17 June 2019
By David Palmer, Co-Fund Manager HC Verbatim Portfolio 5 Income Fund
The sound and the fury about the recent initial public offering of Lyft and Uber’s incipient debut on the stock market masks a more profound shift in how taxi services will function in the future.
At the moment, ride sharing’s disruption of transport provision in cities around the world has little impact on the fortunes of the automobile sector. But, over time, the emergence of the robotaxi will more closely intertwine the fortunes of manufacturers and such service providers.
While taxi companies, rather than car manufacturers, are currently bearing the brunt of Lyft and Uber’s changes, makers of automobiles face plenty of challenges from other quarters.
The automobile sector faces technological disruption on a number of different fronts. Traditional combustion engines are being replaced by electric ones. Rapid advancements are being made in assisted driving technology to improve safety. The ultimate goal is full automation, when all those travelling in a car will be passengers.
At the same time, the consumer’s love affair with the automobile is waning. The number of millennials taking their driving test is falling. Growing urban populations as well as concerns over the cost of owning a car and the impact on the environment are all driving a lack of interest in car ownership.
These trends, in combination with the growing popularity of car sharing services today could pave the way for the robotaxi of the future. Rather than people owning their own car, they will pay per mile for an autonomous vehicle.
We anticipate the autonomous car will bring taxi costs to much lower levels than those currently offered by Lyft and Uber – it could be as low as $0.26 to the mile.
Not only are electric vehicles easier to maintain than those with combustion engines but autonomous taxi fleets will be much cheaper to operate because a driver does not need to be paid for their time.
This is likely to accelerate the trend away from car ownership towards a rental model. It can make car use more efficient: rather than tying up significant chunks of capital in an asset which is used only 5% to 10% of the time, autonomous vehicles could be shared.
There would also be beneficial environmental impacts – autonomous electrically operated robotaxis would generate less pollution. If fewer people owned cars, space would be freed up in streets and garages could be turned into residential units.
New business models may well evolve that see taxi services turn into leasing businesses. Larger companies could develop fleets or individuals could decide to rent out their asset, when they are not using it. In this future world, Lyft and Uber would be able to provide a database of potential customers.
But while ride-sharing services will have their role to play, the company which will profit the most from the development of the robotaxi is whichever company owns the operating system. This is where the greatest opportunity lies for investors.
At first, developing an operating system is a capital intensive business which takes time to develop. But once built and adopted by makers of autonomous vehicles, this becomes a high margin business. Developers of operating systems also tend to have market dominant positions, which minimises competition and protects prices.
It’s hard to predict when these operating systems will emerge and which companies will successfully develop these systems. The two largest contenders are Waymo, a subsidiary of Alphabet, and a GM business called Cruise.
While investors could gain exposure to these businesses by buying the large parent companies, it’s not a particularly efficient way of allocating capital. Over the medium term, investor returns are more likely to come from developments in assisted driving.
The robotaxi revolution, however, is more likely than not to come into existence and investors should keep a close eye on this trend to ensure they can position their portfolios correctly once a clearer picture emerges.
And those eyeing an investment in Lyft and Uber may find the current sound and fury will look overblown if the robotaxi arrives before this companies have managed to turn expectation into profitability.
The value of investments and any income from them can go down as well as up and is not guaranteed. Your clients could get back less than they originally invested. Past performance is not a guide to future performance. The portfolios' investments are subject to normal fluctuations and other risks inherent when investing in securities. Verbatim Asset Management has taken due care and attention in preparing this document, which is solely for the use of professional advisers. Verbatim cannot be held responsible for any inaccuracies arising out of information detailed within and will not accept liability for any loss arising out of or in connection with its use. This article is for information only and should not be deemed as advice.