Our Driverless, Auto-Centric Urban Future, Pt. 2

As I mused on the other day, the advent of driverless cars has the potential to completely upend a lot of things about the political economy of America.  A particularly astute reddit commenter, in a post being shared around, lays out the implications pretty well – as automated vehicles become cost-effective and widespread, they will simply destroy large portions of the economy.  One aspect that I didn’t really dwell on but probably should have is that this transition has the potential to be pretty murderous for rural and even suburban dwellers.  Why?  Let’s follow the train of logic a little further.

The key insight here is that the driverless car substitutes capital for labor, like all automation.  This means that driverless cars first become economical as part of a Lyft-like service in a big city because the more it is used, the faster the capital investment is amortized.  Right now, the Google Car is bespoke and costs 600K+, but depending on its durability it’s possible to imagine the GLyft might make sense in a big city.  Well, maybe – let’s do some back of the envelope calculations.

The standard taxi rate in San Francisco is $2.75 per mile, and let’s ignore pickup/dropoff charges for now.  Let’s assume that the Glyft gets 25 mpg, and that gas in SF is around $3.70 (spot-quoted on 2/2/13), or $0.15 per mile.  Maintenance on cars tends to run about 5.3 cents per mile, but these are complex machines so let’s figure double that, or $0.11.   If we assume a fair amount of congestion and an average speed of around 20 mph, that translates to $49.80 in profit per hour.  Not bad, right?  So, is that economical for a $600,000 investment in a Glyft?

It all depends on a combination of two factors – the lifespan of the car and the amount of utilization it is able to get.  The former is simple – the longer-lived a car, the more time it has to make back its costs.  The utilization is the reason why you want to focus in big cities, because the greater the density of the people the fuller utilization you’re able to get and the more profit a car can generate.  So you can look at it from either angle, but I would suggest looking at utilization because it’s easier to estimate.  Let’s assume, conservatively, that there’s enough demand every 24-hour period for 8 hours of vehicle-miles-traveled (VMT) in San Francisco – that’s around 400 dollars per day in profit.  Which seems pretty good…that’s a yield of about 25% on your $600,000 investment.

But that means it takes 4 years to earn back your investment, which is quite a while and I’d be surprised if it didn’t fall apart long before then with 8 hours per day of continuous use.  I would guess that 14-16 hours per day in a dense city is probably more realistic, and a two-year recovery horizon makes it look far more possible.  With a $600k driverless car, we’re talking about something which I think is an infeasible investment today…but not crazy.*  With a $300K driverless car, which will come very very soon, I think it makes sense (independent of all the regulatory nonsense).  As economies of scale grow and car prices drop, cost per VMT will plummet.

I think the math demonstrates that this is probably going to happen much sooner than we think.

The flipside?  Transport for those who live outside of cities will become relatively substantially more expensive.  Since utilization rates in rural areas will be so low, cost per VMT for TaaS (transport as a service) will stay much higher than within cities.  It likely won’t be an economic option.  But buying a driverless car of your very own will, most likely for a while, be too expensive for all but the quite wealthy.  That’s not an issue as long as people can continue to buy and own their own human-driven cars.   But then there are either two possibilities – either human operation is banned eventually (unlikely in the US for various cultural reasons) or it continues to exacerbate the rural-urban divide.  I think the net effect of this would be to push greater migration to the cities and the rural developed West continuing its slide into relative poverty.

*: I could see depreciation allowances pushing it into realistic territory.

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