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