Driverless Tech Will Impact These 5 Industries

Self-driving vehicles are one of the most anticipated and exciting innovations in the world today. Driverless cars seemed like a sci-fi fantasy only a decade ago but they are fast becoming a reality as companies like auto manufacturers, ridesharing services, and tech companies race to develop a safe and reliable autonomous vehicle (AV).

This article originally appeared in the Motley Fool.

If the autonomous vehicle revolution lives up to the expectations of futurists and forecasters, its effects will be far-reaching. Not only will everyday commuting and transportation be transformed due to the rise of "mobility as a service" — as the driverless revolution has been called — but a wide range of industries will also be changed for better or worse as they adapt to a world where people can easily move from one destination to another in computerized pods.

Just as the cloud has led to the transition of computing as a scalable service rather than a concrete product like hardware, analysts see a similar evolution with self-driving cars. As autonomous vehicle technology advances, commuters and others (especially in cities) are expected to no longer need their own cars and can rely on a fleet of driverless vehicles to ferry them to and from work, home, or wherever they need to go. Since the biggest cost today of ridesharing services like Uber is the driver, eliminating that will make such rides vastly cheaper, therefore making the comparative expense of owning a car untenable for many.

Among the industries that will be most clearly impacted are auto manufacturers and ridesharing services, but also insurance companies will bear a burden since car crashes are expected to decline. Gas stations, airlines, and hotels are all connected to the transportation industry and will be changed as well. Manufacturing costs for cars will increase due to the quantity and cost of the technology necessary in AVs, meaning that potentially car ownership will decline.

We'll examine how these and other industries will be affected by the proliferation of driverless technology, but first let's take a look at where driverless technology is today, its potential and the challenges it faces, as well as the other key aspects investors should understand.

For the sake of our discussion, a driverless car is defined as a vehicle that can operate itself without human input through a network of sensors including cameras, radar, lasers, and other technologies.

A brief history of self-driving cars

To a degree, autonomous vehicle (AV) technology has existed in a diluted form for a while. Cruise control has been a standard option for decades, and other features like cameras to assist with parallel parking or blind spot detection have become common in new vehicles, making the driving experience more automated.

Today, autonomous driving has become a reality on controlled tracks and other such environments. A number of states have begun allowing AV testing on public roads. California, which is home to AV leaders like Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL),Tesla (NASDAQ:TSLA), and private ridesharing company Uber recently moved to allow AVs on its roads without a driver.

Driverless vehicles have also been tested in a number of states and cities including Arizona, where the weather is easy on driving, and Pittsburgh, which Uber chose due to its challenging terrain. However, autonomous vehicles have yet to make a full transition to everyday use in all types of weather and traffic situations where they would have to react to sudden surprises.

AVs use a combination of technologies such as computer vision, made up of a network of cameras that can detect objects to the front, back, and to the side of a car, radar, and LiDAR — a system that works similarly to radar but uses light from a series of lasers to detect nearby objects.

The information received by the cameras and LiDAR gets overlaid with mapping technology to direct the car and plan the best route available. AVs can also predict the moves of other cars, enhancing safety. Autonomous vehicles can learn to predict behaviors of other automobiles and pedestrians by using artificial intelligence and machine learning. Through repeated observations and modeling, the software behind the autonomous vehicle can develop a data set that allows it to extrapolate the most likely moves of other vehicles on the road based on what it has recorded in the past. As more AVs take to the road, the technology will become even safer since they will be able to communicate with one another, and will not have to worry about the variance of human error.

The industry uses a five-level scale to measure autonomous vehicle capabilities.

• Level Zero — No Automation: The driver performs all tasks.
• Level One — Driver Assistance: Vehicle assists with features like adaptive cruise control, which can slow down the car according to traffic, or lane keep assist, which keeps the car inside highway lanes. However, the driver still must be in control of the car.
• Level Two — Partial Automation: At level two, the car can help control speed and steering, helping with spacing in between cars and centering in lanes. Some examples of level two automation include Tesla autopilot, Volvo Pilot Assist, and Audi Traffic Jam Assist.
• Level Three — Conditional Automation: Representing the next forefront in AV technology, level three vehicles can operate themselves under ideal conditions such as limited access highways. A driver is still required to be behind the wheel of a level-three vehicle, but they can take their hands off of it.
• Level Four — High Automation: At level four, vehicles can drive themselves without human interaction. Waymo, Alphabet's autonomous vehicle division, has developed and is now testing level-four vehicles on both closed-track environments and public roads that can drive themselves in most conditions, and has now logged more than 5 million miles, making it the leader. Uber, meanwhile, has racked up 2 million miles as of December 2017.
• Level Five — Full Automation: At level five, a vehicle can drive itself on known and unknown roads and doesn't require any human input. Such vehicles can operate under any road conditions and since they don't need human input, they will be designed without steering wheels and pedals. Below is General Motors' (NYSE:GM) Cruise AV, a fully autonomous model without a steering wheel or pedals that the company hopes to deploy next year.

Today, autonomous vehicles on the road are somewhere between level two and level three. Since these vehicles rely on connected software to program them, an example of the Internet of Things, companies like Tesla can easily upload the latest upgrades for its customers, making it easier for the technology to advance. The automaker says that its vehicles "regularly receives over-the-air software updates that add new features and functionality," a notable difference from traditional cars.

Opportunities and challenges

It's hard to understate the opportunity of the driverless economy. Intel (NASDAQ:INTC) — which has gained a strong position in autonomous vehicles thanks to its acquisition of Mobileye — and research firm Strategy Analytics predicted that in the years 2035-2045, 585,000 lives would be saved by AV technology, $234 billion in public safety costs would be cut, and 250 million commuter hours annually would be saved. They also predicted that the passenger economy would be worth $7 trillion by 2050.

By remaking transportation and the way space is used — especially in cities — the effects of autonomous vehicles will be far-reaching, bearing consequences well beyond carmakers and the technology companies that are developing software for AVs. For instance, parking lots could be repurposed as parks, solar farms, retail spaces, apartments, or any of a number of ways that are more environmentally friendly and useful than a paved parking lot. Similarly, on-street parking can also be removed to create more room for traffic flow, bike lanes, sidewalks, or greenery.

Still, there are plenty of obstacles to a future where autonomous vehicles are the norm. The response to a recent Uber crash shows one such risk. After a self-driving Uber killed a pedestrian in Tempe, Arizona, there have been calls to slow down the spread of autonomous vehicles until there was a greater assurance of safety. While experts believe that AVs will be safer than human-driven vehicles, the general public may need more persuasion for now as there will almost certainly be more accidents like this one.

Regulatory barriers may also delay the advance of autonomous vehicles. Legal concerns about who would be at fault in an accident abound as regulators are just starting to address the myriad of liability issues that would emanate from self-driving car usage. A group of senators recently asked autonomous vehicle makers to clarify their position on such lawsuits.

In some states, progress is moving more slowly than expected. GM said in October 2017 that the company expected to test an autonomous ridesharing service on the streets of Manhattan by early 2018. However, more than six months after applying for a permit, the carmaker is still waiting for a final approval from the state. Following the Uber crash, regulators may be more wary of testing such vehicles in an uncontrolled, high-risk environment, and regulations will likely delay the technology's full deployment.

Still, the effects of the AV revolution are already beginning to be felt in a multitude of industries. Let's take a look at the sectors that can expect the most impact from the rise of driverless cars.

1. Auto manufacturers

No industry will be more impacted by self-driving than the automakers themselves. Already, traditional automakers are jockeying for position. General Motors has made several acquisitions to beef up its autonomous pipeline including Cruise Automation, an AV-tech start-up, and Strobe, a LiDAR manufacturer. Based on GM's plans to deploy a self-driving ridesharing service as soon as 2019, the Chevy maker seems to be making considerable progress in the AV race.

Ford (NYSE:F), meanwhile, recently said it would deploy AVs in a test in Miami, and the company plans to have fully autonomous vehicles in operation by 2021. However, based on the valuations — both Ford and General Motors command price-to-earnings ratios around 6 — for traditional automakers, investors seem to be taking a dim view of their prospects. Investors are awarding much richer valuations on younger companies like Tesla and Uber.

Investors should note that several factors influence P/E ratios and in the case of Ford and GM, they are also low because of fears that the auto cycle is reaching its peak.

No one knows exactly what effect self-driving cars will have on traditional automakers, and that will depend on the speed and the extent that consumers embrace AVs and how quickly traditional auto manufacturers can develop and incorporate the technology.

However, the conventional wisdom is that auto manufacturers could be among the losers for a couple of key reasons:

1. Fewer consumers will need to own cars since ridesharing will be so cheap and convenient.
2. The carmakers could also be fighting for market share with more players as tech companies enter the market.

That being said, tech companies such as Alphabet, have said it would focus on the technology itself and leave the car manufacturing to the experts. It has partnered with Chrysler to develop a ridesharing service that could hit streets as early as this year. Uber has partnered with a range of automakers including Volvo, Toyota, and Daimler.

Only Tesla has emerged as a legitimate competitor to the big three, and Apple is rumored to be developing its own electric car, which could evolve to have self-driving capabilities over time. With the proliferation of self-driving cars, fewer American city dwellers are likely to own their own vehicles as it will, in theory, be so easy to hail one from an autonomous ridesharing service.

Despite this, the rate with which Americans will give up car ownership may be exaggerated as drivers — especially those in suburban and rural parts of the country — are used to the current model of car ownership and for many owning a car may be more of an emotional decision.

In fact, the AV market could be an opportunity for automakers as it could expand the market for cars. Self-driving vehicles are likely to take share from other modes of transportation like trains, subways, buses, and even air travel, and it should grow the number of vehicle miles traveled.

By alleviating traffic, parking, and the need for actually driving using AVs will become more attractive than other forms of transportation. That should be a boon for car-makers as they can either operate their own self-driving ridesharing fleets or sell vehicles to other operators if individual car ownership declines. Considering their ability to manufacture cars at scale, they will likely have an advantage over competitors like Uber in operating self-driving ridesharing services.

2. Auto insurance

Auto insurance is big business. The American auto insurance market is worth $200 billion today based on annual sales, but if AVs are successful in significantly reducing the number of accidents, the need for auto insurance will decline.

Currently, about 90 percent of accidents are estimated to be caused at least in part by human error, but with the elimination of a human element in the driving process, the burden for carrying insurance will be shifted to the fleet owner (in the event of ridesharing services) or manufacturer instead of the driver. Since those companies will have more negotiating power, many may be able to get lower rates or self-insure. In 2017, the average insurance cost for a medium sedan was $1,202, another factor that could accelerate adoption of driverless cars. The accounting firm KPMG predicted that the insurance market will shrink 70 percent by 2050, losing $137 billion of its value.

Warren Buffett, whose Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) conglomerate owns the auto insurer GEICO as well as other insurance companies, acknowledged that self-driving cars would hurt the industry. Buffett told CNBC, "If they're safer, there's less in the way of insurance costs, [and] that brings down premiums significantly."

Insurers like Progressive and Allstate are also likely to suffer as the accident rate declines. Since insurance prices are based in part on accident rates — as the money insurers collect is paid out to cover damages and claims from accidents — prices will fall as accident rates go down since insurance is a competitive market with a number of companies fighting for drivers' business.

3. Ridesharing/Taxis

Ridesharing services like Uber and Lyft have already had a significant impact on urban transportation. The value of taxi medallions in major cities has plummeted as regulated taxis no longer have a monopoly now that consumers can hail rides with an app.

Shares of Medallion Financial, which invests in and owns taxi medallions, have fallen by nearly three-quarters since 2013, and the price of a New York taxi medallion has dropped from about $1 million in 2013 to less than $200,000 last year.

With the rise of self-driving cars, the ridesharing industry is about to be disrupted again. Companies like Uber and Lyft have been aggressively working to develop a viable autonomous vehicle or to partner with carmakers that can do so as there are obvious benefits for the companies.

In the current ridesharing business model, the driver (and their car) accounts for an estimated 75 percent of the cost of the ride so eliminating the driver would make ridesharing significantly cheaper. That would likely expand the market as many rides could become less expensive than typical public transportation fare.

Although Uber and Lyft are the current ridesharing leaders they may not be the winners in the driverless ridesharing market. Those companies' biggest strengths may be the thousands of drivers they employ as it takes time to build up such a base of contractors. However, with AVs ascendants, those drivers may be rendered obsolete.

On the other hand, Uber and Lyft are jockeying for positions in the new self-driving car market with partnerships with automakers and by developing their own AV technology. Uber also acquired Otto, an AV tech company that makes retrofitting kits that allow conventional vehicles to become self-driving, signaling a potential opportunity for their contractors to turn their traditional vehicles into self-driving vehicles and use them to go and pick up rides and make money while they don't need them.

For competitors wanting to access this market, there are other significant barriers to entry such as mapping technology, an app, and making consumers aware of your service. Brand recognition may be Uber and Lyfts' biggest advantage for now.

In one key area, however, traditional automakers may have the edge: Pricing. Car manufacturers like GM can build their own vehicles and can operate their own ridesharing services at lower costs. If GM can provide a cheaper ride than Uber because it doesn't have to split its revenue with drivers/the vehicle owners, then consumers are sure to flock to its service.

Either way, the ridesharing industry is about to get more competitive, and facing off against profit machines like GM and Ford with more access to capital won't be easy. However, for now, brand recognition and a contractor base in the tens of thousands are discernible advantages for the ridesharing companies.

4. Gas stations/Convenience stores

A world full of self-driving vehicles could eventually mean a world where people no longer have to fill up their gas tanks themselves. Since autonomous vehicles will be able to operate themselves without any passengers, the cars will eventually be able to fill themselves up on breaks like late at night when no one needs them. That, along with the rise of electric-powered vehicles, which will force gas stations to add chargers, is likely to weigh on gas stations and convenience store chains that rely on customers stopping in to pick a coffee or sandwich when they're putting gas in their car.

Because drivers will no longer be pumping gas themselves, gas stations won't be needed at major intersections and fueling and recharging will likely take a place in out of the way locations where real estate is less expensive.

Some of the publicly traded gas station/convenience stores that are likely to suffer include Casey's General Stores, which makes the vast majority of its gross profit from items like grocery and prepared food, but relies on traffic from people refueling. Similarly, truck-stop chains like TravelPlaza will also face challenges as trucks become automated, meaning drivers no longer need to stop at roadside service centers for a hot meal or a shower.

However, some observers believe the spread of AVs could be boon for convenience stores as long-distance trips will become more popular and replace air travel. Even if the nature of filling stations change, passengers will still need to stop to use the bathroom or to get something to eat or drink, so it remains to be seen if business at roadside convenience stores could increase.

Warren Buffett finds himself on that side of the bet as he took a 38.1 percent stake in Pilot/Flying J, which will turn into a majority stake five years from now. With the move, Buffett is signaling that he believes the effects of the coming EV and AV revolutions have been exaggerated, saying at the time of the deal, "We don't buy businesses to change them."

5. Hotels/Airlines

Finally, the spread of self-driving cars is likely to have a significant impact on the broader travel and tourism industry, specifically airlines and hotels.

Since autonomous vehicles should make transportation cheaper, faster, and easier, it will likely encourage more weekend trips to nearby destinations, allowing travelers to effortlessly zip to a city, beach, ski area, or another popular spot that's within a few hours. More travelers and increased tourism should be a boon for hotels and companies like Airbnb that also provide lodging. Even restaurants could benefit from more frequent travel.

Years of consolidation in the hotel industry have essentially turned it into an oligopoly led by Marriott, Hilton, and Intercontinental Hotels Group, all of which could benefit from the rise of AVs as they have thousands of hotels in popular locales that should see an increase in demand as traveling gets easier.

However, the rise of autonomous vehicles will likely be a negative for roadside motels, which sprung up specifically to accommodate travelers en route to a destination, rather than at the destination itself. Since AVs don't require anyone to drive them, travelers may just choose to sleep through the night in such a vehicle in order to get to their destination faster, rather than stopping at a motel to rest in a bed. Car-makers, for instance, believe that car interiors will have multiple modes, according to the passengers' need at the time, such as sleep mode that would allow the seats to recline, or meeting mode where the seats all face each other. As such needs become more specialized, it's also possible that cars/buses will be designed specifically for overnight trips, much in that way that sleeper cars exist on trains, further obviating the need for roadside motels.

Similarly, autonomous vehicles will become convenient substitutes for short-haul trips on airlines. For instance, it would be easy enough to travel overnight in an AV from New York to Chicago, and AV passengers can avoid the hassles of air travel such as getting to and from the airport and getting through security. Airlines like Southwest, which only serves the domestic market could suffer as a result, or will be forced to improve their service to compete.

A fundamental shift in travel

Beyond these five, many other industries will be affected. For example, the need for parking spaces will be gradually relieved, which will also affect the way real estate is used; long-haul trucking will become more efficient which could put pressure on railroads; more cellular data and entertainment services like Netflix will be consumed during car trips; package and food delivery will become more efficient and cheaper, accelerating the growth of restaurant delivery and e-commerce; driving schools will become obsolete; and the demand for auto parts could be transferred to tech companies rather than traditional parts-makers (though some believe increased wear-and-tear vehicle miles could boost traditional parts-makers).

Like the internet, the driverless car revolution will remake vast swaths of the global economy in ways not yet foreseen, but for investors, the five spaces above are likely to see the greatest amount of upheaval and because of that, they will present the greatest opportunity.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman owns shares of General Motors and Netflix. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Berkshire Hathaway (B shares), Casey's General Stores, Netflix, and Tesla. The Motley Fool recommends Ford and Marriott International. The Motley Fool has a disclosure policy.