This is the second in a series of articles about self-driving cars. The views expressed in this article are my own, and do not represent the views of Travelers Insurance Company.

A few weeks ago, Waymo (Google’s self-driving company) announced a partnership with Jaguar to purchase up to 20,000 I-PACE electric vehicles factory-fitted with Waymo’s self-driving technology. This includes plans to roll out a ride-share services in various locations over the next four years, achieving 1 million self-driving miles per day by 2022. GM/Cruise has announced similar plans to begin roll out a service in 2019, using their own self-driving tech and building their own electric vehicles.

When I first read about GM/Cruise’s ambitious plans, it was a revelation for me. I knew that self-driving technology was advancing more quickly than most thought. But I hadn’t yet fully realized the powerful, synergistic relationship between self-driving, electric, and ride-share services that will bring about major change and disruption even faster than I was thinking.

Here are five ways these three advances go hand-in-hand into the future.

#1 – Self-driving tech: Skill goes up, size and cost go down

In Part 1 of this series, I discuss the exponential nature of self-driving technology. Over the next few years, growth in self-driving capability will accelerate very quickly. It took about 13 years (from the Grand Darpa Challenge in 2004) for the technology to reach the competency of your average student driver. My son is learning how to drive, and although he is able to get us from A to B, I often feel a bit frightened when he is behind the wheel. I think that today’s self-driving tech probably makes people feel a bit frightened from time to time. Because of exponential growth, this technology will quickly overcome this skill gap, and in only five years these cars will drive better than the very best professional drivers, in any situation, and in all road conditions.

 It’s not only the processing/software in self-driving cars that is improving rapidly. With exponential technology, size and cost also tend to decrease at an exponential rate. LIDAR technology that used to weigh 28 pounds and cost $5000 per laser now weighs 10 pounds, is the size of a hockey puck, and costs $3000 per laser. In additional, there are 30+ companies working to produce solid-state, sub $1000 LIDAR devices; while many of these will likely fail, some will succeed. In the next few years, the cost and size will continue to drop and will reach the point where the technology needed to make self-driving cars work is quite affordable.

#2 – Electric vehicles will soon attain cost parity with internal combustion (ICE) vehicles

In 2012, the Tesla Model S was introduced at a cost of $80,000+ and had a range of 250 miles per charge. In 2018, a Tesla Model 3 costs $40,000 with a range of 310 miles per charge, and other car manufacturers (GM, Nissan) have EVs available for similar prices but slightly lower miles-per-charge. In just a few years, the cost has dropped by 50% and the range has increased. The main reason is that batteries are also on an exponential curve, albeit not nearly as steep as computer processors. Since 2010, batteries have decreased in cost per kilowatt hour by 20% per year. Tesla’s creation of battery “gigafactories” will only accelerate this trend in the near term by increasing the efficiency of the supply chain.

This will quickly lead to electric vehicles that cost the same as ICE vehicles (the average gas-powered car in the US costs around $33k.) By 2022, this trend will lead to electric vehicles priced at $20,000 with a range over 300 miles per charge. Why is this important to self-driving ride share services? It’s all about replacing/lowering the cost of the driver.

Once the cost of an EV gets low enough (and after adding on the cost of self-driving technology), the total cost of the vehicle (amortized over the mileage of the vehicle) replaces the cost of the driver. Currently, ride share drivers get paid around $0.75 per mile. If the price of a self-driving electric vehicle falls below this cost, then the vehicle replaces the driver! For example, a $150,000 self-driving vehicle with a total lifetime mileage of 200,000 miles (a very conservative number), would cost the same per mile as paying a ride-share driver.  I believe the costs will easily drop below this amount (if they haven’t already), lifetime mileage will continue to increase, and we will see the vehicle cost-per-mile drop below $0.20 by 2021.

#3 – Cost of {Fuel, maintenance, lifetime miles, driver, insurance/finance} all dropping

The main costs of running a ride share company are the driver (replaced by the self-driving vehicle), fuel, maintenance, lifetime miles, and insurance/finance charges.  The decreasing cost of the “driver” was discussed in reason #2 above.  For the rest of the items, pick any one of them and cost is going to decrease rapidly in the coming years. The key point is that this is true only for electric vehicles, not ICE vehicles.

Fuel

The current average cost to charge an electric vehicle is .10 per “eGallon”, vs. around $2.50 per gallon for gasoline. This equates to a 55% reduction in cost when switching from ICE to electric vehicles.  Batteries should continue to get more efficient over time, lowering the cost to charge. Oil and gas companies may get desperate to retain market share and drastically lower the price of oil to counter EVs becoming mainstream, but in the end electric will still be cheaper.

Maintenance

There are varying numbers thrown about on the internet, but if we compare an estimated 20 moving parts in an electric motor vs 200-2000 in an ICE engine, we see a 10-100x decrease in complexity, resulting in significantly lower maintenance costs for EVs.

Lifetime miles

As the technology matures, electric vehicles will be able to drive more miles over the vehicle’s lifetime. The improvement of batteries plus the simplicity of electric motors will push the total miles upwards, helping to spread out the vehicle purchase cost over more miles. This means decreasing the charge per-mile for ride share customers.

Insurance/Finance

Companies can purchase or build self-driving electric vehicles outright, removing any finance charges from the equation. Additionally, these vehicles will be skilled at avoiding accidents or limiting the damage; there will be less accidents and therefore lower costs, creating the incentive to self-insure and lowering the cost of insurance for individual consumers.

#4 – Ride share greatly increases usage, which increases profit

How often do we really drive our cars each day, versus having them parked and unused? Unfortunately, the car costs the same regardless of how much it is used each day. For a ride share company, increasing the amount of time a car is being used lowers the fixed cost per vehicle (from running the business) while increasing daily profit. This will enable them to provide a ride, available any time, for less than what you pay for your personal vehicle today.

As discussed above, Waymo just recently signed on to purchase 20,000 Jaguar I-PACE electric vehicles for use in a ride share service. If these cars drive 150,000 miles per year with a profit load of $.05 per mile, they stand to make a profit for Waymo of $150 million per year.  These vehicles represent 0.008% of all registered vehicles (250 million) in the USA, barely a scratch on the overall market.

Just for fun, consider this: if the entire US fleet was replaced with self-driving ride share vehicles (which is possible due to each ride share vehicle replacing multiple personal vehicles), at a $.01 profit load per mile, the profit generated would be $37.5 billion per year!  It is no wonder that world-class companies, including car manufacturers, are working hard to get first mover advantage in the self-driving ride share space.

#5 – Skill and price converge in 2021

We live in an amazing time, where self-driving technology advancement converges with lowering costs of electric vehicles. I estimate that by the end of 2021, the skill of self-driving cars will reach a point where people are comfortable trusting the technology. In this same year, the cost of self-driving ride share will drop below $0.40 per mile (I pay $0.70 per mile for my personal vehicles today). At this price point and comfort level, there will be little incentive to own your own vehicle. From here, the price will only continue to drop. To be fair, the cost-per-mile to own could also go down as oil prices drop and electric vehicles become affordable. But in the end, ride share’s lower cost will win the day.