FRESH TAKES ON BIG IDEAS

It’s a really cool time for autonomous vehicles (AVs). Five years ago, there were primarily test vehicles with safety drivers. Now, the industry has moved past the pilot stage to actual driverless deployments—the industry calls these L4 vehicles—that are charging customers and generating revenue. In the United States, AVs are available in Austin, Las Vegas, Los Angeles, Phoenix, and San Francisco, with more cities in the works. Internationally, people are using AVs in parts of China, Germany, Japan, and the United Arab Emirates.

Many people who get into an AV are quickly convinced about its safety. I haven’t talked to a single person who said they didn’t feel safe in an autonomous vehicle. The driving is very consistent. Within five minutes, most people have stopped being amazed by the new experience and are texting on their phones. I even put my parents in an AV in San Francisco. At first, they were very nervous. But when they got out, they were like, “Where can we get one?” As the technology becomes more mainstream, I think people will adapt their routines. There may be moments where privacy or “alone time” is paramount, for example, and people will seek out an AV for those rides.

Cities will adapt, too. In 2035, there will likely still be a mixed-fleet world. People will still own cars, but they might choose to take an AV into the city rather than driving and having to deal with parking. Right now, most personal cars are sitting idle the vast majority of the time. With AVs, there could be fewer, safer cars that are used more. That could mean fewer accidents and that cities could eventually need fewer parking spots and would have more room for public spaces such as parks. People could also have goods delivered to them autonomously—another use case that could become more prevalent in the next ten years.

How can the industry get there? Leaders in the AV space are now saying, “OK, the technology works. Now let’s make it a viable business.” Having great software is necessary, of course, but by itself, it’s not enough. The first piece of a successful business model is safety, which is table stakes and has to be the absolute priority. The industry is already seeing data that shows that AVs are at least as safe or safer than cars driven by people. Another piece is adhering to regulation, which varies from city to city and state to state. At present, AVs in San Francisco are allowed to go on the freeway, but that’s not yet the case in other cities.

“The industry is already seeing data that shows that AVs are at least as safe or safer than cars driven by people.”

Scale is a third piece. Right now, AVs are quite expensive because of vehicle costs, including sensors and computer hardware, and also because of the cost of operations and infrastructure. Scalability will depend on getting hardware and operating costs down and getting to profitability. There are different go-to-market strategies: Some companies might want to be price competitive with existing ride-hailing services, and others might want to market their service as a premium product. Some might want to seek partnerships with existing rideshare brands; these partnerships are already operational in some cities.

The fourth piece is distinctive operations: getting users from point A to B as painlessly as possible. These operations issues aren’t technical R&D projects like the software development was, but they’re still difficult to solve and critical to winning market share. And a final piece of the successful business model will be customer loyalty. Consumers have a lot of options. People could hail a different ride or drive themselves. Once the shininess factor wears off, what’s the distinctive AV experience that wins customer loyalty?

This is a complex ecosystem. It’s unlikely that one type of company will win the whole market. Partnerships among tech players, OEMs, software companies, and other suppliers will be key to capturing value. The way the vehicle looks and feels may evolve over time, but people are still going to need a physical compartment with wheels to take them from one place to another. I don’t think tech companies want to design and build their own vehicles and parts end to end. Even some of those that are doing custom-built vehicles are working with suppliers and partners. Ride-hailing companies can play their part, too. They’ve created the marketplace and can connect the supply and demand. It would be quite challenging and expensive for one company to be able to do it all because each company has its own strengths that it brings to the table.

Since it’s really an ecosystem play, the talent question is changing. If a young person had asked me five, ten years ago what skills to develop to work in the AV sector, I would have said AI and software engineering. But at this point, I think the key skill is going to be all-around great problem-solving. There are so many problems to solve in this new industry. How should participants think about business models, generating demand, and partnerships in this brand-new industry? There are analogies to learn from in other industries, but it’s still its own new thing. There’s not always a playbook; sometimes it’s a matter of going back to first principles.

ABOUT THIS AUTHOR

Emily Shao is a partner in McKinsey’s Detroit office.