Autonomous Autos – Top heavy maths

Rapid replacement will not save the OEMs.

• Automakers who are expecting to avoid a collapse in vehicle demand because autonomous vehicles will be replaced more frequently are in for a nasty shock because I calculate that their maths is wrong.
• The most important factor in vehicle demand is miles driven because it is this that is the biggest determinant in how many vehicles need to present in a market and how often they need to be replaced.
• Consequently, any realistic analysis of demand for vehicles whether they be manual or autonomous, petrol or electric must take this into account.
• In an interview with The Daily Telegraph (see here), John Rich, the operations chief of Ford Autonomous Vehicles says that decreasing demand for vehicles is the issue that worries him the least.
• He also goes on to say that he expects the life span of Ford’s autonomous vehicles will be four years.
• It is not difficult to see where this estimate comes from and at a very high level, it is correct.
• RFM calculates the capacity of an autonomous vehicle at 164,250 miles per year which is derived from US average speed of 25mph, 18 hours a day (6 hours charging), 365 days per year.
• If the useful life of an electric vehicle is 500,000 miles (Tesla) then one would need to replace the vehicle every 3 years which is not so far from what Ford is saying.
• However, this does not take into account miles driven which I believe will be the real driver of vehicle demand in any scenario.
• In the USA 3.1tn miles are driven every year which is slowly expanding at a sub-economic growth rate and there are currently 250m vehicles present in the market.
• RFM expects that this figure in by 2047 will have reached 3.4tn miles per year.
• These vehicles travel 12,500 miles every year on average giving utilisation of just 4%.
• In a fully autonomous scenario, RethinkX calculates (demographics, rush hour etc) that the USA market could be fully served with 44m vehicles.
• RFM estimates that in 2047 (assuming no material change to demand), the transition to autonomy will be essentially complete with 44m vehicles present in the market.
• If 44m vehicles are travelling 125,000 miles per year (which is what would be required to meet Ford’s 4-year life forecast), then the market would need to be demanding 5.5tn miles.
• Furthermore, with every vehicle being replaced every 4 years, demand would still only be 11m units some 37% below where it is today.
• Even in Ford’s scenario, declining vehicle demand is the biggest issue it faces in the long-term.
• It would appear that the OEMs have not thought much past replacement rates and as a result are drastically underestimating how weak demand for vehicles may become.
• RFM’s base case is 3.5tn miles driven by 44m vehicles giving 78,400 miles per year per vehicle and a requirement to replace each vehicle after 6.4 years.
• This gives vehicle demand of 6.9m units some 60% below where demand is today.
• In order to keep demand for vehicle flat at around 17m units, the market would need to demand 8.8tn miles driven by 53.6m vehicles being replaced every 3 years.
• However inaccurate RFM’s miles driven forecast may be, I think it is very unlikely that the market will demand 8.8tn miles which is some 2.6x higher than RFM’s current forecast of 3.5tn in 2047.
• Consequently, rapid replacement of vehicles will not save the OEMs which is why they must explore other revenue possibilities such as digital services in their vehicles.
• Failure to achieve this is likely to result in massive consolidation resulting in the same number of brands but only 3 or 4 companies making vehicles globally.
• I remain very cautious of any position in companies that make cars for a living.