KEY POINTS
- As the world embarks on a shift towards electric vehicles (EVs) a new wave of autonomous vehicles (AVs) and robotaxis are hitting the streets, such as those developed by Cruise and Waymo, who have plans to extend their robotaxi fleets in San Francisco, Austin, and Los Angeles.
- When it comes to AVs, it is the premium brands that are ahead of the race. “Most OEMs, especially in the mass market, are at Level 2 autonomy, providing emergency braking, parking assist, cruise control and lean assist. But it's really these premium OEMs and Tesla that are leading the way,” says Narayan.
- Mercedes became the first OEM to attain regulatory approval for Level 3 automated driving in the US in 2023, following its approval in Germany the previous year. However, these more advanced AVs – offering so-called “eyes-off/ hands-off” technology – are more limited in where then can drive, restricted to highways at speeds below 60 miles per hour.
- Meanwhile, BMW recently got approval for its eyes-on/hands-off Level 2+ AVs, which still requires a driver to monitor the road. However, the driver doesn’t have to have their hands on the wheel when travelling below 130 kilometers per hour.
Tesla and the road to full autonomy
“On the policy level there’s enough inertia for this to happen. And if it happens quicker, I do see politicians acting on it quicker.”– Tom Narayan, Lead Equity Analyst, Global Autos, RBC Capital Markets
Of all OEMs, Tesla is most commonly associated with EVs and autonomous driving among consumer audiences. Its FSD (Full Self Driving) systems offer Level 2+ eyes-on/hands-off autonomy and are approved in the US. However, two crucial barriers remain on the journey to full automation and the widespread adoption of robotaxis. The first revolves around the tech, which Narayan believes will become viable by 2030. “Level 4 and 5 autonomy currently doesn’t work very well in urban environments, where there are just too many random factors such as pedestrians, bicycles and animals,” he says. “But the encouraging thing is that on highways Level 2 and 3 systems have the potential to get to Level 4. We’re nearly there.”
Narayan believes that regulation will be a more substantial roadblock to full autonomy, estimating robotaxis won’t get the green light globally until 2035. “In the US it will happen on a state-by-state basis, with some states being more aggressive in approving it than others. In Europe, it's probably going to take longer than any other place. In China we see regulators approving it quicker than anywhere else.”
For Narayan, regulatory approval will be motivated by arguments for the greater utility of robotaxis, the most significant of which is the case for improved road safety. Around 1.35 million people die from road accidents every year, according to the World Health Organization (WHO). Over 93% of those deaths are the result of human error.[1] What’s more, over 100 million people need medical treatment every year following traffic accidents, according to Narayan’s analysis. For AVs to gain approval OEMs need to show that traffic accidents would be greatly reduced. While there is no comprehensive AV safety data available to date, Waymo’s analysis of its first million driverless hours reported 54% fewer collisions overall and a 73% reduction in collisions with risk of meaningful injury.[2] Further evolution of the tech could potentially reduce accident rates even further.
Robotaxis could also offer greater travel efficiencies and free up much-needed space in urban areas. “A third of US cities are used for parking and the average commute speed is 10 miles per hour,” says Narayan. “Robotaxis will save hundreds of millions of productivity hours for people. On the policy level there’s enough inertia for this to happen. And if it happens quicker, I do see politicians acting on it more quickly.”
The economics of robotaxis
“There may be a consolidation fest led by the OEMs who are best positioned to capitalize on this theme.”– Tom Narayan, Lead Equity Analyst, Global Autos, RBC Capital Markets
Arguments around safety and travel efficiency are important to win both public and regulatory approval for robotaxis. But it is perhaps the economic arguments that are most likely to move the dial for OEMs and other operators seeking to enter this potentially lucrative space. While the cost of making robotaxis is currently far higher than that of private cars due to the advanced tech involved, Narayan anticipates those costs reaching relative parity by the end of the decade.
“The profitability of robotaxis could be massive,” he says. “When you take an Uber, you spend around $1.90 per mile. A private car costs about 50 cents per mile to own, and they’re only used around 5% of the time. But people are still willing to pay so much more because of the convenience. If the robotaxi costs 30 cents per mile and you’re able to charge 90 cents you could be making up to 60% profit.”
While there is much value potential to be unlocked for robotaxi makers and operators, the resulting reduction in road traffic would put significant pressure on smaller OEMs. “Every robotaxi on the road would replace five private cars. The value of car brands may get more commoditized so a lot of smaller OEMs may go away,” says Narayan. “When's the last time you cared what rideshare brand picked you up?” he adds. “There may be a consolidation fest led by the OEMs who are best positioned to capitalize on this theme.”
Tesla’s long-term strategy
There is much to be gained for the OEMs who navigate the long journey to a successful worldwide robotaxi rollout. So what strategies are companies like Tesla deploying to pull ahead in the race? “Tesla is embarking on a strategy of partnering with and selling services to other OEMs. Typically that doesn’t happen,” says Narayan. “A lot of automakers like Ford, GM and Rivian are selecting Tesla's charging infrastructure in the US and we expect this to happen in Europe as well,” he explains.
“Tesla currently charges about $200 per month for FSD. Their strategy is to cut the pricing and increase the take rate of subscriptions. Maybe they get less money for the FSD per car, but they get more cars taking FSD, which they can sell to other car makers.
“Tesla already has the best cost economics on full electric cars, because they started before everybody else. Their costs are around $100 per kilowatt hour, whereas others are around $150 per kilowatt hour. They have a better cost structure, so they can afford to cut pricing to gain market share.”
“Tesla has the leadership position on FSD, but there is still room for other contenders like Nvidia, Qualcomm and Mobileye to make progress,” says Narayan. “There are others who are making strides but I think Tesla will be a substantive player,” he notes.
However, any future domination of robotaxis is still a fair way off, and the firms that win will be the ones that have the staying power to persist over the long term. “Because robotaxis are so far away you need to be able to take losses and spend a lot of capital for many years and then capitalize on the opportunity when it comes. So companies like Tesla, Google, Waymo and Apple are the ones who can afford to last long enough to see the light at the end of the tunnel. Those who are well capitalized enough to survive may be the ones that really see the fruit of that investment.”
[1] https://www.who.int/news-room/fact-sheets/detail/road-traffic-injuries
[2] https://getcruise.com/news/blog/2023/cruises-safety-record-over-one-million-driverless-miles/
