Self-Driving Cars Written Assignment

With autonomous vehicles (AVs), Amazon has the unique opportunity to enhance, expand, and develop their business to an unprecedented scale. By leveraging the strengths of this retail powerhouse and vertically integrated AVs, Amazon will expand its influence, changing the future of ecommerce and drive forward a shared economy.

AV customers can be identified through two categories: individual and shared consumers. Individuals encompass tech-savvy early adopters, as well as the elderly, children, and disabled individuals who would be unable to travel otherwise. The shared category includes taxis and ride sharing, as AVs can redefine the industry by providing consistent services without relying on drivers’ schedules. Restaurants can use the service for food delivery at all hours, and hotels can use AVs to transport travellers and host tourist activities. AVs can also provide huge benefits to emerging markets, as individuals who may not have been able to afford a car or transportation may now have access to an extended AVs network. This could maximize the number of accessible jobs, boosting the overall economy. Hospitals can also utilize AVs to get individuals in states of emergency to care more quickly, efficiently, and safely. Beyond all of these clear opportunities, merchants like Amazon have an opportunity to take advantage of this technology. Amazon still utilizes other courier services to distribute its products on a global scale. By investing in a startup’s technologies, Amazon can take advantage of this industry to expand the scope of their influence. A key component is the potential for AVs to expand Amazon’s shipping network, increasing access to previously remote locations and increasing speed. The increased range will benefit customers living remotely who previously lacked access, and increased efficiency will benefit existing customers yearning for more rapid delivery. Both of these customer segments will benefit from the introduction of AVs, and the attractiveness of these improvements will boost Amazon’s consumer base and draw in more members. Amazon just announced that they now have $100 million Amazon Prime members, had $178 billion net sales in 2017, and their shipping costs have continued to increase, amassing to $4-7 billion every quarter. By using a startup’s technology to develop their own service, Amazon can immensely cut these costs.

Beyond the public value of enhanced mobility, improved safety, and big data, the adoption of AVs will have direct value specifically for Amazon. Acquiring a startup that will automate logistics will cut costs associated with shipping companies and in-house R&D, and enable first-mover advantage in an e-commerce sector that is rapidly growing in competitiveness and market size. AVs will also improve operational efficiency and user experience with faster, simpler shipping and will pave the way for a shared economy, fundamentally transforming the global economy. As Amazon sales revenues grow domestically and abroad, the the firm must vertically integrate to build in-house logistics to mitigate increasing costs. From FY 2016 to FY 2017, Amazon’s sales revenues increased 30.8%, but a 31.8% increase in operating expenses effectively displaced the upside. Shipping costs account for a significant portion of operating expenses and increased 33.4% along the same horizon. While Amazon’s shipping providers have maintained constant prices, Amazon has resorted to a declining pricing model that reduces costs facing the customer and incurring costs to maintain a competitive advantage.

Breakdown of courier costs below (here we assume Amazon is charged between $2-5 per package. The percentages represent the percentage of Amazon’s packages that are shipped from each courier):

  • USPS (62%): 3.1 billion packages (3.1*$2 = $6.2 billion)
  • UPS (21%): 1.05 billion packages (1.05*$4 = $4.2 billion)
  • FedEx (8%): 400 million packages (0.4*$4 = $1.6 billion)
  • Others (9%): 450 million packages (0.45*$4 = $1.8 billion)
  • Total Expenditure on outside shipping companies = $13,800,000,000.

This represents about 64% of Amazon’s total shipping costs. Looking at the deal between Uber and Volvo, we can extrapolate an idea of AVs costs. Uber acquired 24,000 AV’s for about $1 billion. This means each AV costs approximately $41,700. While automated trucks that Amazon requires might pose different costs, here is a rough picture of an automated fleet assuming AVs pricing:

  • USPS (62%) – 190,000 vehicles (117,800*41,700 = 4,912,260,000)
  • UPS (21%) – 108,210 vehicles (22,724*41,700 = 947,590,800)
  • FedEx (8%) – 80,000 vehicles (6400*41,700 = 266,880,000)
  • Others (9%) ~ 90,000 vehicles (810 0*41,700 = 337,770,000)
  • Total cost of vehicles = $6,464,500,800.

These numbers demonstrate roughly $7.3 billion cost savings with a switch from traditional couriers to AVs.

The only way to escape this pattern is by integrating an in-house fleet of autonomous vehicles for enhanced shipping. Every component of the supply chain is automated — from sorting packages in warehouses to loading and unloading trucks. The only inefficiency in the system lies in truck driving and transport, with costs attributing to over ⅓ of the $700 billion industry. Amazon has the chance to cut these growing costs by acquiring a startup that will enable an in-house, completely efficient supply chain. Integrating autonomous vehicles into Amazon’s logistics model will also benefit the consumer in unprecedented ways because of reduced delivery time. Amazon’s recent Flex delivery option employs drivers to deliver select products from nearby warehouses to consumers within a 25-minute span, and Amazon Fresh functions in a similar manner with groceries. The system works because Amazon has built its warehouse infrastructure so that 50% of the U.S. population lives within 20 miles of a storage facility. By incorporating automated trucks and delivery vehicles into this framework, Amazon will drastically transform the user experience with new Flex product offerings and expedited delivery times. Now that Amazon owns Whole Foods, they can also take advantage of the food delivery customer segment, and their recent entrance into the healthcare space provides another outlet in which they can utilize AVs for distribution and emergency care.

The overall risk is relatively low. Though there are huge capital expenditures initially, from technology development, startup’s expenditures, increasing the scale of the startups production, employ more people towards the project, but all of these costs will be outweighed by the future gain. This is the direction that the world is going – autonomous vehicles are already on the roads and more industries are becoming automated. This development while make Amazon both an ecommerce and transportation company, changing the trajectory of the company.

There is intense competition in the self-driving car market, where technology companies have joined top automobile companies in the race to produce the first commercially available autonomous vehicle. The key competitors are Google, Uber, and Tesla, with other notable competitors including GM, Audi, Ford, and BMW. Google was the first company to put a fully driverless car on public roads. Firefly was Google’s reference vehicle that has custom sensors, computers, steering and breaking, no steering wheel or pedals, and was thus a full Level 5 autonomous vehicle. This project became Waymo, which has now added Chrysler Pacifica Hybrid minivans to their fleet. This was Google’s first vehicle built on a mass-production platform with a fully-integrated hardware suite. One of Google’s strengths is their experience as they have logged over 5 million miles, hundreds of thousands of miles ahead of the competition. Another one of Google’s strengths is their safety patent that was just granted to Waymo. The patent describes rapid automated reactions in a self-driving vehicle just before it hits a pedestrian, vehicle, or object, reducing the crash impact, damage, or injury. Waymo has invested heavily in its LIDAR system, incorporating three LIDAR sensors in combination with 360-degrees RADAR and several camera-based sensors. Another potential advantage is that Google Maps and Google-owned Waze collect a huge amount of geographic data about traffic patterns, which can benefit Waymo as it expands to new cities. Waymo’s biggest challenge is that it does not have experience manufacturing cars, which is a complex process that requires huge amounts of capital and labor. While Waymo has signed a deal with Fiat Chrysler to supply 600 Pacifica minivans, more vehicles are necessary to make them a major commercial player.

Uber is another major competitor attempting to amass a fleet of autonomous vehicles, and acquired an initial fleet of 20 Ford Fusions and now 24,000 Volvo XC90 SUVs to expand their automated fleet. However, starting in 2017, Uber has faced public scrutiny over several crashes with their autonomous vehicles. In 2018, an Uber AV fatally hit a pedestrian walking outside of a crosswalk, marking the first fatality involving a self-driving vehicle. Following this incident, Arizona’s governor suspended Uber’s ability to test AVs on the state’s public roads, and Uber suspended all self-driving car tests nationwide. Uber’s main strength comes from its established presence in the ride-hailing market. One challenge that Uber faced is the lawsuit that Waymo brought against Uber claiming it stole intellectual property. The lawsuit was settled in February 2018, with Uber giving Waymo an equity stake worth $245 million. Furthermore, the Arizona crash has severely set back Uber’s testing and AV development, putting it at a current disadvantage.

A third key competitor in the AV space is Tesla, which already sells vehicles with the “Fully Self-Driving” feature. Tesla claims that as soon as they can demonstrate it is safer than human driving in accordance with regulation, they will eventually enable the feature through software updates. In their most recent update, Musk claimed that self-driving will encompass all modes of driving by the end of 2019. Tesla’s biggest strength comes from the fact that they have 70,000 vehicles equipped with Autopilot on the roads, which allows customer-owned Tesla cars to log instances where the Autopilot software would take over, and this data can then be used by Tesla. The factor that most differentiates Tesla from other competitors is that they do not use LIDAR technology, which can be expensive and bulky. Musk calls LIDAR a “crutch”, and argues that in the long-run companies will have to master camera-based systems in order to keep costs down. Although it is a riskier strategy, if Tesla can successfully develop autonomous vehicles without the use of LIDAR, it would be a huge advantage. Tesla’s major weakness is its well-known ongoing production issues and financial limitations.

The final major competitor is GM, who acquired the company Cruise Automation and has been developing autonomous Bolt EVs. GM recently announced plans for a 2019 trial of its own commercial self-driving service. GM currently has a semi-autonomous product called Super Cruise that is in a Cadillac model of customer cars. GM’s strength is its production scale, as it is able to build its autonomous vehicles from the ground up. This gives them the advantage of being able better optimize production and control over the production process. However, they are delayed in developing the technology that their competitors wield.

Although startups do not have the same amount of funding and influence as these major companies, they are a more viable target for Amazon because there are many that have developed advanced technologies and unique innovations. They just need Amazon to expand their influence and provide a profitable application for their technologies.

In attempts to further their chance of controlling the market, major players are continuously competitive over intellectual property rights for each of their innovations. More than 22,000 new inventions related to autonomous vehicles have already been patented globally. Patents have covered everything from control systems, operating software, new brands, and other hardware. Software is more difficult to patent, so perceived infractions are deemed to be “trade secrets.” With the open sharing of ideas and research, it is becoming more common that firms will accuse others of mishandling trade secrets. Waymo infamously accused Uber of trade secret misappropriation, resulting in a major settlement in which Uber had to pay $245 million. However, this practice is detrimental; the whole industry can benefit from the best of the best in software coding, automation, and robotics coming together to further the industry. Clogging the industry with patents and lawsuits may end up halting the innovation. Instead of focusing so much energy on protecting their inventions, the major players should harness their efforts on transforming the future of mobility. If Amazon acquires or partners with an existing company, they can take advantage of a developed technology rather than adding to the competition and risking patent or trade secret infringement. The valuation and pricing of IP assets for Amazon licensing or purchase may be the key to more successful commercialization of self-driving cars. While other companies are occupied competing with each other and stifling innovation with lawsuits, Amazon’s acquisition of an AV startup has the potential to propel innovation forward to take advantage of the technology and start harnessing its commercial potential.

An increasing number of states are considering autonomous vehicle legislation. As of 2017, 33 states have introduced legislation, 22 have enacted legislation, and 10 have enacted executive orders. California is one of the states leading in revolutionizing regulation. In February 2017, California’s Department of Motor Vehicles declared the elimination of a requirement for AVs to have a human in the driver’s seat to take over in case of an emergency. The elimination of this requirement is essential for the development of AVs because California is a hotbed for AV testing. In fact, currently 50 companies are licensed with the California DMV to test AVs. Additionally, at the end of last year, the National Highway and Transportation Safety Administration (NHTSA) released new federal guidelines for Automated Driving Systems (ADS). The NHTSA has been asking interested parties for input into any unnecessary regulations and how to rewrite or eliminate current regulations. This indicates that as the technology progresses, regulatory guidelines will do their best to encourage progress and work with AV companies. However, there have been regulation setbacks for many companies. After Uber’s fatal crash, the Governor of Arizona suspended Uber from testing their self-driving cars on public roads, and other tech firms and government officials are reevaluating the  testing of autonomous vehicles.

When discussing Amazon’s value inflection points in acquiring an AV startup and successfully implementing its technology in its transportation infrastructure, it is important to acknowledge the necessary milestones that AV technology must accomplish in order for the project to succeed. With heavy emphasis on regulation and approval of autonomous vehicles in today’s world, firms focused on implementing autonomous driving must accomplish multiple goals under the regulatory umbrella. First and foremost, the vehicle must have advanced functionality, accomplishing all requirements of its expected level of autonomy. It also must be able to accomplish all basic vehicle functions in addition to handling ethical and moral situations appropriately. Next, the tech-integrated vehicle must function seamlessly within a symbiotic system of AVs. Not only must the vehicle function properly with vehicles of the same manufacturer, but it also must function perfectly with AVs of other manufacturers, human drivers, pedestrians, animals, objects, weather and more. On the software front, the technology must be hack-safe, with high levels of encryption and cybersecurity so that vehicles and their information/contents can not be compromised. Finally, AVs must earn the full trust and reliance of the public. Does the technology save time, money, and lives? Is it easy to use and convenient? Without public trust, the technology will never fully take hold in society. Each of these must be achieved in order for regulatory groups to approve this technology and allow companies and the public to utilize it to its highest potential. The speed at which Amazon implements AV technology is also vital to its ability to stay ahead of the industry curve, and begin to cultivate the tech within its transportation infrastructure.

In terms of Amazon’s purchasing an AV startup, the inflection point pathway is relatively the same, with a few additions. These transportation vehicles must be at level 4 or higher of autonomy in order to function as AVs in the Amazon delivery and freight trucking fleet. Delivery vehicles must be able to successfully determine a package recipient’s address, and drop the package securely in the correct delivery spot. Automated freight trucks must be able to carry larger supply loads and drive for longer periods of time. The vehicles’ hardware and software must be secure so that the vehicle cannot be controlled by a third-party or its data/contents be taken. The vehicle itself must be safe and able to withstand people physically attempting to access its contents. Finally, the public must trust Amazon AV and result in cheaper and more efficient delivery, faster shipping accessible to more people, making it preferable over human courier services. If Amazon can achieve each of these milestones and implement the technology successfully within its delivery infrastructure, regulation, approval, and execution will be swift and simple.

On a different note, autonomous vehicles have a variety of funding sources depending on the type of transportation. Firstly, there is public transportation provided by local, state, or federal governments like city buses, shuttles, etc. These projects are typically funded by the government, public funds, or cities. Next, there is private transportation, autonomous cars purchased and used by average individuals, and sold by major car manufacturers (think Ford, Tesla, BMW). These projects are funded by private car manufacturers, venture capital, and grants. Finally, shared transport, involves consumers paying a fee to be transported by a vehicle that will pick you up and bring you to your location of choice. Known as ridesharing, these services are funded by private ridesharing companies/startups, venture capital, and grants. If Amazon purchases an AV technology startup for its own delivery fleet, the funding of the technology has already been partially funded, and additional investments for further developments will be raised through Amazon’s available cash, venture capital raising, or grants.

Combining its inflection point pathway and funding sources, Amazon needs to focus on seamlessly implementing its technology into its delivery fleet, which will save time and money due to  the elimination of human capital expenses. This will allow Amazon to be more efficient in freight shipping and local delivery, access parts of the US that typically can’t be reached by Prime courier services, and remove the need to pay for expensive courier service contracts. This by itself will add major value and home-grown functionality to Amazon’s delivery infrastructure not only helpful for its typical product delivery but also its new endeavors in Whole Foods and also healthcare products. These developments will provide massive data sets to Amazon for technology optimization and improvements, in addition to adding to our future vision of a shared society.

Amazon could benefit greatly from introducing self-driving vehicle technology in its shipping supply chain. Currently, Amazon relies on shipping companies, such as UPS, FedEx, and USPS to deliver its packages, doing so to ship over 5 billion packages annually and spending upwards of 21.7 billion (about 12.5% of their total expenditures). Amazon’s acquisition of a startup would allow them to control and manage AV in-house, and look into applications across its entire supply chain, in addition to reducing costs. Beyond cutting USPS and other services out of their shipping and logistics expenses, Amazon can also remove the cost of labor and can deliver their products more efficiently because they wouldn’t need to take human fatigue into account. With the global ecommerce market to grow by almost 52%, from $2.3 trillion to over $4.8 trillion, in the next 4 years, AVs will help expand Amazon Prime deliver to more areas across the country, and improve efficiency of driving routes. Implementation of autonomous vehicles across Amazon’s transportation infrastructure have the potential to maximize Amazon’s fulfillment efficiency in the rapidly growing ecommerce market.

There were 17.13 million vehicles sold in the United States in 2017. According to a survey by BCG, 55% of respondents said they would purchase an autonomous vehicle. Assuming the individuals buying the cars also have licenses and the market remains consistent, the individual market size 17.13*0.55 = 9.4 million vehicles annually. For shared segment, Uber recently acquired 24,000 AVs from Volvo, and there are roughly 3 major ride sharing companies in addition to Uber (such as Lyft). Assuming they make comparable acquisitions and additions to their fleets, the ride-sharing market will add 24,000*4 = 96,000 vehicles/year. Overall, this puts the total around 9.5 million AVs/annually. However, this may become skewed if AVs make ride sharing more attractive and less people purchase cars.

Based upon Amazon’s operational needs and our framework for optimizing added value, we recommend that Amazon seek to acquire Swedish autonomous truck startup Einride. The company’s primary mission is to disrupt the trucking industry on a timeline that outpaces all of its competitors. Einride differentiates itself because it brings truckers off the road as soon as the company’s T-Pod trucks reach Level 3 efficiency — one central truck driver will control up to four trucks at one time from a central location, and staggered driving shifts will enable complete on-road efficiency without any down time.

Autonomous vehicles will disrupt the transportation industry. For Amazon, the implementation of AV technology has the potential to immensely cut costs, improve efficiency, and transform Amazon’s operations and logistics infrastructures. The strengths of getting involved in the industry far outweigh the industries weaknesses of oversaturation and the cost of acquisition. Although the AV market is highly saturated and competitive, Amazon can mitigate this risk by purchasing an established startup and applying its technology to their business instead of innovating around IP lawsuits. Acquisition of the startup will enable Amazon to manage the business in-house and work on applications of the technology within its business as it sees fit. Autonomous vehicles have immense commercial potential, from hospitals to restaurants to ride-sharing and individual use, and Amazon should be the first to apply this innovation to fundamentally transform ecommerce and logistics. As an advisory firm, our role in the implementation of this plan will be to connect Amazon with the perfect startup to cater to its needs and facilitate the acquisition. Though there are many large players in the field, we believe that a AV truck startup would be ideal for Amazon.

 

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