Part 1 of 5
In this series, we will be looking at the economics of vehicle ownership and how that is changing due to a convergence of several exponentially accelerating technologies and new business models. Examples of these rapidly evolving technological changes are those from the fields of Artificial Intelligence (AI), neural nets and machine learning, advances in vision systems, and consistent advances in vehicle battery technology and performance. Evolving new business models include ride sharing and the coming emergence of driverless “Robotaxi” fleets enabled by autonomous driving capability – otherwise known as Transportation-as-a-Service (TaaS).
We will consider the automobile strictly as an investment asset and examine personally owned vehicles from a little different perspective than usual – that of ownership on a cost per mile driven basis. The ownership of a personal vehicle — car (sedan or SUV/CUV) or pickup truck — has been such an ingrained part of our American culture for so long that we are oblivious to its high cost and poor utilization. Indeed, a vehicle purchase or lease is the second largest investment most people make, after a house, condo, or apartment. And many families have not one, but two to four vehicles per family when cars for their teenage and/or college children are counted.
Battery-powered electric vehicles and new potential avenues of vehicle ownership and ride sharing opportunities promise great cost savings for individuals and families around the globe. In addition, they offer potential business opportunities for entrepreneurial individuals.
As important, they will provide far less expensive transportation to all, thereby offering increased mobility for people that heretofore were unable to afford to own a vehicle in order to get to and from a desirable and/or necessary place of employment. Furthermore, these ride sharing services also extend safe economical transportation opportunities to people who have no driver’s license, or who are handicapped, or are either too young or too old to drive.
We will use readily available national statistics for traditional gas/diesel-fueled light vehicles, and a few simple assumptions as a basis for our models. To keep our examples straightforward, we will deal with average numbers that make calculations straightforward. The assumptions we use can easily be changed to fit one’s personal circumstances if desired.
Assumptions:
- The average person drives about 12,000 miles a year (though not this COVID-19 year!). Men drive about 60% more miles than women, young people are driving less, and those over 65 years old are driving more years than they used to.
- According to many studies, the total cost of owning and driving a traditional internal combustion engine (ICE)-powered automobile is between about $0.55 a mile for the smallest and most economical vehicles to close to $1.00 a mile for large SUVs such as Cadillac Escalades and Lincoln Navigators, and for pickups – – especially the typical V8-powered four-wheel drive brands offered by Chevy, Ford, and RAM. This range is broad enough so that it covers most electric vehicles as well.
The cost of ownership number varies depending on how long a person chooses to keep a vehicle, as well as how long it is economically viable to keep it, since maintenance costs on an ICE-powered vehicle rise dramatically with vehicle age and mileage. A new set of tires for any vehicle can cost an owner anywhere from $700 to $1,200 for four installed tires about every 50,000 miles.
- The two assumptions above mean the average vehicle owner – whether driving an ICE-powered or a battery-powered electric vehicle — pays about $800 a month or roughly $10,000 a year to own and drive a vehicle. Note we have not been specific about any make and model of typical vehicle, nor about the vehicle owners’ driving habits, nor about the regional cost variation of gasoline and insurance, for instance.
EV versus ICE costs of ownership:
We could spend pages performing elaborate analyses of ICE versus electric vehicle costs, and you can find numerous examples here, here, and here. In most cases, the electric vehicle always wins, particularly the further it is driven. However, the farther out in time one tries to predict the more uncertainty creeps into the numbers. For the purposes of this article, this hardly matters as the number of variables for an ICE to electric vehicle comparison case are too many to arrive at a definitive general conclusion, for example:
- The actual price paid for the vehicle or the vehicle to be leased, not the MSRP
- The anticipated life of the vehicle, in mileage or years?
- The unknowable salvage or resale value at the end of the ownership/lease time period
- The average cost of gasoline or electrical energy over the coming time period
- The significant differences in electric vehicle tax credits by vehicle manufacturers at various national, state, county, and city levels
- The difference in insurance costs between states, and between drivers depending on their coverage, on their mileage driven per year, and on their driving record
- Whether or not maintenance is included for some time period in the vehicle’s purchase price
In the end, these analyses are only valuable at a personal level and if all costs are taken into effect. Despite differences at this point, the overall trends are clear however – the MSRP of ICE-powered vehicles increases every year some 2% to 3%, and the price of electric vehicles will continue to decrease 2% to 3% or more annually.
Another differentiator in prices that cannot be accounted for in advance is that in Tesla’s case, new software-based features and improvements are added periodically through over-the-air (OTA) updates that markedly increase the value of the vehicle during its ownership. Currently, no other vehicle manufacturer is capable of doing that. No one can put a number on that increase in vehicle utility and value to an owner.
For now, we will assume that EVs are some 5% to 20% more expensive to purchase than ICE-powered vehicles. Parity between the competing models is no more than a year away. As we’ll see, today’s price difference in the long run is immaterial.
Utilization of a vehicle as an asset:
Consider three examples of vehicle utilization that only depend on the locale where a vehicle is driven, and the average speed a vehicle is typically driven during a year. Note that in real life, one doesn’t drive every day as our average numbers imply, but you pay for your vehicle every day, whether you drive it or not.
- Urban environment: average speed 30 mph. This results in the vehicle being driven 400.0 hours a year (12,000/30), or 33.3 hours a month, or just 1.1 hours a day (33.3/30.42). In this case, on average an automobile is used about 4.6% of the time and is an idle asset 95.4% of the time!
- Suburban environment: average speed 45 mph. Results: Vehicle driven 266.7 hours a year, 22.2 hours a month, 0.73 hours a day. Driven 3% of the time, idle 97% of the time!
- Rural or interstate environment: average speed 60 mph. Results: Vehicle driven 200.0 hours a year, 16.7 hours a month, 0.55 hours a day. Driven 2.3% of the time, idle 97.7% of the time.
NB: In a rural environment even if a person drives 20,000 miles annually, at a 60 mph average that’s 333.3 hours driven a year, 27.8 hours a month, 0.9 hours a day. Driven 3.8% of the time, idle 96.2 % of the time.
What prudent and objective financial advisor would recommend that you purchase or even lease an expensive asset that you would use less than 5% of the time? This scenario is similar to a person who owns a summer cabin that he/she uses two weeks a year — 3.8% of the time, or to a person who owns a boat or an airplane who uses it 15 hours a month – 2.1% of the time! These assets are nice if you can afford them, but there are more cost-effective ways to make use of the average person’s limited financial resources. Soon we will explore various ways to turn your vehicle into a working asset that makes money for you.
Leasing is one way to lower the amount of capital you have invested in a vehicle, as typically in leasing for a three-year lease you are only paying for about one half the vehicle – depending on the make and model’s residual value, even though your overall operating costs remain about the same as if you purchased the vehicle. In effect, a lease is a long-term rental. In leasing you are only paying for the depreciation of the vehicle over the lease period (that includes an upper limit on the number of miles you will drive per year before penalty), plus finance charge, plus taxes and various small fees. By leasing, one’s monthly payment is considerably lower than if you had purchased the vehicle. A major benefit of leasing for many people is that you can drive a more expensive vehicle for the same monthly payment as if you had purchased a much less expensive vehicle. True, when and if you choose to walk away at the end of your lease you will not own the vehicle (its other “half”), but you won’t owe any more money on that vehicle either.
America’s car culture exists despite the poor asset utilization numbers above for such a significant outlay, and for decades has resulted in most people either owning or aspiring to own at least one vehicle. In spread-out America with poor mass-transit in most areas, owning a vehicle seems (or seemed) the right or even necessary thing to do! But now new technological advances and business models are offering new ways of thinking about vehicle ownership and use. In my judgement, the answer will come in two phases over the next two to five years.
Phase one will be that individual vehicle owners will be convinced by economic savings and vehicle appeal to switch to battery-powered electric vehicles (EVs). As we speak this is occurring in ever-accelerating numbers around the globe. At this point, most (but not all) EVs’ Manufacturer’s Suggested Retail Prices (MSRPs) are much higher than comparable internal combustion engine (ICE)-powered cars’, often one from the same manufacturer. However, the electric vehicles’ costs for “fuel” (charging electricity) and maintenance are around 15 to 30% that of an ICE vehicle’s and the EV has a much longer potential life. By the middle of this decade or before, well after EVs reach price parity or better with ICE-powered vehicles due to less expensive batteries with greater range and quicker charging times, sales of ICE-powered vehicles will decline quickly to ~20 % of today’s level, and eventually to zero, to be replaced by battery-powered electric vehicle sales, if people need to own a personal vehicle at all. See Rethinking Transportation 2020 – 2030, Arbib & Seba, Part 1.
Phase two will occur (and to some extent is also occurring now) with the switch to autonomous driving and the availability of “Robotaxis”. Today’s “Robotaxi” ride-sharing fleets are driven by human drivers and have names such as Uber and Lyft. In less than three years there will be no human drivers or even the usual driver controls in Robotaxis. Since a human driver adds about 50% to their vehicles’ operating cost, Uber and Lyft with their current human driver-based businesses will not be able to compete with driverless Robotaxi fleets. They will either have to move to owning their autonomous electric vehicles or go out of business. Therefore, Uber and Lyft will have to change their complete business models to compete with Robotaxi fleets as the two companies’ strategies now depend on their drivers owning and using their own vehicles.
As you might have noticed, a revolution is underway — made possible by the superior economics of solar and wind-generated power resulting in dramatically lower cost of electricity, battery-based electrical power storage systems, and the superior efficiency of electric motors and powertrains. Everything that moves is going electric – cars, trucks, Class 8 semi trucks, construction machines such as power shovels and backhoes, trash removal trucks, busses, ships, and even airplanes. This blogsite will be covering these changes in detail in future postings.
Once autonomous driving capability (“Full Self Driving (FSD)” in Tesla-speak) is available and legal, the obvious questions for anyone choosing to own an electric vehicle are: “Do I put this electric vehicle I own (if it has autonomous capability) to work for me as an autonomous vehicle, or, do I sell the vehicle, own no vehicle, and use the local Robotaxis’ fleet’s autonomous vehicles for all my ground transportation needs?” Or, perhaps a few entrepreneurial people will ask themselves: “What if I bought several of these autonomous vehicles and put them to work making me money?”
In other words: how do I fit in with Transportation-as-a-Service? Do I use it or exploit it? Or both?
Image courtesy of Pixabay
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