Autonomous driving – Bloody economics

An unattractive proposition.

• It looks increasingly like it will be Cruise rather than Tesla or Waymo that gets to market first with robotaxis giving it the best opportunity to be one of the winners in what is likely to be a bloodbath of cutthroat competition.
• Honda has announced that it is going to start a robotaxi operation in Tokyo in 2026 where it will be using its own vehicles but powered by the Cruise robotaxi solution.
• Japan has been very slow to adopt even testing of these vehicles but a chronic shortage of taxi drivers following the pandemic has triggered a rethink.
• Cruise, Honda and General Motors have signed an MoU that will see the establishment of a joint venture that will operate a robotaxi service within the Tokyo metropolitan area beginning in 2026.
• There has been a lot of excitement driven by Tesla about the economic appeal of the robotaxi business, but I suspect that the reality is going to be quite different and one where scale and first-mover advantage will be everything.
• Tesla’s contention is that ride-hailing currently costs $2 per mile but with a robotaxi, the cost to offer this service will fall to something like $0.30 per mile (which is an estimate with which RFM Research agrees).
• Tesla then contends that it will be able to charge $1 per mile and thereby make 66% gross margins and it is from this that bulls on Tesla derive their valuations.
• The problem with this assessment is that it assumes that there is no competition and that Tesla will be the only one in the market offering robotaxi services.
• All of the available evidence suggests a completely different scenario and one where there are several equally good offerings available in the market and Tesla does not get there first.
• In fact, Cruise, Waymo and a number of the Chinese offerings are already way ahead of Tesla meaning that there is no scenario that I can see where anyone is going to have the market to themselves for very long.
• Journeys are utilitarian in nature and that means if someone else is offering $0.1 per mile less, they are likely to gain a lot of market share.
• Hence, I think that robotaxis are going to quickly become a bloodbath of cutthroat competition where the real price is not $1 per mile but something more like $0.35 – $0.40.
• This is precisely what happened in food delivery, ride-hailing, bike sharing and all of these other schemes that sprang up over the last 10 years.
• This means that the winner is going to be the player with the largest market share over which to amortise its fixed costs which by the nature of its scale will also be able to provide the best service (availability and wait times).
• Cruise looks like it is in a pretty good position as it is already present in some markets and is gaining valuable market experience and its reach is slowly spreading.
• However, there are plenty of others such as Waymo, Mobileye, Baidu and a number of Chinese players who all look like they will be coming to market at roughly the same time.
• Hence, this lead is not going to last very long and by the time these companies see real volume, there are likely to be several equally good offerings to choose from.
• This is why I do not see much value in either the market for autonomous driving solutions or the provision of a robotaxis service.
• Autonomous driving has had a rough ride of late and it is not over.