World Class Faculty & Research / October 8, 2015

In a Driverless Future, Which Companies Will Thrive (or Die)?

SMITH BRAIN TRUST -- In Tokyo this week, Toyota put journalists in a modified Lexus GS equipped with self-driving technology. On its own, the car entered a highway, drove for a bit and navigated an off-ramp. Toyota was signaling that it wasn't ceding the field to Google, Uber, Apple or any of the other American tech companies that have made it a goal to dominate the next automotive era. The company said it would have cars that can handle highway driving on their own by 2020.

The self-driving revolution will affect almost every aspect of the sprawling auto industry. The assumption is that self-driving cars and the Uber on-demand model will merge, and that therefore many fewer people will choose to own cars. What sorts of companies will be disrupted, under such a scenario, and what other societal changes can we expect? David A. Kirsch and Brent Goldfarb, both associate professors of management and entrepreneurship at the University of Maryland's Robert H. Smith School of Business, offered some thoughts:

Companies that design and build cars will see their value plummet:

"The main business question," Goldfarb says, "is, 'which parts of the industry will be commodified and which won't?'" When and if cars become something you summon by an app, rather than purchase, profits will derive not from the vehicle per se but from the networked tech platform. In the current car market, it is car parts that are commodified: They're low-margin goods and largely interchangeable (except at the high end). Some car segments, like the econobox space occupied by the Toyota Corolla and Honda Civic, approach commodification, too. But the driverless car revolution might commodify many more vehicle segments. "The last time you rented a car, did you care if it was a Ford or a Chevy or a Toyota?" asks Kirsch. The driverless revolution "might turn Ford into a Foxconn," he adds, referring to the Chinese company to which Apple outsources its manufacturing.

There will be massive collateral damage in markets that depend on the auto industry as currently structured:

If relatively few people own cars, "the value of the dealer network goes to zero," Goldfarb says. And if cars are operated by computerized systems that keep them safe distances from one another, what is the role for insurance companies? They might insure parts against failure, but that's a small market — and the driverless car companies may choose to self-insure.

Urban infrastructure will be significantly reshaped:

Urban areas will be the early adopters of driverless cars, since density makes efficient service easier; the demand for parking spaces will decline precipitously. Cities will face the question of how to use all of the newly available space. For example, parking lanes may turn into sidewalks allowing more common pedestrian space, or into bike lanes. Parking is hugely expensive to build and maintain, which anyone who rents a space in a dense urban area understands. Eliminating parking will reduce new construction costs, and some of this savings will be passed on to consumers through cheaper prices or better amenities.

In a world of commodified cars, consumers will seek out fresh ways to assert their status:

Not everyone will be content with a generic people-mover that might just carry a whiff of the previous  occupant. Humans being human, "The question of how status is signaled as we move around is still going to offer an opportunity for companies to create value," Kirsch says.  That may mean that you can order a "first class" car rather than a generic "coach class" moving bubble.  Or maybe you join a network that supplies flashy self-driving BMW's. If not for the status factor, Tesla's current focus on style and performance would seem to be a dead end in a car world heading toward commodification. But a driverless Tesla sitting in a driveway would show that you have money to burn (not unlike the current model).

The shift to driverless cars will be filled with unpredictable turns, hiccups and surprises.

Will the shift be a gradual one, as Toyota seems to think, with more and more driver-assistance features added to vehicles until they cross the amorphous threshold to driverless? Or, as Google imagines, will people sell their 2020 Accords, built on the traditional model, and move directly into a revolutionary kind of vehicle?  Will one company rise to dominance — leading the government to step in and regulate?  And what kind of time frame are we talking about? "If you talk to the technologists, they say five years," says Goldfarb. But Kirsch observes: "They always say 'five years.'" As the late Stanford economist Nathan Rosenberg was fond of saying (Goldfarb's Ph.D. advisor, he passed away last month): "The future is predictably unpredictable."

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About the University of Maryland's Robert H. Smith School of Business

The Robert H. Smith School of Business is an internationally recognized leader in management education and research. One of 12 colleges and schools at the University of Maryland, College Park, the Smith School offers undergraduate, full-time and flex MBA, executive MBA, online MBA, business master’s, PhD and executive education programs, as well as outreach services to the corporate community. The school offers its degree, custom and certification programs in learning locations in North America and Asia.

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