The Virtuous Cycle Between Driverless Cars, Electric Vehicles And Car-Sharing Services

There’s a good reason why Elon Musk spends so much time musing about driverless cars, even as he is hard pressed to deliver the next generation of Tesla’s human-driven electric vehicles.

It is the same reason that General Motors announced its $500 million investment in Lyft just days before CEO Mary Barra unveiled the new Chevy Bolt and, a few weeks later, bought the assets of Sidecar, the failed car-sharing innovator.

It is why Travis Kalanick, CEO of Uber, poached 40 top scientists and researchers from Carnegie Mellon University to develop Uber’s own driverless capabilities—at the risk of ultimately alienating the human drivers upon whom Uber’s current business success depends.

And, it is why, in addition to its massive effort to build driverless cars, Google almost bought Tesla, invested more than $250 million in Uber—and why Google’s relationship with Uber soured.

These moves are part of the strategic gamesmanship underway in the colliding automotive and technology ecosystems. Numerous players are jockeying for position at the confluence of driverless cars, electric vehicles and car sharing.

At first glance, the three are distinct business categories with unique technical, strategic and market challenges. A virtuous cycle, however, links them.

Each has the potential to reinforce the others and, together, massively disrupt the technology and business of personal mobility. Ultimately, such reinforcement might mean the difference between lackluster adoption and breakout success.

Driverless Cars And Car Sharing Services

Driverless cars could significantly reduce the cost of car-sharing services like Uber and Lyft by eliminating the largest operational cost—the human driver. As Travis Kalanick has said:

The reason Uber could be expensive is because you’re not just paying for the car — you’re paying for the other dude in the car. When there’s no other dude in the car, the cost of taking an Uber anywhere becomes cheaper than owning a vehicle.

Several studies, including one by Larry Burns and William Jordon and another by Rutt Bridges, estimate that driverless taxis could operate at as little as 20% of the cost of individual car ownership.

Emilio Frazzoli, Rick Zhang and their colleagues at MIT and Stanford have shown that driverless cars could further reduce cost of car sharing services by enabling intelligent coordination to minimize congestion, keep the driverless fleet in balance and better serve anticipated demand.

These advantages leave ample room for driverless-car-enabled business models that give significant savings to passengers (over individual ownership and driving) while enabling hefty profits to service providers. Thus, both Uber and Lyft openly talk about a day when they shift from being intermediaries for individually-owned-and-human-driven cars to providing mobility services with company-owned driverless cars.

Aggressive adoption by mobility services would jumpstart and accelerate the spread of driverless cars. Such services would be able to pay far more for driverless cars than what consumers might otherwise be willing. Some industry insiders estimate that mobility service business models could sustain driverless cars costing as much as $250,000-300,000.

Consumer adoption would be minimal at such price points but mobility services could buy millions of them. The study by Burns and Jordon, for example, estimated that 25,000 driverless cars would be needed to serve a small city like Ann Arbor, MI. For reference, according to the U.S. Census Bureau, there are 228 cities in the U.S. larger than Ann Arbor.

Mobility Services And Electric Vehicles

Electric vehicles are generally cheaper to build, maintain and operate, so mobility services would have a natural preference for them. If such services could coordinate across an entire fleet, they could sidestep typical consumer concerns about electric cars’ battery range and charging station availability. That is because most taxi rides are well within current electric vehicle ranges. Cars could be dispatched according to customer destination, battery life, recharging needs and so on.

Since most trips involve only one or two passengers, mobility services could further reduce car and energy cost by assembling fleets of mostly smaller cars.

The potentially virtuous interaction between mobility services and electric vehicles does not exist for driver-owned car-sharing cars, however. Individual drivers are incented to optimize their own range and flexibility, and therefore avoid electric vehicles.

Electric Vehicles And Driverless Cars

Because of they are modular and lend themselves well to computerization, electric vehicles facilitate the rapid development and testing of driverless technology.

On the flip side, fully driverless cars reduce the number of car components, such as steering wheels and driver acceleration and braking systems, thereby further simplifying car design and cost.

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With an estimated combined valuation of nearly $70 billion already, neither Uber nor Lyft are betting their futures on electric vehicles or driverless cars. Similarly, Tesla's nearly $20 billion market value is primarily based on its prospects in expanding and dominating the market for electric vehicles.

In order to live up to those immense valuations, however, all three companies and others circling the same space, including Apple, Ford, and Mercedes, need to cross the chasm beyond early adopters and become mainstream products.

Driverless cars would complete the virtuous cycle and provide one possible path for breakout success.

Chunka Mui is a business advisor and author of three books on strategy and innovation including, most recently, The New Killer Apps: How Large Companies Can Out-Innovate Start-Ups.  This article was originally published at Forbes.