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Why car companies are trying to imitate Uber and Lyft

January 19, 2017

Car companies want to sell as many cars as possible. This is an indisputable fact. But lately they’ve been trying to speak the language of a post-ownership future. They see Uber and Lyft and the trend of more people moving to cities and abandoning their cars, and they’re anxious. They know there is a problem with too many cars on the road and too much traffic and pollution. So they decided to lean into the “mobility” trend and see where it takes them. Ford spun off its own LLC. General Motors launched a car-sharing company. Nearly everyone started overusing terms like “transportation as a service” and “smart cities” without really explaining what they meant or how this is a sustainable business.

At both CES in Las Vegas and the North American International Auto Show in Detroit this year, this trend was on full display. In Detroit, Ford eschewed the traditional new car reveal in favor of a TED-style talk about smart cities and the future of transportation. Walter Isaacson of the Steve Jobs-biography-fame moderated a totally scripted panel discussion with Ford chairman Bill Ford and CEO Mark Fields, in which they discussed the company’s new business ethos of reducing commuting times and producing “zero waste.” (How do I know it was scripted? I was sitting right by the teleprompter.)

It’s strange watching car companies try to rebrand their mission. During the presentation, Ford showed off just three vehicles, the revamped F-150 pickup truck (still Built Ford Tough), and announced the return of the Bronco and Ranger. But the two vehicles that received the most attention were not the kind you’d see on a showroom floor: a transit van for the ride-sharing service Chariot (which was recently acquired by the automaker), and a hybrid yellow taxi.

Ford also screened a utopian vision of what it sees as the “City of Tomorrow,” in which pedestrians and smart cars straight out of science fiction mingled in harmony in an urban environment that was more Hanging Gardens of Babylon than Blade Runner.

It’s not just Ford that’s out there making big claims about mobility. Cadillac recently started a subscription service. BMW is expanding its car-sharing program to new cities. Honda unveiled a new concept car designed specifically for ride- and car-sharing. With Americans putting more miles on the road than ever before, and traffic fatalities showing no signs of reversing their upward trend, the $1.7 trillion auto industry is suddenly interested in solving the problem it helped create: too many cars on the road.

From the auto industry’s perspective, this is a pretty obvious move. Car sales are continuing to grow, but at a much slower pace than in years past. Analysts say this drop in sales can be attributed to the rise of mobility services like car-sharing and ride-hailing. Investments in companies like Uber and Lyft topped $21 billion in 2016, according to McKinsey. That’s a lot of money, and the car companies want a slice of the pie.

But how serious are these companies about embracing mobility? According to Raj Nair, Ford’s chief technology officer and executive vice president of product development, quite serious. “The total mobility services could theoretically be as large as our core automotive business,” he told me in Detroit. “So it’s not an insignificant opportunity for us.”

Nair ticked off the per-mile costs of various forms of transportation to back up his claim: taxis cost on average $6 per mile, while mass transit falls between $0.30–$0.70 per mile, depending on the city. Ride-hail services cost around $2.50 per mile, depending on surge pricing. And personal ownership tends to cost around $1.50 per mile, Nair said.

Raj Nair

 Photo by Ethan Miller/Getty Images

And with the advent of self-driving cars, the economics underpinning mobility services become even more attractive, with the cost slashed to around $1-per-mile. “Now you have a solution that’s actually cheaper than personal ownership, that’s actually extremely convenient as well,” he said. “It’s not you have to go to the bus station or the subway station. It’s on your schedule, maybe it’s shared, but it could be a personal ride as well. And it’s cheaper than owning a car.”

Of course Nair’s vision for a high yielding autonomous mobility service depends entirely on a future where robot cars roam the streets, endlessly picking up and dropping passengers, never parking, never taking bathroom breaks. It’s a future that depends heavily on both the advancement of self-driving technology and our ability as a society to accept this technology — both of which may take decades, or in fact never converge.

Of course, mobility service startups are still struggling to squeeze out a profit. Both Uber and Lyft are losing hundreds of millions of dollars a year in their effort to undercut each other and the traditional taxi industry. Lyft generated $700 million in revenue last year but lost about $600 million, according to leaked financial documents. Uber appears on track to lose around $3 billion in 2016, mostly thanks to its costly price war in China, which it eventually was forced to concede.

If automakers are serious about mobility, they will need to shift focus from vehicle production to fleet management, which is not guaranteed to be a smooth transition. Somebody has to own these robot cars that we’re using and sharing, but who? Back in the day, the car companies dabbled in fleet management with the emergence of the rental car business, but eventually most were spun off into their own ventures.

“The auto companies expanding into service are lured by the potential of a higher margin business in service that also could insulate them from potential changes in ownership models of vehicles,” said Mike Ramsey, a research director at Gartner. “It’s an age of experimentation — but long-term the companies will have to decide whether operating fleets and all of the energy and cost associated with that, really is fulfilling its stated purpose.”

But confidence that mobility services will eventually bolster a car company’s the bottom line is something you hear from a lot of auto execs these days. While in Detroit, Julia Steyn, CEO of GM’s car-sharing service Maven, told me this new venture is of “tremendous value to [GM’s] core business.” And she defended GM’s ability to maintain a large fleet of vehicles as part of the company’s “core competency.”

“You end up not selling a vehicle, you end up owning a vehicle,” Steyn said. She argued that GM’s after-market division, its network of dealerships, and experience with the insurance industry all “build upon these things that we have done well for 100 years.”

MOST CAR COMPANIES PROBABLY SEE THIS TREND AS A TEMPORARY BLIP

These mobility services are better viewed as a hedge against the trend of more young people moving to cities and ditching car ownership. GM wouldn’t be letting millennials share its cars if it didn’t think that by doing so it stood a better chance to sell them a Chevy Volt or (better yet) an Escalade when they start having kids and moving to the suburbs. And its safe to assume that most car companies probably see this trend as a temporary blip — a momentary pit stop on the road of life, and not detrimental to their core mission of selling cars.

The tech startups doing the disrupting appear unconcerned about the auto industry’s incursions into the mobility space — especially those startups with a vested interest in the industry’s success. Over a year ago, GM invested $500 million in Lyft with the stated goal of collaborating with the San Francisco-based ride-hailing service on a fleet of self-driving taxis. In the meantime, Lyft drivers can get special deals on GM car rentals. Lyft CEO Logan Green told me recently that automakers’ commitment to mobility is sincere. “I think we should take them seriously,” Green said. “It’s a very genuine move.”

“IF THESE MOBILITY OFFERINGS DON’T MAKE MONEY, THEY CAN BE DISCOUNTED AS AN EXPERIMENT.”

We won’t get a good idea of how successful all these mobility services are until they are large enough where their profitability (or lack thereof) can be scrutinized. Until then, they can grow and contract as the market demands — and often with little impact on car companies or their bottom line.

“If these mobility offerings don’t make money, they can be discounted as an experiment when they are small,” Ramsey said. “When they grow and their operations have a noticeable cost, they have to show a path toward profits at least, particularly if the auto market slows.”

But even with its GM partnership, Lyft in on-the-record that the age of personal car ownership for people who live in cities will end in 2021. That can’t be something that GM or any of its competitors will be happy to hear. How long these alliances will last, or what carmakers would do in a world of radically decreased ownership, is a road we have yet to travel.

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