How sharing cars could actually boost auto sales

By BLOOMBERG | 29 March 2016

NEW YORK: Technological innovation in the auto industry, from the advent of Uber Technologies Inc. to a future with self-driving vehicles, promises to change the game for commuters and carmakers.

This shift towards on-demand, shared, and potentially autonomous mobility that's already under way addresses a glaring problem for drivers: Vehicles have a high up-front costs to own and depreciate swiftly, but they aren't heavily utilised.

But according to analysts at Deutsche Bank AG, there are a myriad of misconceptions about how the on-demand revolution will affect automakers-chiefly, about their impact on sales volumes.

"The consensus view is that auto sales will decline, and that this will be negative for US original equipment manufacturers,” writes Deutsche Bank's team led by Rod Lache. “We believe that the consensus view may be wrong.”

However, the analysts acknowledge that the proliferation of on-demand vehicles could ultimately reduce the number of cars on the road in the US by more than 25 million, with population density serving as a key determinant of the size of the on- demand fleet.

"On demand mobility is likely to be practical and financially attractive in the densest sub-sections which account for [circa] 31 percent (on average) of total households in the metropolitan statistical areas we studied (13.2 million households, owning 15.5 million vehicles out of the total),” the team writes.

“Within these sub-segments, up to 61 percent of households (owning 8 million out of 15 million vehicles) may find it financially attractive to switch to on-demand autonomous vehicle mobility services.”

But this decrease in the number of vehicles on the road will coincide with a much shorter life-cycle for cars because they'll be utilized much more heavily, on average, than they are now. The life expectancy of an on-demand vehicle is expected to be just three years; this higher rate of turnover of a smaller fleet would see sales volumes rise, according to the analysts.

"US sales nonetheless increase under every scenario we’ve examined because vehicle scrappage is determined by miles driven,” they conclude. "Each on-demand vehicle will travel more miles (10 to 20 percent more) than the cumulative six to nine privately owned vehicles that it replaces.”

This increase in aggregate mileage is primarily attributable to “empty legs"-that is, the distance on-demand vehicles would travel going between one passenger and another. For instance, the analysts note that nearly half of the miles that uberX drivers travel in New York City are without a passenger.

Deutsche Bank's team put together a handy infographic to explain how they expect this transition to on-demand travel to play out in practice.

A caveat: a significant increase in ride-sharing could throw the analysts' call of increasing aggregate miles travelled in jeopardy, they caution.

But if things play out like Deutsche Bank expects, the auto industry will also become less cyclical, as miles travelled, rather than the state of the economy and credit conditions, will drive sales volumes, so to speak.

Moreover, cost deflation in the provision of on-demand vehicle services could also put further upward pressure on aggregate miles travelled due to the established price- sensitivity of consumers.

"The aforementioned cost discussion does not work in the fact that the cost of on-demand mobility services continues to decline rapidly,” the analysts write. “Costs should continue to decline as efficiencies are gained and as providers use information technology to create new offerings.”

Consider the early experience of ride-on-demand apps: while they've certainly eaten into revenues that would've accrued to taxis in the past, they've also managed to grow the size of the pie by encouraging people to take rides when they might otherwise have walked or use public transit. Two factors explain this: securing an on-demand vehicle by smartphone is typically far more convenient and reliable than hailing a cab, and consumers have been offered a new option that's less expensive than a taxi.

The Pollyanna-ish future envisioned by Deutsche Bank is one in which the on-demand vehicle revolution both lowers costs for commuters and is a boon to automaker's financial performance. Feasible? Maybe not. But surely it's less crazy of an idea than self-driving cars were a just decade ago.