Are Mass Market Driverless Taxis really the Future?

By Dllu - Own work, CC BY 4.0, https://commons.wikimedia.org/w/index.php?curid=141214663

The Financial Times today carried a headline article entitled Waymo explores split with Uber as robotaxi tensions deepen. The article reports that Alphabet's Waymo is considering ending its partnership with Uber as the two companies increasingly compete over robotaxi operations, commercial terms, and regulation.

This article reminded me that from my perspective, the mass-market taxi-replacement thesis is unproven. For two very simple reasons.

Reason 1: Total Cost of Ownership

The economic thesis that replacing a taxi driver with a driverless taxi has not been clearly established on a total cost of ownership basis.

Modelling the economic cost of a driver is simple. According to the US Bureau of Labour Statistics, a full-time driver typically earns $ 36,220 per year in the United States on a single shift basis, after expenses. If we assume two drivers per shift, that’s $ 72,440 per year in driver costs. (Obviously, regional costs vary, with driver revenue in New York City or San Francisco significantly higher).

Modelling the economic cost a startup, with huge development costs, high maintenance and liability costs and all the delusions of grandeur (massive CEO salaries, massive headquarters, marketing and staff costs) is complex. However, when I see the levels of reported spending in companies like Waymo, Tesla or Uber, I suspect these costs far outweigh that of a driver.

For example, the cost of a fully outfitted, 5th-generation autonomous Waymo Jaguar I-Pace is reported to cost between $ 100,000 and $ 130,000. I don’t know about the average investor, but a Jaguar i-Pace would not be my vehicle of choice for a taxi company.

It was also reported that Alphabet’s CEO Sundar Pichai has part of his equity compensation linked to the valuation growth of Waymo, with one estimate claiming this amount to be worth $ 260 million.

Even assuming a rapid technology adaptation rate, costs like this are not going to make a driverless vehicle business model more financially competitive that one with a driver anytime soon. In fact, having an almost unlimited budget can be more a threat to practical decision-making than a sense of frugality and common sense.  

Reason 2: Commodity Economics

The economics of the taxi business are fundamentally a commodity. There are thousands of taxis and ride-sharing options available, every day. In most modern urban centres, they can be replaced by metro, bus or other public transport. They can also be replaced by simply buying a car, motorcycle or electric bicycle in many cases.  

In this case, Silicon Valley appears to have forgotten one simple fact: innovation should not be measured by the amount of technology deployed, but by the amount of customer value created per dollar of capital invested.

There may be additional reasons why consumers will not rush to adapt driverless taxis:

1.     Surge Pricing: I have been in situations where the original cost of a simple commute or airport transfer doubles or triples due to surge pricing. That typically is the last time I will use the brand behind this type of pricing for a while.

2.     Trust: Just as consumers increasingly opt for Fair Trade coffee or organic vegetables, they may decide that lining the pockets of an arrogant billionaire class is not something they are interested in doing. Even if they don’t buy a car, there is always public transport.

3.     Performance: So far, the relatively low number of rides conceals a high potential of customer complaints, vehicle accidents or vehicle mistakes. I live in Europe, and the mistakes made by the automatic route planning software of the taxi service I use often adds 1 to 1.5 km to my trip. I can’t tell if this is deliberate or not, but it happens very regularly, to the point where I have now switched my end destination points to ensure this does not happen.

At the end of the day, we need to remember that taxi services are a fundamentally low-margin business. Yes, the first generation of services like Uber, Bolt, or others have made a fortune by charging extortionate pricing to the vehicle owner and the consumer. But this is likely to fade over time, assuming competition is allowed to regulate this market. (That’s a big assumption, given what we know about BigTech lobbying and the deceptive or illegal practises of certain large players).

And while I am certain that mass market driverless taxis may not work as effectively as we think, the technology itself will definitely be adapted, especially for B2B deliveries in a closed environment, or B2C human transport in a similar context. Imagine airport transfers or travel around a university campus, for example. The point of such commutes, however, will not be monopolistic profit, but convenience and safety as well as lower price for the entire value chain.

Somewhere along the way, our billionaire innovators appear to have forgotten that technology is a means to an end, not the end itself. Customers do not buy algorithms; they buy convenience, safety and value.

As a quick alternative to this, let’s imagine an alternative:

A company or cooperative decides to establish a human-driven taxi service that is designed to compete in the 21st Century. The first thing is to establish a business model that reduces costs through economies of scale, while differentiating itself in the market through superior customer service.

Vehicles

All vehicles are chosen based on two models: a 6-seater van or a 4-seater sedan. The models chosen are ergonomic, fuel efficient and low maintenance. Centralised purchasing leads to a significant cost saving.

Ownership

Ownership is split between drivers and investors. Drivers can either become equity owners directly via direct investment, or via a stock option plan that vests over a number of years, with the vesting schedule tied to performance, not longevity.

Management

Managing is technocratic, frugal and mindful of consumer value, safety, driver welfare, sustainability and overall reasonable financial results. A 15-20% return is a reasonable financial result. No one will become a billionaire because of taxi economics.

Drivers

Drivers are chosen and trained continually in service, route planning, safety, first aid, and customer relationships. They are required to wear a limited uniform (e.g. a company polo shirt, slacks and shoes in the summer). They keep clean and to keep their vehicles clean at all times, as far as is possible. They all speak English and perhaps one other language. Eating and smoking or vaping are not permitted inside cars. Music is not permitted except by headphones. The driver should not speak or take outside calls during paid trips. There is a clear code of conduct.

Service

Service means that the driver gets out of the car to greet the passenger (if not parked in heavy traffic). If there is baggage, the driver helps the passenger load and unload it. If a handicapped person needs assistance, the driver delivers that assistance.

Cross-Training and Capacity

Since there are only 2 vehicle models, drivers are cross-trained to drive both. They are deployed on a day shift or night shift, according to their presence. The permanent drivers are supplemented by apprentices and temporary drivers to assure continual service fulfilment.

Customer Call Centre

The company has a call centre staffed by real people, in the area of operation (not in Bangalore or Tijuana). The call centre operators are trained and motivated to help.

Software

Software emulates the best in class existing offerings: this is now a mature technology.

Big Data / AI

Artificial intelligence and predictive analytics are applied to rides, driver behaviour, passenger behaviour and vehicle performance. These are used to better understand and prepare for ride, maintain equipment, pre-position drivers and vehicles, train and prepare drivers, and respond to incipient customer demand.

Call Acceptance

If the driver accepts the journey, the driver shows up. No cancelled trips. No searching 5-6 times for the same ride.

Driver Request

Where pricing and scheduling allows it, customers can request a specific ride by a specific driver. This may create a variable reservation fee. On the other hand, it may create anchor clients to absorb capacity.

Loyalty Programme

The service includes a meaningful passenger loyalty programme.

Pricing

All pricing is transparent and fixed. For example, airport transfers are at a standard price. The price per km is at a standard price, with day and night rates. Longer trips or trips outside the city have a standard rate. There is no surge pricing nonsense, no price gouging, no uncertainty.

Performance Management

All drivers and staff have a fair, quarterly performance management review based on multiple factors. Bad apples are terminated early. Young, new drivers are recruited and trained.

Apprenticeship

An apprenticeship programme is offered to identify, train and develop young drivers and temporary drivers.

Headquarters

The HQ location needs to be a secure garage with car maintenance facilities, driver services, the Call Centre and other staff. However, this location could also serve as a charging station, baggage storage area, waiting area / coworking space, or have other utility that makes it a profit centre in its own right.

Ancillary Services

If we think about the advantages and structure of a ride service, we understand there are other services that can be added to it:

a.     Regular ride sharing routes on a fixed point schedule.

b.     Package delivery service

c.     Amazon locker service

d.     Luggage or baggage storage service

e.     Parking, vehicle maintenance, charging, etc.

f.      Cooperative purchasing for staff and partners (including healthcare)

g.     At a later stage, Chinatown bus-equivalent service connecting key areas

h.     Exclusive transfers (e.g. airport transfers for hotels, large companies).

Market Entry

The final point to consider is that given capital constraints, such a service will not do a full national opening. It will prioritise key markets and enter based on geographic business activity and cost structure. For example, if we look at metropolitan New York, we would probably prioritise Manhattan and Queens, where the infrastructure would be located in Queens.

Is such a concept difficult to implement? No. It requires careful, common-sense management, frugality and a degree of honesty about the service provided and how this is priced. It requires consistency over time. It requires discipline, patience and long hours.

But, it is also infinitely scalable, both per city and per country. It provides a real service. And its customers will be grateful and will turn into referrors and ambassadors.

Innovation succeeds when it creates more value for customers and society than it extracts. When it becomes a mechanism for concentrating wealth, power or monopoly rents, it loses both its economic rationale and its social legitimacy.

Unfortunately, it is precisely this common sense, discipline and integrity that seem to have been abandoned. The result is an endemic "fake it till you make it" mentality that increasingly permeates entrepreneurship, investment and corporate culture. The emergence of our first, albeit brief, trillionaire is perhaps the most visible symbol of this era.

We should not be surprised by such a development. The only surprise is that we refuse to take responsibility for it.