, when people talk generically about this subject, there are , I can think of three different issues that are getting conflated. One is ride sharing versus ownership and just the fact that cars we might perfect the technology for cars to be autonomous doesn't necessarily mean that they all have to be ride sharing vehicles. People can still own an autonomous vehicle. Uh , that's number one. Another is electric versus internal combustion engine. Again, I think there's kind of an assumption, oh they're all going to be autonomous electric vehicles and that's not necessarily, it doesn't have to, they don't have to go hand in hand. You have any comments on those issues that are people, but you know, cause there were these lines of Oh you probably bought your last car at this point. You know, that was part of the hype.

Speaker 4:

Nobody's ever going to buy a car again. That doesn't seem realistic to me. I think. I think you raised some interesting points. I think in terms of, I think the, the applications that we're , where these technologies make the most sense right now. Um, and I think where they can contribute the most fall under the ride hailing and ride sharing categories because it's an easier way of , um, I think making the , the unit economics work , um, because what you , you'll do is effectively take an asset. If you think about , um , vehicle ownership today, asset utilization is very low. Um, you know, probably sub 5% as the car sits, you know, in a garage most of the day or some parking lot either in front of your home or in front of your office and doesn't get utilized for most of the time. Ironically, and as you and I have spoken in the past, the need for those vehicles tends to be at exactly the same time and making, you know, the peaks and troughs very difficult to manage. I think having a solution where , uh , we have these ride hailing or ride sharing , uh, applications would allow for the asset utilization to, to, to improve, meet meaningfully, particularly in urban centers where there's a lot of redundancy in the potential paths, you know, for demand and where that can be managed. So I , I think some of these applications will emerge , uh, there first and I think , um , it will provide, we'll shift to maybe some car ownership models to mobility as a service. I think car ownership is far from being dead , um, in , in a broad sense , uh , as needs outside of some of these, our urban centers are very different and where some of these services may not be available or certainly not , uh , in the way they are in urban centers. So I think there's that dichotomy in terms of where we'll see some of this emerge . And I think that's why some of the , uh , players that are developing these technologies are focusing on , um, some of these urban centers, some of these cities. Um, there also from a technology standpoint, they can, they can map them, they can work with authorities to operate within them. And there's a business case to be made for , for, for the services. I ironically, I think, you know, as much as people may think that in some of these urban centers , um, vehicle ownership may be , uh , impacted in a meaningful way. What I think you will see as a byproduct when this becomes more ubiquitous is miles driven will go up. Um, the, the reason is, you know, those, those services will allow you , uh , to , to, to leverage these, these pooled vehicles and it'll, it'll bring entire , you know , populations that may not be able to drive anymore if you think about the elderly, the disabled. But there's also a lot of applications for, you know, working professionals that may send their kids to school, you know, to, to, to be dropped off in a robo taxi or a ride sharing service if they feel, you know, the , the technology and the safety

Speaker 3:

profile is there while they go on. I think also the individual mobility needs will be met in a very different way. Um, you don't need a , a three ton military , uh, truck equivalent, I. E the SUV to drop off your kids. Um, you know, you can probably find alternatives that are more suitable for that particular need. And as we configure and think about mobility as a service rather than just, you know, the traditional car ownership model, I think it becomes a very, very interesting in terms of optimizing , um, the, the entire , um, ecosystem. Yeah. We, yeah. One of the things we also talked about was the bet urban versus rural question because it certainly seems like , um, well , again, you know, again, I'm , I'm guilty of the same thing of conflating the issue of ride sharing versus ownership with the issue of autonomous versus human driven cars. People tend , when we think about this in rural settings that you think, oh, people still need their own car. Uh , because you know, you don't wanna wait half an hour for a car to show . Well that's true , but it could still be an auto. You could still own a car, but it could be an autonomous car , uh , but it's just one that you own. So , uh, yeah, I think the ride sharing is much more, certainly seems much more suited to urban environments than to rural environments. Uh, I mean it's already the case when you go out, you know, as far as the suburbs, you find that the coverage from services that ride sharing services is not great. Um, so you talked about , uh , um, the players, he made a reference to the players. And the purpose of this talk is not to get into details on individual companies, but broadly speaking, do you think that , uh, you know who, who's likely to, who are likely to be the big players in this space? Is it going to be the existing incumbent auto makers ? Is it like , it will be new companies? You know, what , what's the importance of hardware versus software in this world?

Speaker 4:

I think that's a very interesting question. I think a lot of the industry incumbents as well as some of the new entrants are figuring out, you know, where their core competence begins and ends , um, for , for each , um, each party. So I think the, the incumbents have traditionally , um, you know, viewed this with a bit of skepticism in terms of the ability to deliver some of these technologies. While I think some of the new entrants have approached it, the way they've approached , um, you know, some of their respective industries and, and been a bit fearless in terms of , uh , you know, trying to solve these problems and , and not having the baggage of a traditional automaker when looking at some of these , um, real technology issues that you need to, to solve. I think where, what's been an interesting battle line is that, you know, historically a lot of the automotive industry , uh, you know, was very focused on the hardware components. As the, the, the, the industry has evolved. We've seen more and more software , uh, being , um, uh, incorporated as, as, as, as part of the package , uh, and delivering a , a vehicle. I mean, if we look at even some of the , uh , autonomous , uh, or I should say be advanced driving assistance systems. So the eight s systems that are put into cars, some of these cars on the premium luxury end today have more lines of code than, than a seven 47 jet aircraft. Um, so they've gotten pretty complex and, and they've moved , uh, uh, quite along that technological curve. What it's allowed for is some of these new entrants to start, you know, to look at what they could bring to the table. And I think ultimately , uh , we're still in, in, in, in the early stages of finding where the technology companies , uh, can, taking a step back, I think the challenge , the challenge is going to be the technology piece is an important puzzle to solve. And it's quintessential to delivering an autonomous vehicle. What I think is hard for the new entrances. The automotive protocols are very, very different than the protocols that they typically deal with in their industries. So , um, you know, apple has , uh , has a, a self driving car project. It's very different , um, to deal with the automotive protocols that come with that. Then dealing with the protocols in the consumer electronics industry for example. Uh, the, the challenges of, and the things that can go wrong in a vehicle traveling at high speed is very different than, you know, an iPhone overheating . And I think that there will be, you know, increased collaboration between the incumbents and, and the , uh, the new entrance , uh, as they're trying to figure out, you know , how to solve this problem, but also find a business model around it. And I think right now there's been a lot of partnerships. You know, if I think of Waymo, they initially partner with Fiat Chrysler , uh , they brought in Jaguar more recently. You know, some of the other companies have been, you know, a lot more secretive and have not really wanted to, you know, let, let anyone see what they're working on. Um , but I think everyone is trying to figure out what they can learn from each other. The , the traditional OEMs certainly understand that software is not their core competence. They've acquired a lot of , um, companies that can help them better understand some of these technologies. And similarly, the, the, I would say the, the, the technology companies realized that, you know, producing a, a vehicle that meets, you know, that truly is automotive grade and meets all the standards is , is not easy to do. Um, so I think there's a lot of learning on both sides and ultimately to solve, you know, this, this problem and truly build a business around it, I think it will require a healthy level of, of, of partnership between the traditional incumbents and the new entrance. Okay. Uh, you mentioned before the , uh , sort of one of the unintended of this is that ironically, well , I know it's ironic, but there would be more miles driven. I think maybe people expect that if you , if the cars were autonomous, somehow becomes more efficient, quote unquote meaning fewer miles driven, beginning through ride sharing, so forth. Um, but anyway, so unintended consequences I think are a big thing in the world. They always happen. Can you think of any other , uh, although maybe that's an oxymoron, a something, an unintended consequence that you know about in advance and then it's not unintended or it's at least it's not unknown. Uh, but you know, what do you think the impact is likely to be? Can you think of other industries that we might not off the top of our head think would be impacted by the switch to autonomous vehicles, but which it will turn out? Oh, that had a huge impact on that industry. Yeah. I think there's some of , you know, maybe to just at least talk about some of the more obvious ones that come up and then segue into the, the, the less obvious ones. I think, you know, clearly the insurance industry , um, we'll , we'll have to react to, to this as , um, vehicles become a lot safer. I mean, we have about, on average, 37,000 deaths a year due to car accidents and more than 90% of those are caused by human error. That that has a , a profound impact in terms of, you know, pricing insurance. If we can , uh, reduce that significantly , uh, you know, that those insurance , uh , that underwriting will have to be retaught and entire verticals of, of , of that business , um, will need to be thought about differently. So I, I think you have obvious areas like that. Um, I think, you know, things that may be , um, that I think a lot about in terms of the way, the way this could really , uh, you know, if I think longer term , uh, could, could affect , uh, the way we live , uh, in , in, in dramatic ways and affects them . I think real estate would be impacted in a dramatic way. You know, as you think about a lot of urban centers , um, parking lots and , uh, places where we store these assets that are utilized or underutilized , um, most of the time , uh, you would really see a reconfiguration of, of how , um, you know, that space is being utilized. There's just simply wouldn't be the same kind of need , uh, for some of that infrastructure. Uh , that exists today. And you could, you could see entire cities , um, you know, truly shift in terms of, of of some very, you know, arguably unproductive real estate that could be converted , um, into productive uses. So you, you think about some of the positive externalities to use economics term , um, in terms of , of some of the things that people may not think about immediately. But if we reached this state of Ubiquity , um, you , if you think about to the amount of time that we can reclaim, I mean, there's been some studies that show that, you know, on average , uh, you know, people are stuck in, in, in, in traffic , um, 15 minutes or more if you get that time back and you can be in an autonomous vehicle and you can hopefully contribute meaningfully , uh , to society by not playing , maybe allocating all that time to candy crush, you know , you , you would be able to contribute more meaningfully , um, to, to GDP. Um, uh , and I think that those are some, some of the , uh , positive, I think unintended consequences. I think the, maybe on the negative side just to touch on , on, on those as well. You know, I think the path to, to having a world where autonomous vehicles are ubiquitous will , will be fraught with, you know, some, some meaningful challenges. Um, I don't think it'll be linear. I think there will be bumps around the road. There's a , there's still an enormous amount of distrust on the , on the way there. Um , I think some, some recent polling I saw done by, by Reuters and Ipsos showed that more than half the people don't trust autonomous vehicles and two thirds would not buy one. The reason for that is probably there's, there's some, there's some, I would think , uh , biases in terms of people's information when they hear about, you know, the Uber Crash in Arizona in 2018 and they're tainted by these , um, these widely reported , uh, adverse events, let's call them , uh , that, that emerge. That's effectively their only experience with an autonomous vehicle. Most people have never been in one. Most people probably won't get to ride one for quite some time. So I think there will be a lot of distrust along the way and that may slow down, you know, the ability to sort of reached out before we get to some of the, the actual material unintended consequences that come, that come from that.

Speaker 3:

Right . Of course, going back to what you said about the people stuck in traffic, chances are they'll just be posting on social media the whole time. If I get this traffic jam, I'm stuck in . I thought , oh , I thought autonomous cars were supposed to eliminate traffic. If, if somebody's accidents are caused by human error, you know, take away the human error. The traffic should just flow smoothly all the time. Um , anyway , uh , I think maybe just to wrap up , uh, there's somebody that was mentioned to me earlier when I told them we were going to be talking about this topic that , and I had had this thought too that, you know, when , when cars themselves first came along, of course they were referred to as horseless carriages because that was the context people had, was a carriage pulled by horse. And that's , that was the only way they could think about transportation was, well, you need a horse to pull you then, but yet this thing somehow magically does it without a horse. I feel like we're kind of going through the same thing again by referring to quote driverless cars. I mean, are they even really cars? You know, they really, it's , I think, I feel like it's, we're, we're at the dawn of perhaps a, you know, a whole different , uh , just era for transportation in general and how you get

Speaker 4:

around and, but we still want to think of them as cars, but their cars without drivers. But maybe they're really something else entirely. No, I , I , I'm , I'm smiling as you're saying this because I think that the notion to have some of these driverless vehicles that we've seen , um, whether it's, it's some of the Waymo videos or some of the ces, the consumer electronic show in Las Vegas, oftentimes in , in January, we'll showcase some of these, these vehicles and it gets , um, onto the news and people will identify with some of those, those vehicles. Interestingly enough, there are always vehicles that are , um, that basically exist today, that have been converted to have, have , um, uh, have been outfitted with significant amount of , uh, technology including , uh , a pretty elaborate and very expensive sensor package, which allows for the autonomous , uh, uh, driving , uh, to occur. Uh, they're still seeing a car that , uh , that they would recognize in way most case they've been using a Chrysler Pacificas. Um, but their v you know , uh , Delphi has been using , um, Audi Q3s. So they're vehicles that people recognize and they've just been outfitted. But the reality is as we moved to a world where autonomous vehicles become more ubiquitous and we think about mobility as a solution, the reality is we'll build purpose built solutions. Um , these vehicles will be built and designed for that. You don't really need a steering wheel, you don't really need , um, you know, a lot of the space that's being allocated right now too for a traditional combustion engine will disappear , uh , in a, in a purpose built vehicle. Because the , again, the, the design components and the design criteria will be completely different in terms of the needs that need to be met. And if we think again, as a, in terms of mobility as a , as a, as a service, you know, a one person pod to go to , um , the office, you know, maybe something contemplated aura , uh, you know, that would look very different than a, than a sedan or a , uh, ride, you know , ride sharing service that could house six, eight people where the configuration of the space within that vehicle looks completely different. So I think we need to think about, you know, that redesigned and that has also, you know, to our earlier point that has big implications for um, you know, how current incumbents think about their vehicles, how they would brand them. If it's even possible to do that in a world where , um, you know, these, these , uh , where mobility is, is rethought completely, you know, you can see a world where there would still be a level of customization where branding is possible, right? You could have a one of the well known luxury brands effectively offer you a service or a membership , um , where you'd have a certain level of customization, you'd have a certain level of, of comfort and service. Uh, the way you may pay for, you know, first class business class on an airline today where you know, you're still getting from point a to point B. The way that's being done , um, and the conditions under which you're being transported can, can vary from being fairly basic to quite luxurious. Right. Well I'm still waiting for the, you know, individual jet packs to get me to work. Yeah . With, I'm just traveling by myself. Anyway, this has been fascinating. Uh , my guest has been Jerome Vander against the analyst here at epic. Uh, thanks to roam and I will talk to you all again next time. Thanks very much. Remember to subscribe to actively speaking on apple podcast or Google play. You can find all of our previous episodes and additional content on our website, www.eipny.com. We'll talk to you again soon.

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