The big squeeze: How self-driving vehicles will put pressure on the car market

In the next five years the first fully self-driving cars will become available for purchase. This will happen after the first fleets of self-driving taxis appear in our cities. How will this affect the demand for private cars? We can expect consumers to react in multiple ways:

In the high end of the market, additional demand will be generated by price-insensitive customers who greatly value their personal time and greatly value their own life. For many affluent consumers who spend significant time at the wheel, full self-driving capability will be a must have and they will not wait until the end of the usage cycle of their current car but have high motivation to switch to a new, fully autonomous model early. People who lease their car will demand upgrades (for example via lease pull aheads) while affluent consumers who buy their own cars, will just replace their old model early. This will lead to a spike in demand for premium vehicles – which is positive for the auto industry.

At the same time it will produce a dent in demand in the run up until the first self-driving models become available. The more customers get the impression that reliable self-driving models will be available on the market soon, the more they will hold off on purchasing a non-self-driving model. Individuals and companies are likely to extend expiring leases on premium cars for a short time just to be sure to switch to fully-self-driving vehicles as early as possible. For any company the most rational path to take is to adopt fully self-driving cars as early as possible because this has a direct positive effect on the productivity and health of their employees.

It is important to recognize that this adoption path can not be incremental. Driver assistance systems are getting better and they indeed follow an incremental route. But the switch to full self-driving is a disruption: only from that moment on can the driver turn his attention away and go to sleep, go over documents, watch a movie or find other ways of using their time. For affluent people who value their time at just $50 per hour, this translates into enourmous benefits ($18250 per year with an average of 1 hour per day in a car) compared to a car model with a high performing driver assistance system.

These reasons have another consequence: The demand for new premium vehicles without fully self-driving capability will crash. The self-driving feature will be a critical benefit for almost every customer; only the exceptionally loyal will avoid switching from a brand that can not offer full self-driving to another premium brand with full self-driving. In this part of the market (excluding chauffeured cars and aficionado cars) competetion will be enormous. Brands which are late coming to the market will dramatically loose market share. We may see a very rapid shakeout in this part of the industry.

The picture looks different for more price-sensitive customers. A small part of this group will find that the obvious additional time and risk-reducing benefits of self-driving cars are reason enough to spend more on a car purchase and upgrade to a premium self-driving vehicle. This will add to the initial demand for premium self-driving cars.

A much larger group will find that they can not afford a premium self-driving car. This group has two major options: It can wait until self-driving capabilities trickle down to less expensive cars. Given the significant benefits of the self-driving feature this has the consequence that they will hold off on purchasing new cars in their segment until self-driving capabilities arrive. Demand for new cars in these seqments will therefore fall and OEMs will feel the pressure to accelerate the introduction of self-driving capabilities into the lower segments of the car market.

The other option for the more price-sensitive group is to switch to mobility services where available. Self-driving taxis are likely to provide mobility at a cost per kilometer that is not significantly higher than the total cost per kilometer of the average privately owned car without self-driving capability. Because this option will be available in many cities even before self-driving cars can be purchased many customers will already experience self-driving and its benefits. In high density urban areas, where space is at a premium, reducing the number of cars per household or even eliminating all personal cars will be the obvious solution. In many such areas the marginal costs of using a private car will be higher than using a self-driving taxi. In all areas where fleet services take hold (this will include many areas with lower density) we will see that households will reduce the number of vehicles they own.

For a part of this more price-sensitive group which can not afford premium self-driving vehicles, the most rational choice will be to switch to robo taxis early – even if they are more expensive than the marginal cost of using their own car – because this will allow them to use their personal time for something better than driving and increase their safety.

Thus even before the first fully self driving cars appear on the market, we will see a drop in demand for new vehicles caused by an increasing adoption of self-driving mobility services as well as the expectation that more affordable privately owned cars will be available in the near future. In this period, the demand for non self-driving vehicles in the lower segments must fall because some consumers are reducing the number of cars in their household by switching to self-driving mobility services and others hold off buying new cars with the expectation that more affordable self-driving cars will appear on the market in the near future.

This will have an effect on the used car market: As people switch to using self-driving mobility services in densely populated areas, they will sell their current cars prematurely; this will reduce prices in the used car market. A smaller group of customers will want to hold off buying a new car until self-driving features become available in their segment. This effect will be small and not be enough to counteract the price drop for used cars.

This will lead to a dilemma for the auto industry: because demand for cars drop and more hiqh quality used cars become available on the used car market, demand for new cars without self-driving capabilities falls. However if the auto industry rapidly switches to offering self-driving cars in the lower segments, then consumers will switch even faster to self-driving cars and cars without self-driving capability will become hard to sell. Prices for traditional cars will fall and traditional cars will depreciate much faster. OEMs that don’t offer self-driving capability will rapidly loose market share.

It is inevitable, therefore, that the advent of self-driving cars will squeeze demand for privately owned cars. It is not possible to rapidly roll out cheap self-driving capability in all segments. On the path to this future, demand for new cars must shrink because for some customers it is rational to hold off on purchasing a new car to wait for the availabity of the self-driving capability, for other customers it is rational to switch to using self-driving mobility services, and last but no least every price cut in self-driving technology makes the use of fleets economically more attractive compared with the use of a privately owned self-driving car.

Thus the auto industry is in a difficult position. As long as the advent of fully self-driving private cars is only a distant vision on the horizon, everything looks like business as usual. But when the first fleets of self-driving cars provide mobility services in an increasing number of cities across the globe over the next three years and as consumers take notice that the release of the first fully self-driving private vehicles appear imminent, then the auto industry will experience a major shakeout. Time to react will then be very short and the survival of more than one OEM will be in question!

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