Are Driverless Cars Too Expensive?

“Would you pay $150,000 for a car?”

This was the hypothetical question posed to me at a recent conference by a rather smug old man whose name I honestly didn’t care enough to remember.

The $150,000 figure was in reference to the cost of Google Inc.’s (NASDAQ: GOOG) driverless cars. It stems back to a public release, explaining the total cost of equipment (LiDAR and Prius included), from 2012.

This man and many naysayers like him have been carrying the number around in their pockets for three years now. It’s what they believe to be a silver bullet for anyone possessing even the slightest sense of optimism regarding our ability to innovate.

It’s what they believe to be a foolproof argument against the adoption of driverless cars.

The Wrong Question

On the surface, the argument actually seems pretty solid. Having your own personal robot chauffeur sounds great, but $150,000? That’s six times the cost of your average consumer sedan!

Indeed, a six-figure vehicle would surely not fair very well at all in the consumer market — no matter what bells and whistles it might have. There’s no arguing with that.

But asking consumers if they would spend $150,000 for a driverless car is foolish at best. That’s because the question has two glaring flaws, both of which I will point out below.

Before I do that, though, a quick update on the driverless car initiative, as there were two major developments this week:

First are rumors that Google is preparing to launch its own ride-sharing app to compete with Uber. According to Bloomberg (emphasis mine):

“Now there are signs that the companies are more likely to be ferocious competitors than allies. Google is preparing to offer its own ride-hailing service, most likely in conjunction with its long-in-development driverless car project. Drummond [Google’s Chief Legal Officer and Uber Board Member] has informed Uber’s board of this possibility, according to a person close to the Uber board, and Uber executives have seen screenshots of what appears to be a Google ride-sharing app that is currently being used by Google employees. This person, who requested not to be named because the talks are private, said the Uber board is now weighing whether to ask Drummond to resign his position as an Uber board member.”

Next, we have Uber following up by announcing that it’s teaming up with Carnegie Mellon University to start its own driverless car research lab in Pittsburgh. According to a blog post on the company’s website:

“Uber and Carnegie Mellon University (CMU) are announcing today a strategic partnership that includes the creation of the Uber Advanced Technologies Center in Pittsburgh, near the CMU campus. The center will focus on the development of key long-term technologies that advance Uber’s mission of bringing safe, reliable transportation to everyone, everywhere.

The partnership will provide a forum for Uber technology leaders to work closely with CMU faculty, staff, and students — both on campus and at the National Robotics Engineering Center (NREC) — to do research and development, primarily in the areas of mapping and vehicle safety and autonomy technology.”

Working at the newly created Uber Advanced Technologies Center will reportedly be 50 senior scientists from Carnegie Mellon and the National Robotics Engineering Center (NREC). The NREC has a long list of relevant development initiatives, including:

• 3D image sensing
• Machine learning
• Autonomous cargo vehicles
• Path planning for autonomous water vessels
• Off-road autonomy

Now let’s get back to that $150,000 price tag for Google’s driverless car. First and foremost, we must look at it in context:

To start, not only does the figure come from a three-year-old press release, but it’s based off a prototype that requires a $70,000 laser guidance system to be mounted to the roof.

Google has since released a different prototype, which has abandoned that piece of equipment entirely. If we assume all other things are equal, the price is already down to $80,000. Sure, that’s not exactly cheap, but it’s far more appealing than the initial $150,000 figure.

Even more importantly, though, Google has recently entered into talks with a long list of auto-manufacturers including General Motors, Ford, Toyota, Daimler, and Volkswagen. If and when a deal is inked, mass production is bound to bring down the manufacturing cost of driverless vehicles — as it would with any other product in any other industry.

Some OEMs have projected the additional cost for the driverless feature to be in the range of just $3,000 to $5,000 by the time they go into mass production. If these initial estimates are accurate, it would be very difficult to argue that driverless vehicles are too expensive to penetrate the market.

But even if these estimates are wrong, driverless cars will still have enormous value. In fact, even if you assume a cost of $100,000 (we’re being very generous here), these vehicles are still arguably worth it.

That’s because consumers aren’t the only target market for this technology — at least in terms of ownership. In the end, it doesn’t matter whether or not you would buy an autonomous vehicle — it just matters if you would pay to ride in one.

Taking Over the Roads

As we’ve witnessed this week, the driverless car market may not actually end up being about car-buyers after all.

Google and Uber, two companies that have held relatively close ties up until now, have essentially declared war by advancing into each other’s respective territories. Why? Because there’s enormous value in the autonomous taxi industry.

Consider, for instance, that Uber is already expected to pull in $10 billion by the end 2015, yet 80% of its top line will go to its partnering drivers. That’s a massive bite out of the company’s margins — a problem that could undoubtedly be solved by autonomous vehicles.

According to Glassdoor.com, the hourly pay for an average Uber driver is $13 (Uber claims $19.04, but whatever), meaning for every hour on the road, Uber is losing that much money. Assuming a 40-hour workweek, that comes out to $27,040 a year.

But robot drivers won’t be working eight-hour days, five days a week. They’ll work every day from 5:00 a.m., when the Type-As wake up, until 2:00 a.m., when the bar crowd goes to sleep.

Considering the fact that driverless cars don’t get tired, they could potentially put an extra $100,000 back in Uber’s profit every year. Of course, the vehicles would depreciate after enough time on the road and would need to be maintained occasionally, but these costs are nowhere near the 80% Uber pays out to its drivers.

We can even consider the possibility that consumers could potentially rent out their driverless cars to Uber or Google when not in use. Imagine getting a steady, additional income while you’re at work, or even while you sleep, as your robot employee drives other folks around the city all day.

Separately, driverless cars and ride sharing may be exciting initiatives. Together, though, they have the potential to completely transform transportation altogether.

Until next time,

Jason Stutman

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