How Google's Self-Driving Car Will Change Everything

Imagine getting in your car, typing or speaking a location into your vehicle’s interface, then letting it drive you to your destination while you read a book, surf the web or nap. Self-driving vehicles – the stuff of science fiction since the first roads were paved – are coming, and they’re going to radically change what it’s like to get from point A to point B.

“The building blocks of driverless cars are on the road now,” explained Russ Rader, senior v.p. of communications at the Insurance Institute for Highway Safety. He pointed to the front-crash prevention systems that for several years have been able to warn drivers of an impending obstacle and apply the brakes if they don’t react fast enough.

These systems were quickly followed by technology allowing cars to self-park by sizing up a free spot and automatically steering into it, with the driver only controlling the accelerator and brake pedals. Mercedes-Benz took autonomous driving even further with last year’s unveiling of a steering system that works on the highway, in certain circumstances.

The first big leap to fully autonomous vehicles is due in 2017, when Google Inc. (GOOG) said it would have an integrated system ready to market. Every major automotive manufacturer is likely to follow by the early 2020s, though their systems could wind up being more sensor-based, and rely less on networking and access to map information. Google probably wont manufacture cars. More likely, it’ll license the software and systems.

As with the adoption of any new revolutionary technology, there will be problems for businesses that don’t adjust fast enough. Futurists estimate that hundreds of billions of dollars (if not trillions) will be lost by automakers, suppliers, dealers, insurers, parking companies, and many other car-related enterprises. And think of the lost revenue for governments via licensing fees, taxes and tolls, and by personal injury lawyers and health insurers.

Who needs a car made with heavier-gauge steel and eight airbags (not to mention a body shop) if accidents are so rare? Who needs a parking spot close to work if your car can drive you there, park itself miles away, only to pick you up later? Who needs to buy a flight from Boston to Cleveland when you can leave in the evening, sleep much of the way, and arrive in the morning?

Indeed, Google’s goal is to increase car utilization from 5-10% to 75% or more by facilitating sharing. That means fewer cars on the road. Fewer cars period, in fact. Who needs to own a car when you can just order a shared one and it’ll drive up minutes later, ready to take you wherever you want?

“This [has the potential to] dramatically reduce the number of cars on the street, 80% of which have people driving alone in them, and also a household's cost of transportation, which is 18% of their income – around $9,000 a year – for an asset that they use only 5% of the time,” said Robin Chase, the founder and CEO of Buzzcar, a peer-to-peer car sharing service, and co-founder and former CEO of Zipcar.

In 2030, self-driving cars are expected to create $87 billion worth of opportunities for automakers and technology developers, said a report by Boston-based Lux Research. Software developers stand to win big.

If you’re an automaker, such as Ford Motor Co. (F), General Motors Co. (GM), Chrysler Group LLC, Toyota Motor Corp. or Honda Motor Co., Ltd. (HMC), which account for about 70% of the U.S. market, you could see an initial surge in the $600 billion in annual new and used car sales in the U.S. But as soon as the technology takes hold, sales could fall off significantly as sharing popularizes.

Cars will always need steel, glass, an interior, a drivetrain and some form of human interface (even if that interface is little more than a wireless connection to your smartphone). But much of everything else could change. As an example, take front-facing seats; they could become an option, not a requirement. Automakers that see change coming, such as how the big profits are secured downstream by car servicers, insurers and more, are focusing on services as much as on what and how they manufacture.

With fewer cars around, parking lots and spaces that cover roughly a one-third of the land area of many U.S. cities can be repurposed. That could mean temporary downward pressure on real estate values as supply increases. It could also mean greener urban areas, as well as revitalized suburbs, as longer commutes become more palatable. And if fewer cars are on the road, the federal and state governments may be able to reallocate a good portion of the roughly $30 billion spent annually on highways.

If you’re in the business of finding, extracting, refining and marketing hydrocarbons, such as Exxon Mobil Corp. (EOX), Chevron Corp. (CVX) or BP plc (BP), you could see your business fluctuate as use changes.

“These vehicles should practice very efficient eco-driving practices, which is typically about 20% better than the average driver,” said Chase “On the other hand, if these cars are owned by individuals, I see a huge rise in the number of trips, and vehicle miles traveled. People will send out their car to run errands they would never do if they had to be in the car and waste their own time. If the autonomous cars are shared vehicles and people pay for each trip, I think this will reduce demand, and thus (vehicle miles traveled).”

Autonomous vehicles are also expected to be safer. “These cars won't get drunk or high, drive too fast, or take unnecessary risks – things people do all the time,” Chase said.

“Over 90% of accidents today are caused by driver error,” said Professor Robert W. Peterson of the Center for Insurance Law and Regulation at Santa Clara University School of Law. “There is every reason to believe that self-driving cars will reduce frequency and severity of accidents, so insurance costs should fall, perhaps dramatically.”

“Cars can still get flooded, damaged or stolen,” notes Michael Barry, the v.p. of media relations at the Insurance Information Institute. “But this technology will have a dramatic impact on underwriting. A lot of traditional underwriting criteria will be upended.”

Barry said it’s too early to quantify exactly how self-driving vehicles will affect rates, but added that injured parties in a crash involving a self-driving car may choose to sue the vehicle’s manufacturer, or the software company that designed the autonomous capability.

Initially, insurers such as State Farm Insurance, Allstate Corp. (ALL), Liberty Mutual Group, Berkshire Hathaway Inc.’s (BRK-A) GEICO, Citigroup Inc.’s (C) Travelers Group could see a huge benefit from lower accident liabilities, but wind up losing a big portion of the $200 billion in personal auto premiums they write every year as fewer cars take to the road. Some have even speculated that mandatory insurance for cars could be dropped. And as long as we’re talking about financial services, what of the multitude of banks and creditors that lend buyers money in about 70% of car purchases if sales volume falls?

According to a University of Texas report, if only 10% of the cars on U.S. roads were autonomous, more than $37 billion of savings could be realized via less wasted time and fuel, as well as fewer injuries and deaths. At 90%, the benefit rises to almost $450 billion a year.

Self-driving cars could have a substantial impact on the taxi and limousine industries and could create new ones. Chase noted that they could be used to share specific trips as a kind of pay-as-you-go small-scale public transportation – taking a disparate bunch of Manhattanites to the beach in the Hamptons, for instance.

One study found that a fleet of 9,000 driverless taxis could serve all of Manhattan at about 40 cents per mile (compared to about $4-6 per mile now). There are licenses for over 13,000 taxis in the Big Apple now.

Self-driving cars may also challenge train lines. “A self-driving car offers much of the convenience of rail service with the added convenience that the service is portal-to-portal rather than station-to-station,” Peterson said. “On the other hand, a fleet of self-driving cars available at the station may make rail service more palatable. “The technology has already been adopted in closed systems, such as campuses, air-terminals and mining,” he noted. “Rio Tinto Group (RIO), a large mining company, uses enormous self-driving trucks in its mining operations. European countries are experimenting with the platooning of trucks. Among other things, this saves about 18% in fuel.”

There are regulatory and legislative obstacles to widespread use of self-driving cars, and substantial concerns about privacy (who will have access to any driving information these vehicles store?). There’s also the question of security, as hackers could theoretically take control of these vehicles, and are not known for their restraint or civic-mindedness.

However it plays out, these vehicles are coming – and fast. Their full adoption will take decades, but their convenience, cost, safety and other factors will make them ubiquitous and indispensable. Such as with any technological revolution, the companies that plan ahead, adjust the fastest and imagine the biggest will survive and thrive. And companies invested in old technology and practices will need to evolve or risk dying.