Beans, Uber and the Post Office

This is the second post on social media versus messaging and its effects on suppliers into the supermarkets and business relationships with customers in general. The first one can be read HERE

As applications like Facebook Messenger or WeChat or Slack ( Slack Improves Slash Commands So You Can Call A Lyft And More From Inside Slack) move to have more and more activities and transactions inside their apps it is changing the nature of how people use their mobile devices and where they spend their time. From the applications point of view it is a very smart move because the more time that people spend inside the apps the more they can serve ads in their system . In addition if they become the gateway for all sorts of suppliers to the consumer and tie that contact with identification and other social data they can take a cut of all transactions through their application. A dual income business model.

The example that has been used to describe the Facebook Messenger changes is that of booking an airline flight which then creates a permanent one on one connection between the airline and then purchaser through which they can send boarding passes and notifications. Done in the right way and with subtle advertising approaches this link minimises friction for the consumer and provides information for the seller. An ideal win win.

If I move back to the subject of suppliers into the supermarkets the conversation has to be different. Either the product has to be different or the way it is delivered has to change in a way that reduces friction or reduces costs, or preferably both

Take me for example. As part of my preparation for the summer triathlon season I have been mostly pursuing a slow carbohydrate nutrition plan which involves replacing carbohydrates in bread,pasta,rice,potatoes, etc with complex carbohydrates and proteins. It also means much more salads and vegetables. As a result I have been eating a lot more canned fish and canned beans. I am not that particular when it comes to the brands of those cans that I buy and generally do a weekly stock up and buy what is on special that week.

Now if one or more of those suppliers is able to communicate with me inside my messaging app and give me a quick option on a weekly delivery or a tap on quantity option then they have a relationship with me that bypasses the supermarket and may tie me to their brand

Having solved that problem and reduced the friction they then have  a delivery problem. I have long been a believer that Uber is a long term data play rather than an alternative people transport company and that they will use the data they are gathering for all sorts of uses including package delivery. In the long term that will be automated between driverless cars but in the shorter term they are still options. Once Uber has enough data they can offer package pick up and delivery options to drivers based on their known patterns of movements.

If a driver is heading home anyway and can pick up 5 packages and deliver them near their home for an extra income that will be an attractive proposition to them and a low cost delivery system. The reason I put the Post Office in the title of this post is that the Australian Post Office (along with others all around the world) is struggling with its business model and profitability in an era of reduced letter postage and increased parcel delivery competition. Its major strategic assets are its locations and its special place in the hearts of the community. A partnership with Uber using the post offices as a pick up and drop off location would provide an extra income stream and also drive foot traffic into their locations. Customers could pick up their packages or the messaging app could sense that they were home via GPS and ask if they want their package delivered now.

The key question in all of this is whether the logistics costs of a personalised pick and pack system and delivery system can reduce costs to the end consumer compared to a direct delivery service into distribution centres , taking into account the margins of the supermarkets and the other costs they impose on suppliers.

The secondary question is one of a cultural change. I know from personal experience in the food business that a big cultural change is required to move from a make it and ship it out culture to a customer focused culture.

The changes to our digital tools throughout the supply chain make these questions worth asking and exploring.

 

Major Disruptors of the Next Decade Section 3 – The Uber Pivot

This is part of a larger series on major disruptors. You can see the previous post in the series at:

Major Disruptors Section 2

The posts so far have focused on both the gains to be made from driverless car technology and the disruptive effects of that technology on various industries and landscapes. The next post was supposed to be on opportunities from driverless cars rather that disruptions. That post will be along soon but meanwhile lots of people have been asking me about the Uber business model in relation to driverless cars.

Uber has worked by displacing the taxi industry to a certain extent by harnessing unused capacity in vehicles in our communities but also by bypassing regulation and maximising the use of application and location technology. Given that the company has been valued at US$18 billion according to its latest funding round, (Taxi app Uber valued at $18 billion in new funding round) and my view that driverless car technology might be fully implementable in 10 years the question has been how does the company valuation make sense when the model is likely to be completely wiped out?

Firstly I think that the business model does have some short to medium structural problems. It is highly possible that the taxi/driver based car system is the one that will be initially replaced in the implementation of driverless cars. If this becomes clear then I think that Uber will have trouble retaining drivers and gaining new drivers in the transition period before the implementation period becomes practical. Who is going to invest in a vehicle or throw in their job, or turn down a job if they are likely to be replaced in one or two years. This is is similar to the problem that the car manufacturing industry will have close to a full scale implementation that I mentioned in my initial post.

The second issue is one that a lot of companies are facing right now and more will in the future. In a world that is changing more rapidly and where disruptive business models or technologies can turn up from anywhere how do you maintain a strategy and a profitable business model that has longevity? Market valuations are supposedly based on the forward view of cash flows (market irrationality aside). In a world where you business model only lasts for 10 years or less how do you maintain a valuation, especially if those cash flows are negative while you rapidly expand? The only way that Uber can do this is a long term vision of pivoting their business model significantly and that model has to be one of being a significant player in driverless car models. In the meantime they have to maintain a profitable or funded model that makes sense to people. In the longer term the game has to be one of using that platform to accrue a huge amount of data and expertise around customers and their travel requirements. It may seem crazy to have a 10 year plan to expand to hundreds of cities just to create a new business in the future but that is what is necessary in these times for lots of businesses. To me it is the only way that the current valuation makes sense.

 

What is your business model/strategy to deal with these sorts of issues given that as Gary Hamel has said “somewhere someone is making a bullet with your business’ name on it”.

 

 

Major Disruptors Section 2

On Tuesday I started a blog post series on the major disruptors of the next decade. You can see the first post at:

A Series on the Major Future Disruptors of the next decade – Section 1

The first post centred on introducing the subject and looking first of all at driverless cars and the effects it may have on the insurance industry, taxis, and the road building supply chain. Today we continue to look at other sectors that may be affected in a major way:

Public Transport

A system of government subsidised and supported driverless cars would essentially be a hybrid public/private system. It is a complex issue to compare the utility of public and private transport in those circumstances but the most likely scenario is that more people will transfer to cars and away from trains, buses ad trams. The advantages of a personalised transport offering with increased comfort, door to door delivery, and specialised and personalised  services will be pretty compelling.

As always this will be a dynamic situation as less congestion on public transport may make that more appealing for some people. Overall though it is likely that there will be less demand for public transport, less demand for new public transport investment and a problem for all the shops and systems that have built up around the train and tram stops.

Hospitals and the medical supply chain

A 90% reduction in road trauma would have a significant effect on the hospital system and its supply chain. Road trauma supplies a large part of the business of major hospitals. Having suffered such trauma myself there is also a large component of ancillary services such as rehabilitation services, physiotherapy, insurance systems etc that flow on from the original trauma.

Apart from the reduction in the emotional toll if we saved $30 billion a year in hospital costs (see the first post in this series) it will have significant flow on effects in terms of short terms need for new hospitals, long term care requirements for the seriously injured, and all the income flows that come with the whole system.

Car manufacturing

Global implementation of driverless cars will mean sweeping changes to the car manufacturing system due to a number of key factors:

  • If we do not own cars then we are likely to be less concerned about the models of cars that we use and we will have far less model ranges. The experience will be far more focused on what happens when we are in the car from the point of view of connectivity, entertainment, safety and our capacity to work while in motion than they will an emotional attachment to a car model.
  • Cars will be driven far more than they currently are. Cars are currently used on 4-6% of their daily life. If we reduce the number of cars on the road by 60-70% then the mileage done by most cars will be much higher than it previously was. In fact some uses may be five times as high if a model is adopted where a basic car model is the workhorse of the system and we use other cars less for specialty occasions such as moving stuff or a luxury dinner night.

This means that it is likely that the number of car models will reduce significantly and the focus will be on durability and reliability and a faster changeover of the life of cars measured in time while they last longer in terms of kilometres traveled. So while there may be a bloodbath in car manufacturing as these adjustments are made there is the capacity to have significant reductions in the costs of car manufacturing and running costs based on improved model volumes and increased durability from improved design, and more rapid innovation cycles.

Real Estate Markets

One of the key drivers (sic) for real estate prices in inner city areas is the price of the commute to work for a large number of people. That price is both on of an economic price of vehicles, fuel and parking but also one of a personal toll in terms of time spent travelling and lack of productivity. I live I Brunswick (6km from the Melbourne CBD) because it is 15-20 minutes into the city via tram or train, it is 15 minutes to the airport (and I travel a lot interstate and internationally), and it has a car sharing service which means I save money I would otherwise spend on owning a car. I am prepared to send more money on housing for those reasons.

If the time spent travelling can be reduced by the smart use of driverless cars creating less traffic on the road, and if costs can be reduced by sharing use of those cars and no parking, and you can get all the connected services you want inside those cars would you be prepared to travel further? If you could work in the car on the way back and forwards to an office with specialised cars that allow that in comfort plus use virtual reality technologies to have meetings while you travel would you travel further? If you could have a drink on the way home and watch your favourite comedy show in the car that no-one else in the family likes watching would you travel further? Personally I would like the capacity to have a 30 minute power nap.

If the answer to any of those questions is yes it is likely to cause a reduction in price pressures for inner city living and an increasing prices for real estate a little further out.

As an extra change all those inner city car parks will disappear, freeing up more space for accommodation and/or offices. I would be factoring that into my investment thinking right now.

Postal and Delivery Services

If we think through the issues of driverless cars and demand for their services if we implement a wholesale implementation of driverless cars then obviously there will be peak demand times around travel to work that will determine overall volumes. This means that there will be lots of times where there are large excesses of available vehicles. If we combine this with the opportunity for advances in robotics to create automated delivery systems it is easy to see a system that will replace all current postal and parcel delivery systems

A semi-autonomous system that would flex and change and link to when people are actually at home rather than based on logistics systems that seek to get us to provide a window of our time would be much more efficient. Imagine a system that senses when you arrive home and sends you a message asking if you are able to take delivery in the next 90 minutes. Parcels could be kept continually in motion and exchanged between vehicles in a way that keeps the parcel within deliverable distance of your home on a continual basis using smart logarithms. This would eliminate warehousing and provide a much more efficient system and provide a much reduced cost of delivery by utilising vehicles that are already in motion and being used rather than those dedicated to delivery.

 

Urban Planning

A significant change to road use, the number of vehicles on the road, changes in parking requirements, and the desirability of living areas has significant challenges for urban planning. If this change is likely in 10 years then the changes start to impact on the thinking for urban planning well before that point. At what stage should the approaches to urban planning change? This is a very tricky question. Even if we had an implementation date right now it would still be a difficult question to answer. We should all start thinking through these issues now

 

 

Most of the focus on these issues so far has been on the disruptions of existing infrastructure, industries and business models. In the next post I will look more at the possibilities for new jobs and services that might spring from the wide scale implementation of a driverless car society.

 

Paul Higgins

A Series on the Major Future Disruptors of the next decade – Section 1

I have had a bit of a holiday from blogging over the last couple of months due to a variety of reasons but now I am back.

Last week I did a presentation for the Cambooya Family Education Day on what the future looks like. This was both for them to look at how they should think about future investments but also to think about the future of their children and grandchildren.

We had an interesting discussion on a variety of issues and it prompted me to think a bit more deeply about the major disruptors in our global society. This was because part of my premise was that we are facing increased levels of change and disruption and therefore we need to rethink our views and measures on investments and their returns.

First of all this needs a definition. By disruption I mean a sudden change that alters a sector or industry rapidly and extensively. The definition of rapid here can be quite misleading. It took the iPhone years to really disrupt the sector and Airbnb took several years to ramp up to the size that it currently sits at but these are rapid changes when looked at form a historical perspective. Other changes such as turn by turn navigation being available on Google maps were a single individual change which revamped the GPS industry overnight.

By major I mean the capacity to completely transform large slabs of our entire society and economy.

So what do I believe are the major disruptors in the next decade.

The first of these is the driverless car. My last post:

Implementation of Driverless Cars – A case for public subsidy of private transport systems

was on how I believe there is a business case for government subsidies to implement a widespread adoption of driverless car technology given the savings that accrue to government in the process.

Given the promise that driverless cars could eliminate 90% of all accidents lets look at the industries and sectors that could be changed by such an implementation, some obvious, some not that obvious:

Car Insurance

The obvious one here is that car insurance as an industry would shrink enormously due to the reduction in accidents but there are a number of other interesting angles:

  • What happens to insurance of a vehicle where you are not driving – where do the risks lie and how do you insure those risks? If an accident is due to the failure of an algorithm then who is to blame if that algorithm has reduced the risk by 90% but still causes the accident? There is a case here for a comprehensive insurance of the system as a whole.
  • If there is wide scale implementation of driverless cars what does it cost to insure your car if you still want to drive? If you are 10 times more likely to have an accident or kill someone will anybody share those risks? If the government has implemented wide-scale adoption and is relying on the business case of reduced medical costs to fund that change are you liable for any costs incurred, including all medical costs? If so would only the super rich be allowed to drive and would we actually allow it?

Taxis

Taxis are an obvious one – put a fork in them they are done. There are some large legacy issues here. In Melbourne we are seeing protests from taxi licence holders because the government is going to issue extra annual licences which the current owners believe will devalue existing licences. Now I have little sympathy on anyone that builds a business and borrows money based on government policy on issued licences and then complains when government policy changes but there are political considerations here when taxis licences become worthless. I would not be buying one as a long term investment.

Road Building

The estimates are that we will need 30-40% of the vehicles on our roads if a complete system of driverless cars were implemented (Toward a Systematic Approach to the Design and Evaluation of Automated Mobility-on-Demand Systems: A Case Study in Singapore)

We have already started to talk to councils about what this might mean for road building and maintenance. It is clear that if we drastically reduce the amount of cars on our roads then we will need both less new roads built and less road maintenance. Of course there are all sorts of variables here about what might happen. It is likely that there would be a significant shift from public transport to private transport and that would be significantly different in different cities.

We also do not really know what happens to demand when we move from a cost that is largely embedded to one where costs are directly related to an individual decision. For instance I no longer have a car and use a car sharing service called Flexicar here in Melbourne. I estimate that it has reduced my car costs by about 60% but every time I use a car the cost is right in my face rather than being involved in my annual registration and insurance costs, or the costs of capital involved in owning a car, so I am much more likely to walk, cycle, or use public transport. The reactions of people around me are similarly different. People offer me a lift or ask me “will you have a car” or say “don’t go to that expense” when I talk about coming over when they would never do so if I owned a car. A full scale implementation of driverless cars will be an interesting experiment in people’s reaction to those costs.

What is clear is that road building companies and their supply chains will have far less demand in the long term future.

 

Please join me in the next installment where I will discuss some of the less obvious changes including effects on real estate prices.

 

Paul Higgins

 

Section 2 of this series can be found at

Major Disruptors Section 2

 

Implementation of Driverless Cars – A case for public subsidy of private transport systems

My family had a vigorous discussion over the Christmas break on driverless car technologies and the implementation timetable and pathway (yes we are like that, and if you don’t like it don’t turn up).

While we disagreed on the timelines there was general agreement that the technology is inevitable and desirable. My view was that there is a strong case for government subsidies to implement the technology which has some similar network effects as the fax machine: who buys the first fax machine?

Now, having a driverless car has some initial advantages, even if you are the only adopter. For instance if you can read/work/sleep instead of driving it is a great time saver while reducing your chances of having an accident. However the benefits of us all having driverless cars are far greater because network benefits accumulate exponentially as the number of vehicles with the technology grows.

This means that there is a significant case for a huge publicly funded effort for implementation to maximise early adoption rates. This was reinforced for me in the last week while reading several items:

The New Killer Apps: How Large Companies Can Out-Innovate Start-Ups

Audi’s traffic light assistance helps you hit every green light

The Men Who United the States: The Amazing Stories of the Explorers, Inventors and Mavericks Who Made America

In the New Killer Apps the authors describe some of the cost savings that implementation of driverless cars in the USA including:

“The American Automobile Association studied crash data in the ninety-nine largest urban areas in the United States and estimated the total accident-related costs— including medical costs, loss of productivity, legal costs, travel delays, pain, and lost quality of life— to be roughly $ 300 billion. Adjusting those numbers to cover the entire country suggests annual costs of about $ 450 billion. Now take 90 percent off these numbers. Google claims its car could save almost 30,000 lives each year on US highways, prevent nearly two million additional injuries, and reduce accident-related expenses by at least $ 400 billion a year”

Mui, Chunka; Carroll, Paul (2013-12-02). The New Killer Apps: How Large Companies Can Out-Innovate Start-Ups (pp. 19-20). Cornerloft Press. Kindle Edition.

They also go on to postulate that there would be other savings include fuel costs due to more efficient driving, and productivity improvements due to time saving. They also state that the demand for cars would be reduced by 90% due to improved utilisation of vehicles. While it is true there would be reduced demand for cars I highly doubt it would be at this level because the reduced demand theory is largely based on the fact that we only use use our cars a small percentage of the time. I no longer have a car for this reason and use Flexicar a local car sharing service. In Australia the data indicates we only use our cars on average 4% of the time and they lie idle the rest of the time. However the figure of 90% reduction in car demand is likely to be an exaggeration due to two factors:

  1. There will be a requirements for cars at peak times that will need to be filled, meaning that at other times there will still be a large capacity underutilisation.
  2. If we increase the overall capacity utilisation of our cars then they will not last as long. If we increase average car utilisation to say 20% then we will increase the mileage of our cars 5 times. In Australia that would mean moving average distance traveled to 70,000 km per year instead of the current 14,000 ( 9208.0 – Survey of Motor Vehicle Use, Australia, 12 months ended 30 June 2012 ). That means a 5 year old car would have traveled 350,000 km so changeover rates would be much higher. (there are some interesting design issues here – designing and building cars with greater durability while still allowing technology updates for instance)

There are clearly huge savings to be made in implementation of a true driverless car system if the Google assumptions are only partly correct.

In the Audi story the article states:

“Using both live and predictive data beamed into the vehicle’s navigation unit via onboard wifi, TLA doesn’t need a single camera to tell you when the light is going to change. Local data sources provide information about traffic light patterns, and the in car system uses that data and the motion of the car to predict exactly how long it’ll be until the green light goes red”

Clearly this does not work that well unless almost everyone is on the system. If drivers ahead of you are travelling too slowly for the system or brake suddenly then it would not be of much value. Also if you were travelling slowly to match your speed against when the next light would change and behind you was a trail of angry drivers trying to pass you then it could cause more problems than it solves. This magically disappears if all cars are on the system and fuel and time efficiency are gained as well as reduced accidents.

This is what I mean by network efficiencies. There must be a tipping point at which once there are enough driverless cars on the roads that benefits start to accrue more quickly and more adoption takes place. For instance if nearly all the cars on the road were driverless and communicating with each other then travel time information would be greatly improved. However the benefits accrue to different sections of the community rather than just accruing to the user, and accrue at different time frames, and there will be many self interested parties. The following are just a few examples:

  • Reduced accident rates mean a huge reduction in physical trauma and medical costs on top of the reduction in emotional trauma. This is largely saved in the government sector both in operating costs but also in continuing demand for new hospital facilities (this is also complicated by demographic changes, growth of cities, and urban intensification).
  • Individual car owners will save money in the longer term but will have the legacy costs of their current vehicles and their financing costs which may inhibit adoption and cause political backlashes. For instance if you new car is suddenly almost worthless and you have a car loan against the asset what do you do?
  • A number of sectors will miss out on income. The government will miss out on speeding fines and drink driving fines. Panel beaters, car insurers,and car manufacturers will all suffer significant revenue losses as will taxi operators and taxi licence holders.
  • If the general public came to the conclusion that large scale adoption of driverless cars was a good thing and about to happen in the next 3 years new car sales would plummet. Who would buy a new car today if it was virtually worthless in 3 years time?

Which brings me to Simon Winchester’s fine book,The Men Who United the States. In it he describes how a young Eisenhower was part of an army project to cross the USA by road in 1919 to test the capability the road system for military transport in case of war (Lt. Col. Dwight D. Eisenhower – Transcontinental Motor Convoy, 1919).Winchester claims that this experience led to Eisenhower’s long term commitment to the National road system which was later built at the cost of hundreds of billions of dollars and changed the nature of America.

There is a similar case for a large scale public investment in the adoption of driverless cars across the world. As many of the benefits accrue to government through lower costs in the health system then there is an overriding case for the government to get involved on several levels:

  • Implementation of the necessary technology systems outside of the cars themselves which link the cars to the rest of the transport system including traffic light systems.
  • A major effort to overcome any legislative barriers and risk issues, and coordinating national approaches to the problems. As an example the implementation of all this technology is likely to result in more accurate data on causes of accidents even if the overall numbers fall significantly. There will be cases where failures in the car technology causes an accident. In that case the manufacturers are likely to be held liable for the costs in that accident through the courts. At the same time the manufacturers would not accrue any of the benefits of the large reductions in accidents flowing from the technology adoption. There is a strong case for governments sharing those costs with the manufactures to reduce the costs of implementation ( I would be against indemnifying the manufacturers as they need some skin in the game).
  • Public subsidy of the system in a similar way that we subsidise private road use and public transport systems now but at least initially for a different reason. There is likely to be significant barriers to adoption of the technology which will be tied to initial costs and social attitudes. In a networked system such as large scale of adoption of driverless cars the advantages accrue much faster with higher rates of adoption. A pure business case can be made to government subsidising the system in the initial phase to significantly reduce costs and ramp up adoption rates with the payback being more rapid reduction in government costs.

Beyond all the economic arguments the human cost of road trauma is enormous and long lasting. As someone who was hit by a car 2 years ago and was lucky to escape with some serious injuries which I have mostly recovered from I have enormous sympathy for those who have not been so lucky. I was in hospital for 10 days and had 4 anesthetics and two lots of surgery but the day I left a patient in my ward was being moved to rehab after being in hospital for over 3 months, with the prospect of never walking normally again. I was able to compete in a triathlon again last Sunday in an embarrassingly slow time but at least I could finish. My thoughts go constantly to those who have not been so lucky.

My question is where are the visionary leaders of our time who will take on the huge challenge of implementing a system that can change the lives of thousands of people over the next 50 years? Who will hold the experience of meeting a severely injured car accident victim in their head in the same way Eisenhower held in his head the difficulties of crossing the USA in 1919 and set about changing the system?

Paul Higgins

Further Links:

Large-scale trial of driverless cars to begin on public roads

The world’s first large-scale test of driverless cars will involve 100 Volvos taking to the streets of Gothenburg in 2017

BMW FORECASTS CARS WILL BE HIGHLY AUTOMATED BY 2020, DRIVERLESS BY 2025.

U.K. town will build driverless podcar system

Milton Keynes, a town of more than 200,000 people, announced that it will begin a pilot program for a transit system that uses driverless, electric podcars starting in 2015.

The £65 million pilot project will use 100 podcars (that can hold two passenger each) which can be summoned by a smartphone. The initial test will have the podcars travel on a one mile route between the city’s train station and shopping centers and offices. Each ride will cost £2. The pilot will run for two years and continue if the test run is positive, possibly even spreading to other cities in the U.K.

Further links posted up by futurist P A Martin Börjesson:

New IHS Automotive study forecasts nearly 12 million yearly self-driving cars sales and almost 54 million in use on global highways by 2035

The Driverless City

 

Update:

Volvo’s first self-driving cars now being tested live on public roads in Swedish city