Automaker AVs can't compete with Uber and Lyft

As an autonomous future looms large, automakers such as General Motors, Ford and Toyota are racing to capitalize on self-driving technology. And while the technology itself still faces significant hurdles, there is even more uncertainty about the best ways to commercialize it. With billions of dollars of investment at stake, it is critical for automakers to make the right strategic choices in building businesses around the budding technology.

There is one option in particular that we strongly urge automakers to reject: launching their own ride-hailing networks in competition with Uber and Lyft. Yet this is exactly what we observe some automakers and their AV affiliates considering. GM's Cruise Automation has said it intends to launch its own ride-hailing service, while Tesla has made it clear that it wants to do the same via its autonomous Tesla Network. Unfortunately, taking on the ride-hailing giants will be an expensive battle that will entail bleeding red ink for years.

One mistake many observers and industry participants make is assuming that autonomous vehicles are "disruptive" and therefore entrants employing the technology are likely to upend industry incumbents, whether in long-distance trucking, farming equipment, or ride hailing. This simply isn't true. No technology is inherently disruptive; it's how the innovation is deployed in a specific market that determines its disruptive potential. In the case of ride hailing, AV technology can be readily adopted into Uber and Lyft's existing business models, with both companies eagerly developing in-house self-driving technology. This should enable the incumbents to maintain their dominant position in the market.

AV tech will simply help Uber and Lyft do what they've always done, but better. AVs will not fundamentally change the way the ride-hailing companies make money, or redefine the service they provide to their customers. At least initially, Uber and Lyft will still charge riders a fee and share a portion of it with its suppliers of rides. AVs could also make those rides safer, thereby improving the traditional ride-hailing service.

Further, in circumstances where new entrants try to compete head-on with entrenched incumbents, they almost always lose. Just 6 percent of new ventures that employ this strategy ultimately succeed, and that success often comes at the cost of large amounts of red ink. That's because entrenched, motivated companies such as Uber and Lyft have the resources and organizational capability to defend themselves against upstarts. Entrants such as GM Cruise and Tesla can try to beat the odds by throwing money at the problem, but they'll wind up funding losses for years as they spend to acquire customers and engage in the inevitable price wars that are so common in the ride-hailing industry.

For instance, one resource Uber and Lyft will be able to offer that purely autonomous ride-hailing firms will struggle to replicate is a hybrid network consisting of both human and autonomous drivers. AVs will initially be deployed in limited, geofenced areas and as a result a fully autonomous ride-hailing service will not be able to take riders outside of that defined area. In contrast, Uber and Lyft will be able to serve the full range of customer destinations, likely making them the preferred choice for customers during this transitional period. For an autonomous ride-hailing firm to build out a similar network of human drivers, they would need to spend heavily on driver incentives — further contributing to the operating losses required to launch the new firm.

Automakers can avoid the bloody price wars and low margins associated with ride-hailing by taking either of the following approaches: They can aim to become the "brain" of the autonomous vehicle, thereby earning the more attractive margins of a software vendor, or they can provide fleets of their AVs to the ride-hailing network, which can be deployed as "drivers."

In either of these approaches, automakers would be focusing their efforts on monetizing what is likely to be the most scarce technology in AVs — the operating system. And controlling scarce technology is almost always a route to much more attractive profits.

When faced with the option to launch a higher-margin business within a brand-new competitive playing field vs. entering a low-margin, price-competitive business with entrenched competitors, the choice for automakers should be clear.