Taxwise Or Otherwise

People today take automobiles for granted. In the early 1900’s, people thought it was a remarkable thing to replace the horse and buggy. Today, the constant iteration of technological advancement even threatens to do to man, what it did to the horse more than 100 years ago.

While the technology has experienced limited adoption in the United States and in Europe, all users of automobiles will see their view of the world impacted profoundly by highly autonomous vehicles.

The impetus for the commercialization of the technology, aside from the profit motive, arises from the benefits seen from using driverless car technology. Google has invested major funding in driverless car technology to mitigate safety issues.

Self-driving cars don’t fall asleep, don’t get drunk, don’t get distracted by text messages or phone calls. Developing this technology is thought to be an opportunity to dramatically reduce car incidents that are caused by human error.

Beyond safety, some other advantages to the technology include increased mobility for the elderly, disabled, and for people who can’t currently drive. Other benefits include reduced fuel consumption, greenhouse gas emission reductions, better land use in cities by the elimination of parking garages, convenience, and saving time.

The insurance industry also stands to benefit from widespread adoption of driverless cars. Knowledgeable industry insiders project that as damage claims decrease because of better safety performance, claims will decrease and insurance premiums may drop. Some insurance industry players are already adjusting pricing based on the adoption of advanced safety features found in self-driving cars.

A compelling argument exists for capitalizing fully on the benefits (higher safety, increased mobility for certain stakeholders, lower fuel use, decreased emissions, repurposing real estate, convenience, productivity, decreased insurance claims, and lower premiums) from using driverless car technology.

In the non-life insurance industry, the anticipated drop in premiums due to reduced accident rates will mean that insurers will have to find new sources of revenue to shore up their automobile lines. Pressure to maintain profitability and market share in this area may lead to horizontal mergers among insurers.

The real estate industry may receive a welcome boost. For the most part, private cars are inefficient because they spend more than 80% of their time parked. The land used for parking remains mostly unproductive, and the rental yield, minimal.

As usage of autonomous cars increases, the impetus for car ownership may decline as people choose to pay for utility. This means that cars will become the mobility fleet for the future, as utilization rates may increase dramatically.

This means that the demand for parking will decrease and the supply of real estate for more productive usage will increase. We can imagine better usage of open space, better living and commercial spaces, which will increase the value of real estate and the quality of life in the city. Because of this, we may see real estate companies engage in a form of urban land banking as they seek to consolidate land in the city for redevelopment.

The business models of automobile companies may undergo a significant transformation. As individual ownership declines, the value proposition of selling to individuals may lose commercial momentum. Automobile manufacturers may choose to transform themselves into personal service logistics companies.

The capacity rental model has profound implications for logistics companies too. Logistics companies may also transform themselves into pure service companies; completely eliminating significant ownership of hard assets. They will choose to compete based on pure differentiation — and they may find themselves partnering with competition to reduce costs to customers.

Fast-moving consumer goods producers contend that they compete on the shelf, and not in the truck. New distribution models facilitated by the capacity rental framework will mean much lower logistics costs for all.

The implications of the widespread disruption across industries likely to be caused by driverless cars mean that corporate strategists, and company managements, will have to work harder to get ahead of the competition. The multi-industry disruption described here will occur in other situations as technological advances enable greater human creativity and inventiveness.

For the corporate strategist, there are two powerful questions that allow one to re-imagine a possible future state, given the current industry landscape. These involve turning conventional wisdom upside down.

“What does the consensus say is true, but is actually false? What does the consensus say is false, but is actually true?” Answering those questions may provide new insight on how an industry, or a business model, is evolving in the present.

People used to say that it was unsafe to get into a car with a stranger at night. Now with transport network vehicle companies, that myth has been dispelled.  How has this changed personal transportation?

The consensus used to say that a driverless car would be unsafe; but a change in the consensus indicates that the same technology is demonstrably safer compared to a human driver. How will this impact the automobile and peripheral industries?

The challenge then, is to try to answer those questions as they apply to your industry, and see how one can compete effectively going forward.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.

Raoul A. Villegas is a Director from the Deals and Corporate Finance group of Isla Lipana & Co., the Philippine member firm of the PwC network.

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