The Future of Transportation

"If I had asked what people wanted, they would have said faster horses." 

-Henry Ford

I've been wanting to write about this topic for quite some time, and given the recent buzz from Google and others, now seems to be a good time. The topic is self-driving, electric vehicle car-sharing, and I believe it has an amazing potential to change how we view personal transportation.

I've mentioned before in this blog the interplay between efficiency and economics of electric vehicles. Electric vehicles may be about $10K more expensive, but they are 1/6th the cost to operate. I had said that in the case of high gas price, EVs become much more economically attractive. They also become much more attractive if the mileage on them increases; the farther you drive, the more you leverage lower operating costs to your advantage. The problem is Americans don't drive enough. Well...I mean, Americans drive plenty, but not enough to currently offset the spread between our extremely cheap gasoline and electricity. In order to make the spread work more in our favor, we have to increase the number of miles traveled/vehicle; that means car sharing. Car sharing is a great idea. We are terrible at making good use of our own cars; we drive them just 30 miles/day on average, and we're in them only for an hour a day, leaving them sitting unused for the remaining 23 hours [1] (as an aside, the National Household Travel Survey from the US Department of Transportation is a pretty interesting report; you ought to take a look). Car sharing drives up vehicle utility.

To look at how electric vehicles could impact a traditional car sharing company, I looked up one of Zipcar's last shareholder annual reports before they were bought by Avis [2]. In addition to having to look up the difference between "revenue" and "income," I also had to look up some assumptions for cost of vehicle ownership [3], fleet mpg [4], gas prices [5], and some of Zipcar's historical data from Wikipedia [6]. Here's the breakdown from 2012:

• 770,000 members, 10,000 vehicles
• $280 million in revenue, $15 million in profit ($10 million from some "tax thing")
• From revenues:
• $40 million from membership fees
• $240 million from usage payments (I simply assumed the remaining revenue)
• From estimates on costs:
• $100 million for gas
• $24 million for vehicle acquisition in 2012
• $24 million for parking space costs
• $12 million for insurance
• $5 million for maintenance

It was here I realized I was $115 million short on costs. I also failed to remember Zipcar is a company that needs to do things like "pay employees" and "run marketing efforts," so I included those [7].

• Additional estimates for costs:
• $70 million for payroll
• $20 million for customer acquisition
• Sum total of costs: $255 million

Not bad for an estimate of an entire company's cost and revenue structure; we're less than 10% off. If we were to wave the vehicle electrification wand, it would primarily impact gas costs (the largest fraction of costs) and vehicle acquisition. To that end, gas costs would now become electricity costs at $23 million based on similar vehicle class efficiency figures (I used the Nissan Leaf) [8] and 2012 electricity prices [9]. Vehicle acquisition costs would increase to $36 million. In this scenario, revenues are still $280 million, but costs are now $190 million, raising profits from basically break even to $65 million; a healthy 23% profit margin.

That was a straight swap of EVs for gas cars in an existing car sharing company. What about invoking the self-driving component? Well, that one is a little tricky. The closest analogy is Uber, and it took some research to figure out how they actually operate, as well as a leaked 5-week snapshot to get an idea of finances [10]. Uber works as the marketplace for taxis and black car services; they actually don't own any vehicles themselves. As such, I don't have a feel for operating expenses like I did with Zipcar. All I know is that from the fare the customer pays, Uber (primarily a software and marketing company) takes 20%, leaving the 80% and the rest of the vehicle ownership, maintenance, insurance, payroll, etc. to the taxi or black car company. Rather disappointingly opaque, but most Silicon Valley startups are like this.

Let's consider hypothetically starting our own company using shared self-driving EVs. In honor of rolling out fleets of Google self-driving cars, let's call it "Gaggle" (a terrible name; no one ever use this name). Gaggle's usage statistics are similar to Zipcar's: there are 77 members/vehicle, 6hrs of use/day on each vehicle, 180 miles driven/day in each vehicle. If we use the NHTS data, this means there are 6 trips in each vehicle/day. For simplicity, Gaggle charges on a "per trip" basis; think of it like a flat fee, or like a bus pass. Let's consider 2 scenarios corresponding to 2 prices: a $12/trip scenario and a $6/trip scenario. And let's do a simple payback period analysis where trip revenue pays for the initial purchase of the car. Consider a $20,000 base car, $10,000 for self-driving capabilities [11], and $10,000 for a battery pack. At $12/trip, the gas and electric self-driving vehicles don't look that much different. Gaggle's electric self-driving vehicle pays for itself in 1.6 years and racks up 109,000 on the odometer, while the gas self-driving vehicle pays for itself in 1.8 years and hits 117,000 miles. The $12/trip cost is roughly half that of Uber and about equal to Zipcar's economics. What about the $6/trip case? The electric vehicle pays for itself in a longer time, 3.6 years and climbs up to 240,000 miles: high but given EVs lower maintenance requirements, definitely achievable (would be about 2500 battery charge/discharge cycles). The gas vehicle on the other hand requires 8.2 years and needs 540,000 miles to pay it back; this is definitely a vehicle replacement, further impacting economics.

Due to the lower operating cost of self-driving electric vehicles, Gaggle can offer cheap, convenient private transportation that makes a strong business case for profitability. Gaggle can reduce traffic, reduce pollution, and reduce frustration, all for about the cost of grabbing lunch out. Car sharing has never been better.

World: meet Gaggle.

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[1] http://nhts.ornl.gov/2009/pub/stt.pdf
[2] http://www.zipcar.com/press/releases/zipcar-reports-fourth-quarter-and-full-2012-results
[3] http://org.elon.edu/sustainability/documents/Zipcar%20FAQs.pdf
[4] http://www.nhtsa.gov/staticfiles/rulemaking/pdf/cafe/April_2013_Summary_Report.pdf
[5] http://www.eia.gov/dnav/pet/pet_pri_gnd_dcus_nus_a.htm
[6] http://en.wikipedia.org/wiki/Zipcar
[7] http://www.marketingsherpa.com/data/members/handbooks/2012-Lead-Generation-Benchmark-Report-EXCERPT-5-23-12.pdf
[8] http://www.fueleconomy.gov/feg/Find.do?action=sbs&id=30979
[9] http://www.eia.gov/electricity/monthly/pdf/chap5.pdf
[10] http://valleywag.gawker.com/matt-durham-an-analyst-at-an-ecommerce-company-crunche-1476549437
[11] http://www.fastcompany.com/3025722/will-you-ever-be-able-to-afford-a-self-driving-car

Zombie Journalism and Electric Cars

Apparently my blog isn't the only thing that has risen from the dead. FastCompany ran an article a month ago about the downfall of one of the companies I worked for: Better Place. The company had folded over a year ago; I'm not entirely sure why now would be a relevant time to discuss them, but I'm glad Better Place is getting talked about again. I had a lot of respect for what they were trying to do, which was to make EVs financially attractive.

Electric cars are remarkable. The powertrain is 80-90% efficient, compared to a gasoline car's 10-20% efficient engine and transmission. This makes a huge difference in operating costs. If you put $20 worth of gas in a 22mpg gasoline car, you'd get 120 miles before the tank runs out [1] at today's gas prices of $3.70/gal [2]. If you put $20 worth of electricity in something like a Tesla Model S, you'd get 670 miles before you run out of juice [3]. Electric vehicles are so economical to run because 1) the powertrain is so efficient, 2) the electricity to run them is so cheap. The problem is the battery is pricy, so even though an EV is less expensive to run, people won't buy them because their upfront costs are too high (consumer discount rates w.r.t. energy efficient appliances, EVs included, is a fascinating energy economics post for another time).

Let's do what Shai Agassi likely did when he decided to found Better Place and look at the economics of EVs relative to gasoline cars. We already did the math saying EVs are about 6x cheaper/mile to run. If we take Tesla's quoted cost of the replacement battery of $10K, how far would we have to drive to make up that cost difference? With $3.71/gal gasoline, $0.10/kWh electricity, a 22mpg gas car vs. a 3mi/kWh EV, it comes out to be about 70K miles: less than the standard lifetime mileage of a car, but not much less. There's a business case to be made, but not much of one given the slim margins.

What about Shai's home country of Israel? Turns out they pay about the same electricity prices as we do, but pay far more than we do for gasoline: $8/gal [4] [5]. That means $20 would only get us half as far: 55 miles in Israel instead of 120 in the US. Taking this into account, we would only have to drive 30K miles to make up the additional cost of the battery. Everything after that would be savings to the customer, or profit to a company. This is a far more promising business case, and indeed it was the case that Better Place was founded on.

The math here is greatly simplified. We simply talk about the marginal cost of the battery pack, when in fact there's other cost differences that bring EVs more in-line with gas car costs. We also neglect infrastructure costs, which might matter if you're trying to build something expensive like battery swap stations like Better Place or superchargers like Tesla. The lessons learned from the exercise don't change though; EVs make sense now, and Better Place wasn't founded on some idealist's whimsical fantasy.

Dead ideas like amateur blogging or voyeuristic post-mortem news articles might keep coming back long after we thought we buried them, but live ideas with a spark in them, like electric cars, will always stay alive and kicking.

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[1] Idaho National Lab vehicle energy cost comparison: http://avt.inl.gov/pdf/fsev/costs.pdf
[2] EIA gasoline costs table: http://www.eia.gov/dnav/pet/pet_pri_gnd_dcus_nus_w.htm
[3] Tesla Model S powertrain specs: http://en.wikipedia.org/wiki/Tesla_Model_S#Powertrain
[4] Israel electricity prices: http://www.eia.gov/countries/prices/electricity_households.cfm
[5] Israel gas prices (surprisingly hard to find): http://www.timesofisrael.com/gasoline-prices-to-drop-slightly-saturday-night/