RR 247: Derek Kaufman – Partner at Schwartz Advisers – What Does the Future with Autonomous Cars Look Like?

For 40 years, Derek Kaufman has worked in the Transportation Industry with positions ranging from VP Marketing and Product Planning for Freightliner Trucks, SR VP of Sales, Marketing and Customer Support for Hino Trucks, President of Diesel Technology Co, a subsidiary of Penske Corporation, VP of Fixed Operations for Smart USA and CEO of Mission Motors Company. Derek is also an entrepreneur. He founded C3 Network, LLC in 1997 to help clients launch new products in the transportation industry.

Today, Derek is a Managing Partner at Schwartz Advisors, LLC doing M&A support and company growth work in the auto and heavy-duty aftermarket and continues his role as President of C3 Network.

Derek serves on the boards of several companies and is a regular conference speaker at auto aftermarket and trucking conferences.

Derek recently wrote an article That’s It. We’re Done. Nice To Know You. In the article, he discusses a report on “Rethinking Transportation 2020 – 2030” from Rethink.com. We talk about the report, his view of the data and the impact it can and will have on the industry.

This is Derek Kaufman’s second interview on the aftermarkets premiere podcast. Listen to his first, episode 215, on Business Model Transformation.

These talking points are based on the article from RethinkX.com:

  • The RethinkX.com report says that by 2030 – within 10 years of regulatory approval of autonomous vehicles by federal and state governments in 2020 — 95% of US passenger miles traveled will be served by autonomous electric drive vehicles. They will be owned by fleets, not individuals, and operated in a new business model called TaaS – Transportation as a Service.
  • The report forecasts that the number of passenger vehicles on American roads will drop from 247 million to 44 million. And that nearly 100 million existing vehicles will be abandoned as they become economically unviable.
  • The report says that the cost of owning a car that sits in your driveway, a very high percentage of the time, is estimated at 9000 per year.
  • You have to think about this in terms of vehicles in operation and vehicle miles traveled each year.
    • There are over 270 million cars on our roads today. New car sales are currently about 17 million vehicles and scrapping 4.2% or roughly 11 million vehicles a year.
  • Remember “Cash for Clunkers”? That 2009 program eliminated 690,000 vehicles from American roads and cost American taxpayers $3 billion. It eliminated low priced cars from low-income Americans and did not spur the sales of new vehicles as advertised. It reduced the VIO by 690,000 vehicles and cost $3 billion.
    • If we consider the same reduction strategy with 100 million vehicles, the cost would be over $400 billion?
  • Reductions to 44 million autonomous cars handling 95% of our travel, would sharply reduce new car sales.
    • Forecasting a 70% drop in new car sales is a 12 million vehicle per year reduction in output for vehicle manufacturers.
    • The Auto Alliance estimates the auto manufacturing injects $953 Billion into the US economy each year and that 7.25 million people owe their jobs to the automotive industry. 45 states have more than 10,000 jobs related to the auto industry. Cutting that employment by the RethinkX 70% estimate yields the 5 million lost jobs figure.
  • RethinkX says that just 44 million vehicles will handle the 6 trillion VMT in 2030. If 25 million of them are IOICEs, then the 19 million remaining vehicles (all AVs) would need to average 300,000 miles per year to cover the 5.7 trillion VMT. Not unreasonable.
  • But RethinkX says that AVs are 10 times more efficient than IOICEs – that they will travel 40% of the time instead of 4%. So if AVs travel 3504 hours a year and do 300,000 miles each, then each AV would average 300,000 miles/3504 hours or 85.6 mph.
    • Let’s try it again – take the 244 million vehicles times RethinkX’s 40% IOICE estimate – that’s 17.6 million vehicles (instead of our calculation of 25 million) leaving 26.4 million AVs to handle the 5.7 trillion miles. That’s 215,909 miles per year per vehicle. Also not unreasonable. But if AVs are 40% efficient and travel 3504 hours per year, they would still need to average 61.6 mph to cover the 215,909 miles each year.
  • So what happens if AVs average the same 34 mph that today’s IOICEs average? That would mean the AVs need to be on the road 6,350 hours per year or roughly 72% of the time. That could be possible and maybe we misunderstood RethinkX’s 40% utilization efficiency reference. At least we think we did.
  • The bottom line is this – autonomous cars are coming – and we think they will, in fact drive up vehicle miles traveled AND the amount of service required – so that’s good for the aftermarket. We see the following:
    • Vehicle-Miles-Traveled will move from 3.2 to 4.5 trillion as AVs unlock transportation alternatives for the very young, the very old, and lower income people who cannot afford to own vehicles. Baby boomers will live longer and begin to adopt more AV use as they get older.
    • AV adoption in urban centers will be incentivized through a combination of AV taxi and car share programs, AV congestion reduction incentives, dedicated AV lanes etc.
    • 25% of all miles traveled in 2030 will be AVs but they will be a combination of full electric drive and ICE/electric hybrids.
    • 281,250,000 IOICEs (about 50% of which are hybrid vehicles) will continue their 12,000 mile per year usage rate happily sitting in our garages ready at our beck and call.
    • 5 million AVs (BEV, PHE, ICE-Hybrid) will each travel 250,000 miles a year at an average speed of about 40 mph.
    • The vehicle scrap percentage will climb slightly from 4.2% to 6% over the period as AVs displace existing IO vehicles.
    • The combination of AV TaaS businesses, car sharing, and fractional use business models will reduce new car sales by 300,000 to 500,000 vehicles per year.
    • IO Pickup trucks will continue to lead USA sales.

Acronyms You Need to Know

AV: Autonomous Vehicle
BEV: Battery Electric Vehicle
EV: Electric Vehicle
IO: Individually Owned
ICE: Internal Comburstion Engine
IOICE: Individual Owned Internal Combustion Engine
TaaS: Transportation as a Service – Transportation on-demand
PHE: Plug-In Hybrid Electric
VIO: Vehicles In Operation
VMT: Vehicle Miles Traveled
Read Full Transcript

Carm Capriotto: [”[00:04:00]”] It is nice to welcome Derek Kaufman Schwartz advisers for the second time to the podcast. Derek Kaufman is the managing partner at Schwartz Advisers LLC and the president of C3 network. Now Derek and I were together in episode 2 15 as we talked about his one of his favorite acronyms BMT business model transformation. And that was a can’t miss episode, no matter your role in the aftermarket. Derek thank you for that episode. It was great, thank you for all the insights. You’re back with us because you recently wrote an article about the predictions from a group called Rethink and they’re out in the Bay Area and they predict some pretty strong things relative to the autonomous cars in the future of American highways. It’s an article that’s been picked up by a lot of news outlets.
Derek Kaufman: [”[00:05:21]”] You know that that’s right. You can actually find the report at Rethink x dot com. And the basic premise of the article is that by 2030, and that’s within 10 years of regulatory approval of Autonomous vehicles. What they’re saying is that 95 percent of all U.S. passenger miles traveled will be served by autonomous electric drive vehicles. And they’ll be owned by fleets not individuals no will be operated in what they call a transportation as a service business model or TAAS  or SAAS Software As A Service.
Carm Capriotto: [”[00:06:00]”] Yeah you know it’s another acronym we all have to learn. TAAS. Thanks for sending me the link. 77 page report. Unbelievable and I read in the report that they’re forecasting that the number of passenger vehicles on American roads. Will drop from 247 million to forty-four million and that nearly 100 million existing vehicles are going to be abandoned as they become economically un-viable.
Derek Kaufman: [”[00:06:28]”] Well right. And that’s exactly what the report is saying. Essentially what what their premises is that the car ownership will become a thing of the past. And basically, for two reasons. The first one is the cost of owning a car which they estimate at nine thousand dollars a year. And the second is the whole issue of safety. So over 35000 people die on American roads each year. And the Rethink X people are saying that replacing people with autonomous cars is the only way to solve that problem.
Carm Capriotto: [”[00:07:01]”] I was at a party last night. Someone brought the whole concept up to me and we chatted a little bit about this report and where I saw the future going where they think the future is going and the older people want that security of the vehicle the younger people said we maybe need to Rethink this. So interesting the Rethink X page quotes someone from the Motley Fool investor Web site is saying quote “I’m convinced that I and you will probably never buy another car again ever”.
Derek Kaufman: [”[00:07:38]”] I read that and that’s why I wrote in the article I said well that’s enough to make me want to can some peas and head for the shelter.
Carm Capriotto: [”[00:07:45]”] Derek. By you just saying that I guess you haven’t bought this article at face value, but you put some time into thinking about where these numbers fit in how viable or real they are.
Derek Kaufman: [”[00:07:58]”] Yeah, the article goes on and on Carm, about the research they’ve done, and you know being in the aftermarket for my whole career we know with the numbers of the aftermarket 270 million they say 247 it’s actually 270 million over 270 million cars on the roads today. We’re currently selling about 17 million new vehicles into the market and our scrappage rates have actually come down because cars last longer. Now they’ve built a better quality. Our scrap rates have come down from over 5 percent a year to about four point two. We’re putting 17 million cars in and we’re taking 11 million out which means that 270 is growing every year.
Carm Capriotto: [”[00:08:43]”] The report says that a lot of those need to be scrapped. Like over one hundred million cars.
Derek Kaufman: [”[00:08:51]”] Essentially, they’re saying that you know with 44 million cars we can handle all of the miles traveled requirements in the United States. So that that forced me as I read the article to go back to some cash for clunkers statistics. That was back in 2009. And I think the numbers are as I looked it up, six hundred ninety thousand vehicles were removed from American roads and it cost to the American taxpayers about three billion dollars to do that. You know there’s some debate on Cash for Clunkers on what it really did. I think it took a lot of affordable vehicles and perfectly serviceable vehicles out of the ownership of people who can’t afford a new vehicle. And it really didn’t spur the sales of new vehicles as advertised. B y reducing the vehicles in operation by 690,000 if that costs 3 billion then 100 million would cost us over 400 billion dollars. And I just don’t think that’s a viable number.
Carm Capriotto: [”[00:10:02]”] I sit here in awe of that challenge but to get down to 44 million autonomous cars handling 95 percent of our travel needs you’d need to sharply reduce new car sales as well. And I can’t help but think of the economic impact, but you know from just a layperson’s perspective that’s a lot of jobs.
Derek Kaufman: [”[00:10:26]”] Yeah it really is. We’re putting 17 million in. We’re taking 11 million out so you can’t simply, basically take cars away from people you have to curtail the sale of new cars into the market. They’re forecasting a 70 percent drop in new car sales in this report. That’s about a 12 million vehicle per year reduction. The Auto Alliance Web site and you’ll see that they estimate that auto manufacturing injects about almost a trillion dollars 953 billion dollars into the U.S. economy every year and that seven and a quarter million people owe their jobs to the automotive industry. They show that 45 states, I think, have more than 10,000 jobs related to the auto industry. So you’re cutting that employment by 70 percent. Rethink estimate yields about 5 million lost jobs. And that is really something to think through.
Carm Capriotto: [00:12:57] I know you are a statistic kind of guy but I don’t believe you just stop there. But you dug deeper.
Derek Kaufman: [00:13:52] I got lost in this one Carm, I really did.
Carm Capriotto: [00:13:57] I’m going to sit back and I’m going to see if I can keep up with you.
Derek Kaufman: [”[00:14:02]”] I just started doing the math of 270 million cars in operation basically vehicle miles traveled today right around three point two trillion miles. And that means that each vehicle averages about 12,000 miles a year. So, if you go to their forecast and what they’re saying is and we agree with their forecast that autonomous vehicles will actually increase that vehicle miles traveled. They’re saying that it goes from three point two to six trillion miles a comeback to that a little bit later. But by saying that 5 percent only 5 percent of the six trillion miles will be handled by internal combustion engines vehicles that are as they say individually owned with.
Carm Capriotto: [”[00:14:50]”] And that’s a new acronym. In fact, let me let me do this for you. You like to tell the audience that the show notes page of this episode. I’ll put these acronyms down there. So, if you if you want to get free and loose and say IOICE people going to say what the heck is that. So that’s Individually Owned Internal Combustion Engine.
Derek Kaufman: [”[00:15:13]”] Right. Pretty soon. You know the acronyms are a full sentence long, but you know you’re basically saying that 5 percent of 6 trillion miles will be handled by the vehicles that we own today.  And that’s 300 billion miles. If you divide that by the 12,000 miles per year that they travel you get about 25 million of those vehicles on the road. The rest of them, remember now there are 270 million cars on the road. They’re saying only 44 million are needed for a future of travel.
Carm Capriotto: [00:15:44] But when you actually do the real math based on what people are driving you’re really saying that there are 44 million number is really 25 million cars or vehicles?
Derek Kaufman: [”[00:15:56]”] Right. Because it’s really 19. So, 44 minus the 25 million ICE engine of cars is 19 million electric drive AV’s. Right. And they’re traveling about 300,000 miles a year per car to cover the five point seven trillion miles travel that they’re estimating. So, here’s where the thing begins to fall apart because Rethink X says that AV’s are ten times more efficient than individually owned cars and that’s probably true because you’re individually owned car sits in your driveway. You know a high percentage sound like 95 or 6 percent of the time. What they’re saying is that they’re estimating that your car sits around hours only use 4 percent of the time so that AV’s will be used 40 percent of the time. 4 percent of the time for an individually owned car is about 350 hours a year. They say they’re AV’s are 10 times better. Thirty-five hundred and four hours a year. And they’re going to do 300,000 miles each in their report. When you do all that math and you say well these cars are traveling around at 85 almost 90 miles an hour.  So that doesn’t work. You must scratch your head and say that’s come back and say maybe if you take the 44 million cars and take 40 percent of the internal combustion estimate that brings it down like 17 million vehicles you get caught up in the numbers of basically you still come up with the cars going over 60 miles an hour. Their math in the report doesn’t work. We understand that autonomous vehicles will travel further. We understand it maybe 300,000 miles a year for an autonomous car is a realistic number. Then you say well OK it must be on the road you know 72 percent of the time. That says well wait we’re going to have to have a really good maintenance system here that is very systematically servicing these cars which is good for the aftermarket.
Carm Capriotto: [”[00:18:29]”] Sure it is.
Derek Kaufman: [00:18:32] The issue is that it’s a business to business a business model going forward.
Carm Capriotto: [”[00:18:35] “]It is in and if there’s only going to be 44 million based on the that report, you don’t need as many service centers and you need those 24 units. You and I talked about this on the last episode where the car would drive itself to get serviced in the morning hours. You know you’d have to be open 24 hours a day. Interesting business model but. You know when I started to ask some people are you going to start doing shopping at 10:00 at night you’re going to call the car to take get you to go grocery shopping and you know what they said to me. No. Grocery stores are starting to deliver. I don’t need the car to go shopping. I’m going to go online and I’m going to order. I really think that the Internet of Things or online ordering of just about anything you’d ever want in the entire world may be a factor somewhere in there.
Derek Kaufman: [”[00:19:24]”] Absolutely. You have to think very big picture here to understand where all this goes.  We absolutely understand that autonomous cars will unlock travel for people for the very old who can’t drive cars today for the very young. Your kids might be taken to their soccer practice while you’re at work now because an autonomous car will come and pick them up and take them there. That’s wonderful efficiency. So what Schwartz Advisory team is saying is that we see Vehicle Miles Traveled actually going from three point two to about four point five trillion miles as AV’s unlock this these transportation alternatives.
Carm Capriotto: [”[00:20:07]”] The article that came out were Volvo says they’re going with all electric now I guess if you read the headline you say whoa. But you know today you almost got to read deeper into an article to really understand what they mean.
Derek Kaufman: [”[00:20:18]”] Absolutely. You know the people who write the articles are not the same people who write the headlines in many many cases, so the headline writers job is to grab you in and suck you into the article. I get that. But in so doing so many of the headlines were misleading. If you read that Volvo article and you get halfway down the article about them going all electric by 2019 the one word one operative word in there and that word is solely and what it says is their power or their product line will not be solely internal combustion engines by 2019. The article doesn’t say there are going to be all electric it fully opens the door for gas hybrids and that’s in fact the way they will go. They’ll go gas hybrids and over a period of time move toward electric. But like I say that word solely means a whole lot in that article and it can be very misleading to just read the headline and you know run on down the road.
Carm Capriotto: [”[00:21:21]”] Derek where do you see the impact of a AV’s.
Derek Kaufman: [”[00:21:24]”] We think that this will be largely an urban center issue. In other words, this is about cities. It’s AV taxis or car share programs. It’s congestion reduction incentives those types of things with AV lanes being established. We get all that and you know we come up with not ninety five percent of travel of miles traveled, but something closer to say 25 percent. I live on a farm outside of Grand Rapids, Michigan. I agree with you that I’ll probably have food delivered more often but I can’t see calling an AV that will take 15 minutes to get here to take me 15 minutes to the doctor’s office or 15 minutes to a restaurant. I’ll pay the nine thousand dollars to have that individually owned car sitting here ready and as I said in the article, one word that they didn’t discuss was convenience and that holds individually owned cars going up to over 280 million and we think that about four and a half million AV’s will travel somewhere in the 250,000 miles a year in running or around at an average speed of about 40 miles an hour or so.
Carm Capriotto: [”[00:22:51]”] So the AV’s of the future that you’re talking about total electric vehicles you’re talking about internal combustion hybrids right. It’s a mix.
Derek Kaufman: [”[00:23:01]”] We think it’s a mix. We know that you know you have to you have to read the headlines here and understand that France is talking about going all electric by 2040. The UK just announced this week the same thing Norway has done as well. Take a look at the geography of the United States and think it’s a tougher situation and you know just harder to do. We don’t believe that you know we go all electric. We think that hybrids hang in for a long time, but you know that a combination of AV’s, car sharing or all; this probably reduces new car sales but as I said in the last point of our thought is that individually owned pickup trucks still continued to lead USA sales long into the future.
Carm Capriotto: [”[00:23:55]”] Pickup trucks. Yes, because someone’s got to do the work on the farm.
Derek Kaufman: [”[00:24:01]”] Number one selling car in the United States is the Ford 150 and it’s over two times almost three times the sales of the leading vehicle which is the Toyota Camry. You look at what people are doing with trucks SUV and in general, CUVs, it’s what is selling in the United States.
Carm Capriotto: [”[00:24:27]”] It’s amazing when you fly over America and you fly over a lake and you look at a marina and you look at the number of boats that are there and you think, or you know, how did that boat get there and you know OK I guess there could be transportation as a service to haul your boat. Hey honey it ends up being a beautiful day. The Joneses can go with us. Let’s take the boat. Let’s go down to the lake. Let’s spend the day at the lake on the way there let’s go shopping with pick up some food some charcoal. That’s freedom. That’s convenience. And there may be, I can’t imagine that the new generations Derek are going to give up freedom and convenience that you know we have become so used to by having that vehicle in the garage ready to go.
Derek Kaufman: [”[00:25:18]”] Yeah. You know we don’t want to stick our head in the sand here. You have the argument and you know somebody said to me the other day well you know you’re going to be the buggy whip salesman in the in the future the horseless carriage replaced the horse and the people who were selling horses at that time said that will never happen. I get that.  I just think the demographics here the geography the amount of space that we cover doesn’t lend itself to these predictions and the predictions tend to come out of the not to single on the area. But this is a Bay Area group. It’s a software-oriented society out there. It is the home delivery society out there. I get that. We don’t have blinders on here a lot of this will convert. I understand it but not 95 percent.
Carm Capriotto: [”[00:26:20]”] It goes back to the last episode we did Derek, episode 215, as we were talking about these different business models and the investments that the car companies are going to be making in  some of these companies. Where are we going to put our vehicles if our vehicles are going to start serving the public.
Derek Kaufman: [”[00:26:40]”] Right. And you’ve seen that Apple and Google have both made moves with large rental companies Avis and Hertz and I can never remember which was which Apple with Hertz. That makes sense right. You have this infrastructure already in place to handle all the rental cars, so they might be a great platform for autonomous vehicles. And they don’t want to go away.  So that makes sense.
Carm Capriotto: [”[00:27:07]”] Can you imagine being Hertz or Avis or enterprise years ago starting this company and not realizing that the entire world would change that would make what you do so relevant in the future because they could be an autonomous base because they know how to do it.
Derek Kaufman: [”[00:27:26]”] They have the infrastructure in place and they know exactly right. They know how to do it. And it’s you know it’s a matter of the geographies. Now they’re positioned at airports. You know other urban centers. How do they handle all the small towns and those types of things? But the platform is a lot better starting place than from scratch.
Carm Capriotto: [”[00:27:45]”] Well thank you for crunching these numbers. If anyone could have done it you could have done it.
Derek Kaufman: [00:27:51] I’m not sure that’s true.
Carm Capriotto: [”[00:27:54]”] Well you know I think you brought some reality about you know how fast does the car have to go in order to cover the miles that they claim we do drive if the vehicles are less. I think things are things are going to change. I’m accepting the fact that the world’s going to be different maybe not as aggressively as the report says as far as the timeline.
Derek Kaufman: [”[00:28:16]”] It will come down to a discussion of freedom. In order to get 100 million vehicles off the road someone is going to have to come and take a vehicle away from you because you’re not going to voluntarily give it up. That’s a  discussion of freedom and that will be  an interesting debate.
Carm Capriotto: [”[00:28:38]”] You know if I was an urbaner I get what you’re saying I’m in a high rise I really don’t need a vehicle and I’m learning my lifestyle. I figured out how to get around and do what I must to get to the airport how to rent a car how to find a taxi now get an Uber. But like you I’m in the country and the next closest towns eight miles away and I can’t imagine where I could get an Uber to come and find me especially when the urge. You know sometimes I’m done with an episode or two in an interview and I got to go to the bank and my God I may I may go at a completely different time that I called for my ride.
Derek Kaufman: [”[00:29:21]”] Not to mention you’re sitting hip deep in snow half the year.
Carm Capriotto: [00:29:28] Well thank you so much for the enlightenment. I really do appreciate it. Another well written article and some great sage wise words Derek Kaufman managing partner Schwartz advisers and the president of the C3 network. Thank you so much.

 

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About the author, Carm Capriotto, AAP

Carm is the founder and host of the Remarkable Results Radio Podcast; the only one of its type in the automotive aftermarket. Carm calls on his 35 years’ experience in the aftermarket to bring engaging stories from his guests.

Listen to raw, unfiltered, honest, and sincere stories that include insights, trends, best practices and expertise. Each interview brings an opportunity to learn one new thing through the stories of personal achievement. Many podcast guests tell their story of transformation from working in their business to working on it.

As host, Carm uses his enthusiasm and passion for the aftermarket especially the service sector to take his listeners on a journey showcasing successful service professionals’ path to Remarkable Results. He also enjoys interviews with aftermarket industry thought leaders who bring their industry perspectives to his listener.