The utopian future of clean and quiet cars, always available, with no traffic jams, could be a dystopian future for the automobile industry. Furthermore, electric vehicles (EVs) and autonomy could have a materially negative impact on automobile demand. This is why all the vehicle makers are scrambling to come up with a solution for autonomy before the technology industry reduces them to makers of commoditized boxes on wheels.

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Market impact of electric vehicles and autonomy

Electric vehicles and autonomous vehicles are two issues looming over the automotive industry, threatening to fundamentally reduce the amount of money spent on vehicular transportation by consumers. A large part of this reduction is likely to be borne by the vehicle manufacturers, meaning that only the fittest are likely to survive. These are:

  • Electric vehicles will be much cheaper to run and last much longer than internal combustion engine vehicles making them much more attractive to almost all buyers.
  • Autonomous electric vehicles could cause demand for vehicles to decline substantially as fewer vehicles are needed on the road to fulfil demand for transportation.

Together, some reports state these two issues have the potential to reduce the total amount of money spent on transportation by up to as much as 69%, and to reduce the consumer demand for vehicles by up to 64%. This means that revenues will no longer be big enough to support the industry size that exists today. The weaker and slower players are likely to face an existential threat as these issues make themselves felt.

Most vehicle companies today are brands, system integrators and holders of intellectual property on combustion engines and drivetrain. Furthermore, almost all journeys made today are utilitarian drives in that the driver of the vehicle is making the journey to fulfil a specific purpose. This has substantial and positive ramifications for the value of the data being generated, which is why the vehicle makers must maintain control of this data at all costs. All of this means that the vehicle will increasingly become a secondary part of the journey meaning that the characteristics that are used to sell cars today will become less and less relevant.

Cogniance has attempted to gauge the potential economic impact in conjunction with a study carried out by think tank RethinkX. RethinkX believe that the single most important measure when considering the economics of shifting from individual ownership to a rental model is cost per mile. After examination of the study, we made some rough calculations based on the report and other sources, to try to gauge the impact that electric vehicles (EV) and autonomy might have on the end-user economics.

Cogniance finds that by far the biggest impact will be moving from internal-combustion-engine-powered manually-driven vehicles to electric manually-driven vehicles. This is primarily because EVs have a much simpler mechanical propulsion system allowing them to last much longer and to become cheaper to maintain. RethinkX thinks it possible that EVs could end up lasting 5 times longer (1m miles) than existing vehicles (200,000 miles). Simulations from Tesla indicate that the vehicle could travel 500,000 miles before the battery reaches 20% degradation: this is likely to be the biggest factor driving replacement of the vehicle. Consequently, Cogniance is using an average lifetime of 500,000 miles for EV which is some 2.4x longer than the 200,000 experienced by most internal-combustion-engine vehicles today. Taking the longer life time into consideration means that the cost of purchasing the vehicle is spread over 2.5 times as many miles, creating a meaningful decline in total cost per mile. (Cogniance has assumed that an EV costs the same as an internal combustion vehicle in the same category.) Furthermore, the combination of a simpler system, current tax breaks and charging instead of fuel is predicted to have a significant effect. Overall, Cogniance estimates that moving from an internal-combustion-engine vehicle to an EV reduces the cost per mile by 55% from $0.84 per mile to $0.38 per mile for the owner of the vehicle. Given that almost all drives made are driven with a specific purpose, Cogniance considers that the economics of EVs are likely to vastly outweigh any lingering preferences for old style vehicles, resulting in an almost complete conversion of the market once EVs hit economic scale and the right infrastructure is in place.

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Most vehicles today spend around 96% of the time doing nothing but with autonomy this could change significantly.

A move towards EVs has significant implications for the oil-, gas- and electricity-generation industries. Around 45% of oil demand is created through demand for fuel for passenger vehicles which, in the USA, could be replaced with a corresponding 18% increase in demand for electricity (RethinkX), as EVs are much more energy efficient. RethinkX’s study suggests that because electricity capacity is built to meet peak demand, EVs could be charged at times of low demand in order to minimize the requirement for more infrastructure meaning a minimal impact on capex but electricity generation overall would still need to rise.

Migrating from manual EVs to autonomous takes the cost reduction to the end user even further. This creates another incentive for consumers to migrate away from vehicle ownership as autonomy matures. A move to autonomy has scope to significantly increase the total numbers of miles driven, as being able to drive would no longer be a limiting factor when it comes to being mobile. However, for the simplicity of this analysis, Cogniance has assumed that total miles driven in USA will remain unchanged at around 3.08tn miles per year.

Cogniance estimates that an autonomous vehicle could run for 18 hours a day (leaving 8 hours for charging) which, at an average speed of 25mph, gives a total capacity of 164,500 miles per year. Mathematically this would translate into a requirement for 18.7m vehicles to be present in the market to provide the capacity to drive 3.08tn miles. However, demand is unlikely to be constant, meaning that more vehicles will be needed to be able to meet peak demand. Analysis by RethinkX estimates that having 44m vehicles present in the market would be sufficient, taking into account demographics, geography and demand patterns. This represents an 82% decline from the 250m vehicles that are currently on the road in USA, but the total fleet would need to be replaced much more frequently. Most cars are driven to destruction meaning that on average in USA, vehicles are replaced every 13.7 years. 44m vehicles could meet the current demand for 3.08tn miles driven by travelling on average 70,000 miles per year. At this mileage, these vehicles would need to be replaced every 7.1 years giving total demand in the US for 6.2m vehicles. This is 64% below where it is today, raising the likelihood that the majority of vehicle makers today would not be viable in their current form. Many industry experts predict major downsizing and consolidation among the vehicle makers over the next 15-30 years

The caveats to this analysis are many. The most important one is the assumption that miles driven is a constant. In classic economics, when the price of goods or services declines, demand increases significantly. Hence, it is not unreasonable to expect that as the price to travel one mile declines, the total number of miles driven will increase. This raises the issue of congestion and parking, and while humans are still piloting the vehicles, this is likely to prevent miles driven from increasing substantially. However, in an autonomous world, road usage may become much more efficient, leading to an increase in the capacity of the road network even without building new roads. Consequently, when autonomous vehicles have achieved high-level penetration, there will be many fewer barriers to a large increase in total miles driven. Increases in miles driven will help offset the impact of declining automobile sales. To keep the US market at the same level that it is today, miles driven would need to increase from 3.1tn to 8.8tn – an increase of 2.8x.

10 years of automotive excellence

The innovation departments of many of the world’s most well-renowned OEMs have drawn on Cogniance expertise in co-creating their digital services. Over the last ten years, we’ve had a hand in cutting-edge experiences that are familiar to drivers the world over, and built prototypes that have informed the development and direction of crucial strategic initiatives.

Contact our automotive experts to hear how we can contribute to your innovation processes and to learn more about our extensive experience in the automobility space.

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