Autonomous Autos – Hard Economics

Economics will decide this market.

• WeRide thinks that it is mostly governments and regulations that will impact its path to profitability, but I suspect that it will be the market which decides who wins and who loses.
• The world of autonomous driving is chugging along with slow progress from the pure plays and where the vehicle makers have effectively given up and focused their efforts on advanced driver assistance systems.
• Some members of the automotive industry are referring to these advanced assistance systems as autonomous driving, but it is not until I can be fast asleep in the back seat and not worry for my life, will I consider the autonomous problem solved.
• This is what is referred to as level 4 and level 5 while the automotive industry is focused on level 3 which means that for certain roads and certain conditions, the vehicle can take over but must remain supervised.
• The automotive industry is right to focus on this as this is a product that it can sell now and is much cheaper to implement than a fully autonomous vehicle.
• Meanwhile, the pure plays are pushing ahead but it is very slow going.
• Waymo is the undisputed leader with Cruise having pulled out and most of the other offerings still using safety drivers, but it is a close race.
• This is because it is far more difficult to go from 95% to 96% than it is to go from 0% to 90% and this trend of increasing difficulty is continuing.
• This is why progress has slowed down considerably and allowed the laggards to catch up, meaning there is not much difference between the different offerings.
• Hence, when the different solutions are finally good enough, they are likely to come onto the market roughly at the same time and be pretty much equivalent to one another.
• This is what puts a large hole in Tesla’s business case for its robotaxi offering because it is not going to have the market to itself.
• The result will be a bloodbath of cutthroat competition resulting in the price being something like $0.4 per mile rather than the $1 per mile that Tesla is currently predicting.
• This is the difference between 80% gross margin and 25% gross margin on ¼ of the revenue base which makes a gigantic difference to both the profitability and fundamental value of the autonomous driving industry.
• Hence, I continue to think that it is economics as opposed to regulation that will determine the fate of this industry and both PonyAI and WeRide are in for a rough time in the harsh glare of being publicly listed.
• Both of these companies are experiencing very low growth and are very unprofitable as a result of not having enough revenues to cover their operating expenditure.
• I think the eventual winners will be the few companies that can achieve scale and are efficient enough to be able to generate a profit despite the inevitability of low gross margins.
• This will probably mean deep pockets and so the pure plays like WeRide and PonyAI are going to have to raise a lot more money or seek to be acquired.
• Neither of these businesses is mature enough to warrant being listed and so it is possible that the public market was the only option left to them to raise more money.
• I think that the winners from all of this are the OEMs who don’t need to spend billions developing their own solutions but instead can wait until the technology is mature and the robotaxi industry is beginning to emerge.
• By that time, I suspect that the brutal economics of the Robotaxi industry will mean that there are several perfectly good solutions available for acquisition or licensing at very reasonable prices.
• Timing remains very uncertain but if Nvidia is to be believed, it is just around the corner.
• I take a more conservative view and stick with my long-held target of 2028 for commercial autonomy.