The driverless taxi market will determine the future of Tesla and Uber

The battle for the self-driving taxi market is a matter of life and death for Tesla, Uber, and Lyft, according to Intel senior vice president and Mobileye CEO Amnon Shashua. If you had to hear from a ride-hailing executive about what the future holds for human drivers as self-driving taxis take off, it would be best to pick controversial former Uber CEO Travis Kalanick.

He currently holds management positions at two major ride-hailing giants, Uber and Lyft, both of which have recently been either cautious in discussing the timeline for artificial intelligence to replace humans and steering wheels, or have hinted that human drivers may one day be completely eliminated.

Those drivers recently went on strike on the eve of Uber's initial public offering (IPO), and Lyft's stock price has continued to fall since its listing. The uncertainty of drivers' economic income and work status has become a major social issue. But as early as 2014, Kalanick was sure of one thing, and he was not afraid to say it, that is, the future of driverless cars is coming, and drivers will lose their jobs.

“Look, this is what’s happening in the world,” Kalanick explained to would-be unemployed Uber drivers at the 2014 Code Conference. “If Uber doesn’t go in that direction, then it’s going to cease to exist. The world isn’t always pretty.”

Lyft, which announced a partnership with Waymo, Alphabet’s self-driving car unit that has been locked in a years-long legal battle with Uber , announced last week alongside its first financial report, which saw investors dump its stock .

As Tesla struggles to find a roadmap to truly make cars profitable, Elon Musk is touting his company’s potential to become a $500 billion market winner based on Tesla cars that will be converted by their owners into driverless taxis. Musk says his electric car company should have 1 million vehicles capable of serving as driverless taxis next year, and that owners should be able to make tens of thousands of dollars a year from them (although this is an ambitious plan, Musk is known to make predictions that don’t come true on time).

The public often focuses on the risks of autonomous driving — several fatalities involving Tesla and Uber test cars have unnerved many. But the economics of driverless car technology will largely determine the winners of the autonomous future. The race is already underway, and according to the head of Intel’s autonomous driving business, the focus will be on drastically reducing the economic costs associated with human driving today.

For the past six months, Mobileye, the Israeli self-driving company that Intel bought for $15 billion in 2017, has been conducting what its leader, Shashua, calls “a very, very deep study” on the economics of mobility as a service, or MaaS. The company is akin to software as a service, which Uber pitched to investors during its IPO roadshow. But the conclusions of Mobileye’s study help bring MaaS back to reality: The winners will be determined by the same factor that has always dominated business competition: massive cost savings based on current economic conditions.

“The way you’re going to really change the mobility market is by moving from a human-based ride-hailing service … to a self-driving taxi service,” Shashua said in a recent interview with CNBC’s Jon Fortt. “Right now, the driver is 80% of the economic cost. Once you take the driver out and replace it with the capital expenditures — the cost of the car, the cost of the technology, which can be tens of thousands of dollars … in terms of the discount you can give to the existing ride-hailing business, it completely changes the market. Even if you give a 40% to 50% discount to the existing ride-hailing business, it’s still a viable business; it’s a high-margin business.”

Shashua claims he has no groundbreaking ideas about the economics of ride-hailing. "You look at what Uber and Lyft are doing. They've clearly stated that the next stage of their evolution is to have self-driving taxis. Because they understand that this is going to change the market. It's not like we suddenly discovered that it's going to change the market."

Two stages of cost transformation

Lyft's founders have said they are chasing a $1.2 trillion market, and their path to profitability is convincing consumers that taking a ride is a better deal than buying a car. "If you believe that Americans spend $9,000 a year to own and operate a car that they only use 5% of the time, and we can help you use your car more efficiently and save a lot of money, then taking a ride is for you," Lyft founder John Zimmer told CNBC on the day of its IPO in March.

The Mobileye co-founder said that the current cost of an autonomous driving system is estimated to be tens of thousands of dollars, which is a reasonable capital expenditure investment for a company, but it is obviously not possible to pass this cost on to passenger car consumers. Shashua pointed out that the premise for real cost reduction is that the autonomous driving cost curve will drop significantly, which will have two stages of transformation.

The first stage of change “dramatically” reduces the cost per mile to the cost per mile of car ownership. “That’s pretty transformative.”

The second stage of change will come when the cost of autonomous driving systems drops 10-fold to a few thousand dollars.

“You can’t invest in technology that costs tens of thousands of dollars in passenger cars because you need to make a profit.”

Intel has its own market problems at the moment. The chip giant has recently slashed its earnings guidance, such as giving a weaker three-year outlook at an investor day on Thursday. Slowing growth in its traditional PC processor business is one reason Intel is increasingly interested in growing markets such as data centers and potential future markets such as autonomous driving.

Building an autonomous driving system

Mobileye's system uses cameras, lasers and radar to guide the vehicle, with the camera system being the core component.

“Assisted driving is a volume business,” Shashua said. “It’s tens of millions of cars. In a volume business, you can’t imagine an imaging system costing more than a few hundred dollars. You can equip a car with surround cameras and high-performance computing for less than a few hundred dollars.”

Of course, competition in the driverless car market will be a test of more than just cost.

“In addition to building an autonomous driving system, you also need to build mobility as a service… You need to do things like route optimization and customer demand analysis - placing driverless taxis in strategic locations so that when a customer requests service within a minute, the car will arrive at the destination on time, and you also need to deal with peak hours, mixed fleet scheduling and remote control,” Shashua said.

There will still be work for humans. "At some point, the car might get lost, so you need human help. Either call emergency services or do something else," he said. "At Intel, we will partner to develop and acquire all the necessary elements to create a mobility services business based on building an autonomous driving system. We are already developing an autonomous driving system. For each component, we will either acquire it, develop it ourselves, or partner to achieve it."

Shashua believes that industry consolidation will eventually leave the market with only a small number of players, "single-digit players," who can not only build the technology but also test it and work with regulators to get these cars on the road.

“When your computer crashes, no one’s life is at risk. I think that’s the big difference between AI for self-driving cars and AI for ad recommendation algorithms on social networks.”

Mobileye has released a formal safety model and is working with regulators around the world. It also plans to launch a driverless taxi service in a joint venture with Volkswagen, starting this year in its home market of Tel Aviv, Israel, with commercial operations in 2022. The company has already tested self-driving cars in Jerusalem.

“That’s a very, very important sandbox because this launch includes a full mobility service. It’s a launch, it’s a commercial service. It’s not a test. There’s no driver behind the wheel, we need to provide a full range of services. That’s going to be a very, very important sandbox for us to build this service.”

Shashua also noted that Israel provides important agility testing for self-driving cars.

"We are testing those vehicles in very challenging conditions. Driving in Israel is challenging, and driving in Jerusalem is even more challenging because you need to drive in a world where many people don't obey traffic rules. The streets are narrow, and roundabouts are not uncommon."

The Intel executive is aware of the importance of security issues.

"If your smartphone crashes, it's OK. You restart it. With a car, you can't afford for it to crash... You can't make mistakes; especially with self-driving cars," Shashua said. "For consumer products, the level of precision you need in AI is really unprecedented. You can't make mistakes. You have to prevent problems because lives are at stake. When your computer crashes, no one's life is at risk. I think that's the big difference between AI for self-driving cars and AI for ad recommendation algorithms on social networks."

"Autonomous driving is a very beautiful thing because it's really a very natural case study for AI. It involves all kinds of factors, including ethics; all kinds of issues that you need to address when you talk about AI. It involves perception. You need to understand the world around you, understand the kinds of pattern recognition that, while we humans do those things effortlessly, are very, very difficult for computers. It involves decision-making; merging into traffic is a decision, right? When you're negotiating with other road users, you're making decisions. Should I give way to that car? Should I go that way? It's that kind of traditional decision-making... The great thing about autonomous driving is that it's a huge AI problem, but it's a huge business opportunity. It's a huge, transformative business."