A New Value Chain For On-Demand Shared Mobility

This post first appeared on 4/27/17 in O’Reilly’s site. It has been revised since it first appeared.

In my book The Big Data Opportunity in Our Driverless Future I make two arguments. First, societal and urban challenges are accelerating the adoption of on-demand personal mobility services. Second, technology advances, including big data and AI, are making next-generation vehicles, and specifically Autonomous Connected and Electrified (ACE) vehicles a reality. I define Next-Generation Mobility as the movement of people and goods using a combination of ACE vehicles, and of transport services such as ride-hailing, car sharing, ridesharing, and others that are offered on a short-time, on-demand or as-needed basis. Next-Generation Mobility will cause three major shifts that can lead to the disruption of the automotive and transportation industries: a consumer shift, an automotive industry shift, and a mobility services shift.

In a series of posts, starting with this one, I examine what is causing these shifts, one of the value chains that is emerging as a result of these shifts, big data’s and AI’s key roles in the value chain, and the models being created around this value chain.

Next-Generation Mobility Leads to Three Major Shifts

The growing adoption of on-demand mobility services and the upcoming introduction of autonomous vehicles that will be used specifically for the delivery of such services will lead to four major shifts. These shifts are highly related. The availability of transport services is causing a consumer shift. The consumer shift, in turn, is leading to a shift in the incumbent automotive industry. The consumer shift and the availability of ACE vehicles will cause a shift in the companies that provide on-demand mobility services. On-demand mobility services and ACE vehicles will also lead to a shift in the way governments approach transportation and next-generation mobility. Finally, the introduction of autonomous trucks, vans, and other robotic vehicles, along with exploding demand for ecommerce and on-demand delivery services, and real-time supply chains will undoubtedly lead to equally disrupting shifts in logistics. We will discuss the first three of these shifts leaving the other two for a later post.

Consumer shift

The introduction of on-demand transport services, such as ride-hailing, ride-sharing, and bike-sharing, is causing consumers to re-think how they are utilizing their personally-owned vehicles, how they are spending their time while in transit, and what is the total cost of their daily transportation. As a result of this re-thinking consumers have already started transitioning from the notion that puts car ownership at the center of personal mobility to a hybrid model that combines car ownership with vehicle access through on-demand and scheduled transport services.

Obviously, not every consumer will adopt this hybrid model. It is also not yet clear what will be the tipping point for this shift. However, we are already starting to see this shift happening within certain population segments in cities with high population density. It is driven by:

1. The convenience of easily accessing on-demand a broad set of transportation options through a mobile app
2. The price attractiveness of these options when compared with the cost of using personally owned vehicles, and/or public transportation.
3. The overall positive experience while being transported using such services.

The resulting hybrid model could be transitional and last for the next 10-15 years. It could be gradually replaced by a model that centers on mobility-as-a-service in certain settings, starting with specific megacity types.

Automaker shift

As it takes hold, the consumer shift will likely lead to reduced demand for personally-owned vehicles particularly in developed economies. This prospect is forcing incumbent automakers to re-evaluate their business model. Should they remain exclusively vehicle manufacturers? Or should they transition and in addition to providing next-generation vehicles they also provide  personalized (insights-based), and trust-based transportation solutions that address the consumer’s overall ground mobility needs? Automakers that choose this transition must offer on-demand transport services, and other transportation-related services such as parking, fueling/charging, etc. They must also help the consumer with multi-modal transportation such as busses, trains, and subways. Some automakers have already started to offer such on-demand transport services as ride-hailing and car-sharing. Based on their decision relating to this shift, incumbent automakers will be organized in different categories that will be detailed in a later blog post. Incumbent automakers that choose not to make this shift, run the risk of being disrupted as their existing business models will come under increasing pressure.

On-demand transport service provider shift

As on-demand transport services such as ride-hailing and ride-sharing become more prevalent, the companies that offer them will need to consider adopting ACE vehicles because they:

1. Improve the economics of these services. For example, today it costs ride-hailing companies $1.6/mile to offer their service using conventional vehicles. Using ACE vehicles this cost will be $0.35/mile.
2. Enable the services provider to offer a more consistent passenger experience, devoid of driver idiosyncrasies and other issues, that often cause problems for the companies offering such services.
3. Enable transport services companies to use big data and AI to control and coordinate their vehicles and deliver vehicles to the right place, at the right price, in the right condition, and at the right time. Getting vehicles to the right place and charging the right price will become table stakes. The competition will be for the right experience (i.e., providing a car that is in the right condition, in terms of cleanliness, maintenance, and safety, etc., and at the right time for the passenger’s needs). AI-based data exploitation can help in this area.

If they decide to use ACE vehicles in their services, ride-hailing and ride-sharing companies will need to shift from being 2-sided marketplaces that provide ride coordinators to becoming fleet operators. Only by operating their own ACE vehicle fleets they will be able to gain access to enough of these vehicles to offer their services at scale as soon as these vehicles become commercially available. They will also be able to take full advantage of the data generated in these vehicles to personalize the cabin, optimize each vehicle’s performance and availability, and maximize revenue miles.

Today, on-demand personal transport services are offered by Transportation Network Companies (TNCs), such as Uber and Lyft. TNCs recruit drivers who supply their own vehicles, and riders. They use technology to coordinate rides by matching drivers with riders, set the ride’s price, manage the ride, and track service ratings. By not owning the vehicles, TNCs at low cost adapt the supply of drivers to the demand for rides. This is at the core of their business model.

Not all transport services companies will make this shift. Over time the companies offering ride-hailing, ridesharing, microtransit and last-mile delivery services will be use fleets that place them into three broad categories:

• Ride coordinators: The companies we know today, coordinating rides in vehicles owned by other individuals. As the cost of capital increases TNCs belonging to this category will need to determine in which cities they will be able to operate profitably, implying that they may need to constrain their expansion plans.
• Hybrid fleet operators: Companies that use a hybrid (human/digital) model. In some cities they operate exclusively under today’s TNC model. In others, they operate both under todays’s model and by managing their fleet of autonomous vehicles. Whenever possible, they will operate exclusively a fleet of autonomous vehicles.
• ACE fleet operators: These companies operate only fleets of autonomous vehicles. Waymo is a good example of such a company. They will start operating once such vehicles become available and licensed to operate. They will offer general public transportation or specialized services, such as transportation of elderly or handicapped.

A new value chain for on-demand shared mobility

The availability of next-generation vehicles and transport services, combined with the three shifts discussed above are leading to the emergence of fleet-based on-demand shared mobility. Deploying fleet-based on-demand mobility will require a new value chain (shown in Figure 1).

This value will consist of the following components:

Vehicle design and manufacturing. The next-generation vehicles used in fleet-based on-demand shared mobility will be differentiated by their function-specific bodies, e.g., vehicle for short city trips, cabin interiors, e.g., 1-2 passenger cabin for short city trips, and software, hardware and data systems. Each such vehicle’s design may be created by an automaker, often with input from the other members of the new value chain. The vehicles may be manufactured by an automaker or one of the new outsourced automotive manufacturers (e.g., Magna, Foxconn).  These vehicles incorporate two important software-hardware-data platforms that enable the autonomous operation of such vehicles, and provide for personalized experiences while being transported.

• Autonomous Vehicle Operating Platform. This platform controls the vehicle’s autonomous operation. It consists of the hardware, e.g., sensors such as Lidar, software, e.g., AI applications for perception, localization and planning, and data, e.g., sensor data, high definition digital maps, that make the vehicle’s autonomous operation possible. Big data and AI are at the core of this platform. They are used in the data fusion, perception, localization, and planning functions that are at the core of autonomous mobility. Automakers like Tesla, Ford, GM, and BMW are developing proprietary operating platforms to incorporate in they autonomous vehicles they plan to introduce. Tier 1 suppliers like Aptiv, Bosch, and Intel/Mobileeye, are also developing such platforms that they plan to offer to several automakers. Finally, startups like Aurora Innovation, Drive.ai and Renovo (one of my portfolio companies) are developing standalone autonomous vehicle operating platforms that can be incorporated into next-generation intelligent vehicles.
• User Experience Platform. This platform controls the passenger’s transportation experience, including the in-cabin experience. It consists of the hardware, e.g., infotainment system, software, e.g., telematics, AI applications for cabin personalization, and data, e.g., infotainment content, passenger preferences, that address passenger needs while traveling in vehicles with Level 4 or Level 5 driving automation. An example such platform were recently demonstrated by Waymo and another by Mercedes. The UX Platform will likely have components running on the vehicle, the cloud, and the passengers’ mobile devices. Uber’s customer application is another early example of an UX Platform running exclusively on smartphones. Tier 1 suppliers like Samsung/Harman, Faurecia and others are developing such platforms.

Fleet creation. Automotive OEMs that will offer transport services will field fleets of their own autonomous vehicles. All other companies that will offer on-demand shared mobility services using autonomous vehicles will either order such vehicles directly from one or more OEMs, like Waymo recently did with FCA, and with JLR, or will lease such vehicles from fleet leasing companies, like Wheels. This is also the common practice in the airline industry. Fleet creation entails the financing, and insurance of the vehicles ordered.

Fleet operation. There are many activities involved with the operation and management of the ACE vehicle fleet in the process of providing on-demand transport services. They start with generating demand for the services, maintaining competitive prices in order to maximize the total revenue miles, and taking and fulfilling reservations, often involving multimodal transportation where each modality may be offered by a different company or organization. To manage the fleet effectively and profitably operators must perform several activities. They must maintain low downtime for each vehicle, minimize the miles the vehicles travel empty, and have available the right vehicles at the right time and the right place to meet the demand they generate.

Whereas the automotive OEM dominates the vehicle manufacturing and sale value chain, fleet operators will likely dominate the new value chain. The fleet operator will:

• Own the relationship with the customer (reservations, payments). Fleet operators may eventually provide reservations for multi-modal ground transportation that combines on-demand with public transportation options (e.g., city bus, subway, light rail). Startups such as TransLoc, UbiGo, Masabi and Rome2Rio have started to offer such options.
• Understand in detail the customer’s transportation and logistics needs so that it be in the position to anticipate them and address them.
• Control the fleet of vehicles providing the transportation and logistics solutions under a personalized and consistent experience.

Fleet service and maintenance. Servicing, maintaining, and supporting a fleet’s ACE vehicles are critical functions that ensure smooth operation and the achievement of the operator’s financial goals.  Fleet maintenance is already emerging as a major issue for ride-hailing companies. In fleet-based on-demand shared personal mobility it will consist of maintaining and servicing the fleet, refueling/recharging each vehicle, monitoring each vehicle’s performance during each ride and teleoperating the vehicle when the vehicle cannot, or is not safe to, operate autonomously, monitoring the physical condition of the cabin, e.g., how clean it is after a ride, and returning it to the right condition when necessary, taking care of vehicles that have broken down or been in accidents, and managing the physical locations where vehicles are stored, maintained and serviced, when not in operation. Like the airline industry, the fleet operator may decide to outsource its fleet’s service, maintenance, and support to a specialist.

Integrating across the value chain. In order for this value chain to be successful, and the companies participating in it must share data. This means they must develop open, scalable, and secure APIs for their partners in this value chain. The participants can then access and exchange data. Partnerships will be important, as will flexibility. APIs are one expression of this flexibility. HERE, Uber, and Lyft have already started making such APIs a reality. Of course, the design and implementation of such APIs is only one aspect of a company’s interface ability. Its business processes, and ultimately its culture, must be properly designed, or redesigned, to achieve this goal.

Models for implementing the new value chain

This value chain is just now forming. Yet, we are already observing the emergence of three different models that implement it. In all three models, the automaker designs and manufactures the next-generation vehicle.

Model 1	Vertical integration model: The automaker designs and manufactures the next-generation vehicle, including the Autonomous Vehicle Operating Platform, and the User Experience Platform and offers transport services through its own fleet operating company.
Examples: GM (with Cruize and Maven), Daimler (eventually with Moovel)
Pros:
•Full control of the transportation solutions offered
•Full control and ownership of the big data
•Full control of the IP
Cons:
•High overall investment
•Automakers lack data exploitation
•Automaker’s corporate culture inhibits fast implementation and roll-out

Model 2	Partnership Alternative 1: The automaker designs and manufactures the next-generation vehicle, and partners with fleet operating companies to offer on-demand mobility services (today, this is demonstrated by automakers partnering with TNCs). The Autonomous Vehicle Operating Platform may be provided by the OEM, the fleet operator, or a third-party supplier, including a Tier 1 supplier. The fleet operator finances the fleet. Fleet servicing and maintenance will be provided by separate companies.
Examples: Volvo + Uber; Ford + Lyft
Pros:
•Balanced investment between automaker and fleet operator/TNC
Neutral:
•Most of the transportation experience comes from the fleet operator/TNC
•Automakers lack data exploitation
•Co-ownership of the IP
Cons:
•Automakers lack data exploitation
•Automaker’s corporate culture inhibits fast implementation and roll-out

Model 3	Partnership Alternative 2: The automaker provides the vehicle and partners with the provider of an Autonomous Vehicle Operating Platform, a provider of the User Experience Platform, and the fleet operator (today, this is demonstrated with the automaker partnering with TNCs). Fleet servicing and maintenance will be provided by separate companies.
Examples: FCA + Waymo + Avis + AutoNation; SAIC + Baidu + Grab
Pros:
•Low automaker investment
•Low automaker risk
Cons:
•Automaker doesn’t own or control any of the important big data
•Automaker doesn’t control any of the IP relating to the autonomous vehicle
•Automaker’s corporate culture inhibits fast implementation and roll-out

As we see from the three models:

1. Incumbent OEMs may not be certain whether to just continue to produce vehicles or offer on-demand transport services in addition.  For this reason, they are experimenting with both Model 1 and Model 2.
2. Models 2 and 3 show that we are entering an era of innovation-driven collaborations. This occurs between industry incumbents and newcomers, including startups. In many instances these collaborations have the form of partnerships. For example, Waymo partnering with AutoNation. In others they involve investments, e.g., VW investing in Gett, or co-creation, as is the case between Uber and Volvo.

Summary

The adoption of next-generation mobility is accelerating. But we have just taken the initial baby steps. The introduction of ACE vehicles will positively impact on-demand shared personal mobility services. And such services will take us even further down the road towards mobility-as-a-service. Next-generation personal mobility will drive three important shifts that will result in the formation of the fleet-based on-demand mobility value chain. Even in this early stage, we are already seeing different models for this value chain. Right now, there are unique visions for the future of personal mobility and the automotive industry. These visions require different investment models for corporations, venture investors, states, and city governments.

The next article in the series