Michael Hall:
Welcome to the Industries in Motion Podcast from RBC Capital Markets, where we explore what's new and what's next in today's fast moving markets and industries, to help you stay ahead of the curve. Please listen to the end of this podcast for important disclosures. I'm Michael Hall, Head of European Research at RBC Capital Markets in London, and today I'm joined by Tom Narayan. Tom joined us in London in 2019, and beforehand he'd covered the chemical sector and packaging sector in New York for some time, and he joined RBC in 2015, and before that was on the buy side, and also had some banking M&A experience. So delighted to have you here today, Tom.
Tom Narayan:
Hey. Thanks for having me.
Michael Hall:
And we're here to discuss your report, or recent report, RBC Imagine report on autonomous vehicles. Let's kick right into it. I'm a bit of a Luddite. Why do I need autonomous vehicles?
Tom Narayan:
Well, this could potentially be the most important thing that ever happens in our lives. I know that sounds a little outrageous, but just think of these numbers. Every year, one to two million people die globally from auto accidents. Over 100 million people are hospitalized, and 94% of these are just caused by human error. Autonomous vehicles, and robo taxis specifically, have the ability to dramatically reduce millions of deaths and fatalities, save trillions of hours of precious time, and save space in our cities, expands mobility to the elderly, disabled, children, decreases the number of cars on the road, accelerates electrification, and subsidizes energy transition.
Michael Hall:
Okay. So that's a huge and bold claim. When's it going to happen, and where are we on the technology?
Tom Narayan:
Yeah. I mean, it really depends if you're talking about different needs. So the technology is actually already here, believe it or not, for highway use. And we expect level four, which means there's no driver, will actually happen on a hub-to-hub basis for commercial trucks as early as 2025. Now, urban applications will be probably more difficult, but it could happen as early as the end of this decade, and we could see no driver, level four applications in certain cities, and it could happen quicker in some cities before others. For example, San Francisco, way before it happens in Mumbai.
Michael Hall:
And why would that be the case?
Tom Narayan:
Well, this just has to do with a lot of infrastructure that needs to get built out, specifically things like V2X traffic lights speaking to the cloud, and also cars speaking to one another. There's a lot of infrastructure development needed. Also, regulatory situation is really different. San Francisco versus Mumbai, the regulatory regime just probably doesn't exist in a city like that. So there's just different rates of development on the infrastructure and regulations from city by city. But yeah, eventually, in a matter of decades, we could see this happen on more cities, even in emerging market countries.
Michael Hall:
So talk to me, expand a little bit more on the regulatory side. How does that ... I mean, we don't go city by city, but perhaps region by region. How do you see that materializing?
Tom Narayan:
Yeah. Regulatory hurdles really depend on geography. They're probably the strictest in Europe, and they're probably the softest in China. The US, I would say, falls somewhere in the middle, but it's really determined on a state by state basis. A silver bullet that could help solve regulatory hurdles happens if car companies accept liability if there's an accident. And given the vast array of cameras and sensors that are on these vehicles, we expect determining who is at fault will actually be much easier. This could help support car companies from accepting liability.
Michael Hall:
And have you any sense of how big the liabilities could potentially be from this, or is that something to explore further?
Tom Narayan:
Yeah. Definitely. I mean, at the end of the day, we spoke to one of our companies here in Europe, and we said flat out, "Why aren't you pushing forward for autonomous vehicle development more and more?" And they said, "Well, here in Europe, if we hear a headline that says that our company killed a person, we're finished." So it really depends on where the liability is. In the US, there's a large auto maker where this happens, and the liability is simply paid off by insurance companies. So it really depends on where you are geographically. It could be significant from a branding perspective, not just simply a financial one, but yeah, but at the end of the day, we do think that there's enough political inertia that we'll look at the balance and see saving all these lives could at the end of the day be more important than maybe some accidents here and there.
Michael Hall:
Okay. Makes sense. And then if we think about the various sub sectors, you've written a lot recently on the premium end of the market. How would it impact the high end of the market as you see it?
Tom Narayan:
Yeah. The premium car makers, we think, are better positioned for autonomous vehicles if they're levered more to luxury, than let's say those who are levered to the driving experience. Luxury autonomous vehicles could be in a really good position here. They could even take share from other modes of transport, like rail and even air travel, believe it or not, especially during short trips.
Michael Hall:
And then for the non-premium segments, the mass market?
Tom Narayan:
Yeah. We think this is the segment that most people pay attention on, specifically as it relates to robo taxis. And we do see them selling less cars. Our math suggests that 20% of non-private vehicles could be replaced by robo taxis in Western Europe. This is because one robo taxi could actually replace five private cars.
Michael Hall:
Okay. On that maths, how on earth is it not dreadful news for the industry?
Tom Narayan:
Yeah. It's actually a mixed bag. It's bad in some cases, and it's good in some cases. We actually did some work in our report to see what happens to automakers if they ran robo taxi services. In one scenario, we assumed the car maker runs the service completely end to end, and actually, believe it or not, it winds up being even more profitable for these car makers, given the economics of robo taxis and taking the driver out of the car. And in the second scenario, we looked at a revenue share scenario where the car maker actually shares some revenues with a service provider like Uber. And here, we conclude that the service could actually still be accretive to car makers, even considering lost car sales. That said, it would be far less profitable than an end-to-end offering.
Tom Narayan:
Now, regarding other companies, like the suppliers, especially those levered to commoditize components like lighting, and seating, and interiors, these will no doubt be a net negative. For tire makers, the increasing miles driven that's created because of robo taxis will actually be a net positive, and lastly, for trucks, autonomous tech should actually create an opportunity, in some cases, maybe even doubling profit margins, and the viability of these businesses commercially could start as early as 2025 on a hub-to-hub basis on highways.
Michael Hall:
Okay. So let's come back to that point there. The 2025, for when we start seeing this. When are we going to see this in the mass market? Is this 2050? Is this beyond that? Is it credibly 2030?
Tom Narayan:
Yeah. It's probably a really gradual and slow pace on the mass market, especially on the auto. So you'll start seeing cities as early as 2030 start adopting this. Like we mentioned, San Francisco is a great example. But really, on a wide scale, large urban environments, probably more between the latter part of 2035 going into 2040 is probably the timeframe we're thinking about. Now, again, this could really differ geographically. China is approaching this very aggressively. The government is fully behind this. No liability issue. You could see China adopt a lot of these technologies and be more mainstream potentially along the same timeframe, but maybe even on the earlier part, perhaps 2035, around that timeframe.
Michael Hall:
Okay. Fascinating. So Tom, we've run through the auto sector. The piece, you actually had contributions and input from other sectors. Could you just give us high level remarks there?
Tom Narayan:
Yes. Yes. We looked at a couple of sectors, public transport, real estate, and motor insurers. So regarding public transport, autonomous vehicles could take some share. Notably trains, subways, and buses, given that they'll cost so much less than today's taxis. But that said, it could actually result in car ownership coming down. And that's actually a key driver for public transport usage. Regarding real estate, less parking should increase the supply of land for other uses. More efficient commuting could shift land and lower distribution costs and add flexibility on warehouse locations. And finally, for motor insurers, these will likely be impacted by a lower risk pool. There's no way around that, but larger insurers are likely to be better positioned due to scale advantages than smaller ones.
Michael Hall:
Okay, Tom. That's really interesting. Thank you very much for your insights there.
Tom Narayan:
Thanks for having me.
Michael Hall:
What else lies ahead in today's ever evolving markets and industries? We will be keeping track right here on Industries in Motion. Please make sure you subscribe to Industries in Motion, wherever you listen to your podcasts. Thank you very much for listening to today's episode.
Speaker 3:
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