As car ownership goes down, the transportation-as-a-service business model offers a higher-margin opportunity within the auto sector.

The following is a guest post by Paul Asel. Asel is managing partner of Nokia Growth Partners (NGP) and a global technology investor across the US, Europe, and Asia.

A seismic shift is occurring in the transportation sector. As General Motors CEO Mary Barra noted recently at the World Economic Forum, “I believe the auto industry will change more in the next five to 10 years than it has in the last 50, and this gives us the opportunity to make cars more capable, more sustainable and more exciting than ever before.”

The implications of this change are profound for consumers and business. For the average US adult who spends about an hour in cars daily, the prospect of improved productivity is alluring. For business and technology, innovation in the transportation sector, which accounts for over 10% of US gross domestic product (GDP), places mobility as an opportunity akin to the mobile sector.

But the prospect of change is as daunting as it is promising for those in the auto sector. After seven years of rising automotive sales, the auto industry is bracing for a slowdown. Analysts predict a market contraction, noting, “Automakers have finally exhausted the pent-up demand for new cars that went unfulfilled during the depths of the recession, when many consumers were out of work or deferring big-ticket splurges.”

This cyclical downturn is deepened by a broader secular shift away from car ownership. With annual car ownership costs now at nearly $9,000 and increasing roughly 2% per year, many are deciding the costs outweigh the benefits. As a result, car ownership rates are declining, particularly in urban areas where new, alternate forms of transportation are increasingly accessible. The percentage of US households that do not own a car has increased from 8.7% to 9.2% in the past 10 years, according to UMTRI’s Dr. Michael Sivak. In Europe, which has a robust public transportation system, new car purchases have declined by 25% since 2007.

A transformation is underway as the plate tectonics of technology and consumer interests converge. The traditional “Transportation as an Asset” model—in which a person buys, owns, and drives her own car—is shifting to “Transportation as a Service” (TaaS). As the chart below illustrates, PriceWaterhouseCoopers projects nearly 20% of industry revenues and 36% of profit will shift from auto sales to services by 2030.

AUTO INDUSTRY – SHARE OF REVENUES & PROFITS IN 2015 & 2030

TRANSPORTATION AS A SERVICE: THE AUTO INDUSTRY RE-IMAGINED

While Transportation as an Asset is a monolithic model, TaaS may take a variety of forms offering more consumer choices and business opportunities. Transportation services have attracted many new entrants as the industry replaces low-margin asset revenue with high-margin service revenue. Ride-hailing companies have garnered the most attention, with funding totaling over $23B between 2015-2016, according to CB Insights. If you include the recent $5.5B and $100M raises by Didi and Ola, that number approaches $29B. Other TaaS companies offering on-demand delivery services, car sharing, bike sharing, and public transport services have also raised over $8B globally. The chart below shows a selection of TaaS companies funded recently. (Note: Nokia Growth Partners has invested in Moovit, Drivy, Zoomcar, Meican, and Deliveroo.)

LOOKING AHEAD

As Amara’s Law has observed over past technology disruptions, our tendency is to overestimate short-term impacts while underestimating long-term impacts. Autonomous driving, for example, will encounter speed bumps and take longer to implement than many may hope. However, autonomous driving will enhance TaaS, with implications far beyond the services as we currently envision them. With this framework in mind, here is a look at how the rise of Transportation as a Service may play out over the next decade.

The Next-Gen Garage: Garages will seem superfluous for those (particularly millennials) who opt out of car ownership. Instead, many will turn to services such as Airbnb or GaragePointer to rent this extra space. In lieu of their own wheels, services like Uber or Lyft get them around town, while shared vehicles like Zipcar help them get away on longer excursions. New technology that provides transparency on driver behavior and past renter performance will enhance trust and reduce friction in using shared transportation services. Our transformed garages will become a symbol of the shift to an asset-light transportation model.

Smart Commuting and Smarter Cities: Let’s face it—commuting is a drag. But the dawn of Transportation as a Service promises to change this daily grind for the better. Current ride-for-hire-services help boost productivity but also contribute to congestion and pollution. New innovative services are emerging to solve these challenges. Intelligent communal transport options such as Ford Chariot are gaining traction in several cities, while GPS-enabled bike sharing is a green and healthy way to get to work. Moovit enables commuters to compare the time and cost tradeoff of an expanding array of intra-city public transport options in hundreds of cities globally. As smart commuting services converge with autonomous driving, we can expect to see more distributed suburbs and denser, greener cities. Unfettered by daunting commutes, people will be more willing to move to bedroom communities farther away from cities, knowing they can utilize their time productively while comfortably traveling to work. The urban landscape will change as cities that now devote over 25% of city centers to parking will find better uses for this land. Thus, those that choose to remain in cities will enjoy less congestion and shorter commutes.

Logistics and Concierge Services: In the Transportation as a Service age, passenger cars will decline but service vehicles will surge as autonomous driving reduces delivery costs spurring demand for local services. New special-purpose delivery vehicles, such as delivery robots (Starship Technologies) and drones, are already being tested as last mile delivery options. According to CB Insights, private market investment into logistics tech is hitting record highs as investors and startup entrepreneurs probe for opportunities across the transportation industry.

The transportation sector is undergoing several epochal changes simultaneously: autonomous driving, electric vehicles and connected cars. Each will significantly impact the auto sector. Together, these changes offer an opportunity to reimagine the transportation sector and shift to Transportation as a Service. This article gives a glimpse of future opportunities. In the coming months, we will explore more deeply how TaaS will impact both transportation and other sectors involving mobility.