I am convinced that electric driverless taxis and buses will be used as a transport as a service offering which will largely end the era of personal car ownership. What is up for debate is when.
What may seem as relatively unimportant issues might have huge effects on what the next 20 years looks like. Driverless taxis and buses as a service have the potential to completely change our communities and our economies. They wipe out the need for parking which affects urban design, government revenues and private parking business models, including airport business models. They completely re-organise public transport. They end car dealerships and small car repair businesses. They have the potential to wipe out a huge percentage of the road accidents that kill a million people a year. These are only some of the changes. Therefore the speed and pattern of the change will be critical to many people’s lives and businesses.
One of the major factors in the speed of change from personal cars to using driverless taxis and buses as our transport providers is the cost difference. The greater that cost difference, the more likely people are to sell their existing vehicle before they normally would. If people are only prepared to change when they are looking for a new car, then the pace of change will be much slower. If a large number of people buy electric cars over the next decade, they will be reluctant to sell them to use a transport service as their sole provider. We will need two major turnovers of the vehicle fleet to get to the end of personal car ownership. That will take 22–30 years.
As we have learnt over the past 20 years or so we are not rational decision makers. A rational car owner or prospective purchaser would weigh up the total costs of owning a car, and compare it to the alternatives. If those alternatives are cheaper for an equal or better service, they should change to them.
Even putting aside issues of cars as a status symbol people do not make these rational choices. In fact, they underestimate the capital components of owning a car and think more about the day to day costs. Try this as an experiment. Go down the street and ask people how much it costs them to fill up their car with petrol, and how far they get on a tank. I would wager most people could give you a pretty good guess on those figures. That would give a good calculation of fuel costs per kilometre. Now ask the same people how much their cars depreciation and financing costs are per kilometre. Most of them would not have a clue. They would have some idea of insurance, registration costs, and maintenance costs.
This may seem a little bit esoteric to talk about, but it could result in a big difference in the rate of change when it comes to adoption of driverless taxis and buses as a service. This is especially true if a truly driverless car is ten years away. Given all the announcements we are seeing on electric cars, it is likely that we will have significant numbers of electric cars on the road in the next decade. These announcements include car companies introducing new models, and governments making pronouncements about restrictions. Also, cities such as London announcing they will progressively ban non-electric cars from the city centre. The reason that large-scale purchases of electric cars might delay the adoption of driverless cars is that electric cars have much lower running costs. This reduces the incentive to change over to a transport as a service model.
In a previous post: Electric Cars — Saving Real Money or Arbitrage Opportunity? I detailed some of the costs of electric cars versus internal combustion cars. A medium sized car in Australia costs about 69 cents per kilometre to run or about $10,000 a year for the average car. Of those costs, about 54% of them relate to depreciation and financing costs. This leaves 32 cents per kilometre for annual operating costs. Fuel and repairs make up about 16 cents of those. The rest are registration, insurance, and tyres which will be about the same for an electric car. The difference in an electric car is that the fuel and maintenance costs may be as low as 4 cents a kilometre. This would save the owner 12 cents in operating costs or about 37.5% of annual running costs. These are also the costs that hit you in the hip pocket the most. They are the ones that people pay the most attention. The difference in practice will be even starker given that many people will charge their cars at home. So the fuel cost will part of their household electricity bill, and they will notice it even less.
If we add up all these figures, the annual running costs for an electric car come down to about 20 cents a kilometre. If I offer the owner of an electric car a transport service that costs 18 cents per kilometre, they are unlikely to take up the offer. It is 2 cents a kilometre cheaper or $300 a year. Why would they sell their beautiful new electric car for that saving? Rationally they should, but we are not rational decision makers. They would have agonised over the purchase, so selling it would make them feel they made a bad decision. Human beings don’t like that feeling. They will have shown it off to friends and neighbours, so it is more than just transport to them.
But the owner of a 7-year-old internal combustion car might jump at the chance. The difference is much larger. They will save 14 cents a kilometre, or $2,100 a year. They would start thinking what they could do with that money. And, they do not have to find the capital to buy a new car in 2–3 years time. If there are many more electric car owners, and fewer owners of 7-year-old internal combustion cars that has to slow the change to transport as a service systems
Now the argument against this is that electric cars will cost more money to buy. This will make their capital costs per kilometre higher. Prices are coming down for electric cars, especially for battery systems. But an electric car will still cost much more than the current standard medium car. Regarding what we might pay in Australia, Alex Shoolman had a very good summary around the price of a Tesla 3 model back in August. In that assessment, he calculates a “Tesla Exchange Rate” based on prices of the Tesla S in the USA and Australia. Using that rate the price for a base level Model 3 Tesla came out at $54,212 in Australia. The real currency exchange rate in that calculation is very close to today’s rate. The base level Chevy Bolt is US$37,495 in the USA, using the “Tesla Exchange Rate” that is A$58,000. The Bolt has a 60 kWh battery pack. 20% bigger than the base level Tesla 3. That accounts for the difference in price between the two models of car, so we can use the Model 3 as an example. This makes the Tesla Model 3 $21,000 more expensive than the average medium car we have used in our cost comparison. That is 64% higher. Most of that difference is due to the battery which I have calculated at about A$17,000 in today’s costs.
So electric cars will be more expensive, which means higher financing costs. Depreciation per kilometre is harder to calculate. We do not have an established second-hand electric car market to give us re-sale values. This makes it very hard to calculate what depreciation costs will be. Indications are that electric cars will last longer, but a 20-year-old car is still a 20-year-old car. Also because batteries are such a big part of the price the resale value is important. Batteries can be removed from electric cars once their performance is causing range problems. These ex-car batteries can be re-purposed as storage batteries. The problem is that battery costs have been falling. So the repurposed batteries will have to compete with cheaper new batteries. This will increase the depreciation costs for electric cars. In the longer term, the cost improvements will flatten out. At that stage the batteries for electric cars will be cheaper, reducing the cost of electric cars. The difference between new battery costs and second-hand battery values will also narrow. Both these factors will reduce depreciation.
While these numbers are harder to calculate, they are also less important in decision making than fuel and maintenance costs. In fact, the difficulty of calculating them makes them less important still. If a buyer does not understand them, they will be less of a consideration. The upfront costs will also be distorted by subsidies. Chris Rice has looked at this is California, and a Chevy Bolt is close to a standard car once all of the subsidies and concessions are taken into account.
The last point is that the very people who are likely to be the early buyers of electric cars are also the ones that are more likely to take up transport as a service. They will be the early adopters. If buying an electric car locks most of the early adopters into a 10–15 year ownership model the move to transport as a service will definitely be delayed.
I will be writing more here on what the shape of change might look like over the next few weeks.
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I am writing a book on autonomous vehicles with Dr Chris Rice . It is called Rise of the Autobots: How Driverless Vehicles will Transform our Economies and our Communities.