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The Future of Autonomous Vehicles: Trends and Challenges

Photo: Maximalfocus Photo: Maximalfocus
Photo: Maximalfocus Photo: Maximalfocus

The Future of Autonomous Vehicles: Trends and Challenges

Autonomous vehicles may generate $300 billion to $400 billion in income by 2035. What is required to succeed in the quickly evolving passenger vehicle industry is shown by a new study.


Consumers’ aspirations of fleets of efficient autonomous cars transporting passengers to their destinations have sparked billions of dollars’ worth of expenditure in recent years. However, despite certain failures that have extended launch dates for AVs and slowed consumer adoption, the mobility world still generally believes that self-driving cars  have the ability to change consumer behaviour, transportation, and society at large.


As a result, according to a study, AD may generate thousands of billions of dollars in value for the car industry before the end of this decade. However, vehicle OEMs and suppliers may need to create new marketing and business plans, acquire new technology skills, and handle safety issues in order to enjoy the consumer and financial benefits of autonomous driving.

Photo: Kenny Lays

The possibility for autonomous technology to upend the passenger vehicle industry is examined in this study, which concentrates on the private passenger car sector of the Autonomous Driving market. In order to succeed in the AD passenger vehicle market, it also highlights key success elements that every auto OEM, supplier, and technology provider should be aware of. (Other McKinsey papers investigate the possibility of shared AVs such as autonomous trucks, autonomous last-mile delivery, and robo-taxis and robo-shuttles.)


Driving autonomously might benefit drivers, the car industry, and society significantly.

AD has the potential to completely change how customers perceive mobility. Driving might become safer, simpler, and more fun thanks to AD systems. The time you would have spent driving might now be spent working, video calling a buddy, or watching a comedy. Driving an autonomous vehicle (AV) might boost productivity and possibly reduce the workday for individuals who have lengthy commutes. Since employees might complete their tasks from an autonomous vehicle, they would live further from their places of employment, which might draw more people to suburban and rural regions. Elderly drivers’ mobility may be enhanced by AD by giving them choices other than public transit or car-sharing services. One study indicates that the increasing use of advanced driver-assistance systems (ADAS) in Europe might cut crashes by roughly 15% by 2030, which would boost safety.


AD may produce extra value for the vehicle industry in addition to these advantages for consumers. Although most automobiles only have limited ADAS functions today, significant improvements in Autonomous Driving capabilities are about to come. Under some circumstances, vehicles will eventually reach SAE Level 4 (L4), often known as autonomous control. A 2021 consumer study found that consumers demand access to Autonomous Driving functionalities and are prepared to pay for them. A rising market for AD systems might bring in billions of dollars. The component prices for automobiles with lidar-based Level 2+ (L2+) abilities range from $1,500 to $2,000, and they are significantly more for vehicles with Level 3 (L3) and L4 choices. ADAS and AD might create around $300 billion and $400 billion in the consumer automobile industry by 2035, based on customer demand in Autonomous Driving characteristics and commercial solutions now on the market.


There may be considerable spillover effects from autonomous vehicles on other businesses. For instance, AD technology might reduce the amount of people who need assistance with roadside assistance and maintenance by lowering the frequency of automobile accidents and collisions. As consumer use of AD increases, this might put stress on those kinds of firms. Additionally, since turning over control of vehicles to AD systems may imply that individual drivers may no longer be held accountable for auto accidents, customers who own self-driving cars may not be compelled to pay exorbitant insurance costs. New business-to-business insurance structures may consequently develop for autonomous transport.


New insurance packages are already being tested by some automakers. These businesses are using autonomous technology to get information on driving behaviour and provide tailored offers to their customers. The fact that OEMs are in complete control of the AD system, its functionality, and the data it produces (such as the current performance of drivers), gives them a huge edge over independent insurance firms.


How AD may change the passenger vehicle market

Due to the current high levels of market uncertainty, McKinsey has created three scenarios for the sales of autonomous passenger cars based on variable degrees of technological availability, consumer adoption, and regulatory backing (Exhibit 2). In our postponed scenario, automakers further delay the introduction of automated vehicles, and customer adoption is still low. According to this scenario, just 4% of newly purchased passenger cars will have L3+ AD features installed in 2030, and that percentage will rise to 17% by 2035.


Delivering increased automation levels

There is a ton of room for development for manufacturers committed to producing vehicles with increased degrees of automation. For the ease of hands-free driving, consumers may prefer vehicles with more sophisticated autonomous features (such as L2+, L3, and L4), which allow the autonomous system more control over driving duties. While the cost of sensors and powerful processors is falling, safety regulations for Autonomous Driving techniques are still improving. (For instance, soon more sophisticated AD capabilities may be covered by regulations now in place for traffic jam pilots, which enable autonomous vehicles to go through stop-and-go traffic while keeping a safe distance from other vehicles.) Together, these elements may enable the car industry to gradually add increasingly sophisticated autonomous capabilities to a variety of vehicles.


Even though the initial applications are only now hitting the market, according to McKinsey’s sales situations, L3 and L4 technologies for driving on highways are expected to become more widely accessible in the private-passenger vehicle segment in Europe and North America by about 2025. (One high-end European manufacturer provides an L3 conditional autonomous driving system, but only on a limited number of well defined highways and at slower speeds.)


High development costs for L3 and L4 driving systems imply that efforts by automakers to market more complex AD systems may initially be restricted to luxury car segments. During the early implementation phase, additional hardware- and software-licensing expenses per car for L3 and L4 systems might be $5,000 or more, with development and validation expenditures probably reaching $1 billion. Because these cars are anticipated to have high sticker prices, there may be more profit to be made by providing L2+ systems. These automated technologies let drivers take their hands off the steering wheel occasionally in places where it is legal, blurring the distinction between automated driving and normal ADAS.


Numerous OEMs now provide L2+ systems, and numerous further vehicle releases are anticipated during the ensuing few years. The technology used for L2+ systems may aid in the creation of L3 systems if it were given enough sensor and processing capability. Many Chinese disruptor OEMs adopt this strategy. These businesses are introducing cars with pre-installed lidar sensors for L2+ systems. Since the firms are probably utilising their on-road fleet of improved L2+ cars to gather data, learn how to handle uncommon edge circumstances, or operate the L3 system in shadow mode, the vehicles are expected to attain L3 capabilities rather soon.


Developers could potentially provide a blend of L2+ and L3 functionalities in cases where genuine L3 systems are not accessible. An L2+ function for autonomous driving on highways and in cities, collectively with an L3 feature for usage in traffic jams, may be included in this.


AD features are quite popular with car customers.

Customers gain from adopting autonomous driving (AD) systems in a variety of ways, including increased safety, simplicity in parking spaces, merging, and other movements, additional fuel savings due to the capacity of the autonomous system to maintain ideal speeds, and more time together. Our study shows that consumers are aware of these advantages and are still quite open to the idea of adopting Autonomous Driving features.


Customers may profit from AD systems considerably more than others due to the wide range of lifestyles and demands they have, which increases their propensity to pay for Autonomous Driving capabilities. For example, a sales manager who commutes 30,000 miles annually may spend all of the time saved by switching to an autonomous vehicle to contact prospective customers or develop in-depth sales strategy with his or her team. On the other hand, a parent who drives their children to school or uses their car solely for shopping may be less willing to pay for AD features.


By investigating the values of various customer personas, OEMs and dealerships may be able to customise their value propositions and price structures. For instance, they may create a flexible price plan with a one-time set charge, subscription options, and perhaps an on-demand choice like spending an hourly charge for every time a traffic jam pilot is used. According to our study, consumers like having a variety of price alternatives. Twenty percent of the highly interested customers who participated in the ACES study indicated they would want to pay a subscription fee for ADAS features, while almost thirty percent said they were interested in paying a fee each time they used a function. And even after buying a new automobile, one in four respondents stated they would like to be able to access more ADAS functions.


Consumers are becoming more sceptical and realistic about self-driving cars, even if they remain quite interested in the technology. Our ACES consumer surveys reveal that for the first time in the past five years, people are less inclined to contemplate operating a completely driverless car. With 26 percent of respondents stating they would prefer to move to a completely autonomous car in 2021, compared with 35 percent in 2020, the readiness to switch to a private AV has decreased by over 10 percentage points.


Support from regulators is essential.

To address regulatory concerns about AD safety, build a dependable and secure ecosystem, and put international norms into practice, regulator support is crucial. Most public leaders have up until now steadfastly pushed for the inclusion of automatic driver assistance capabilities in current laws, creating the foundation for autonomous driving. As a result, ADAS features are now much more widely used in both passenger automobiles and commercial vehicles.


Auto companies and government agencies both acknowledge that autonomous driving has an opportunity to save lives. Basic SAE L1 and L2 ADAS characteristics are now being regulated more and more. This covers the Vehicle General Safety Regulation from Europe as well as the voluntary New Car Assessment Program (NCAP) from Europe and North America, both of which set safety criteria for automobiles. Active safety system integration in passenger automobiles is strongly supported by NCAP.


OEMs seeking the maximum NCAP safety rating of five stars in 2020 and 2022 found difficulties in installing systems like automated emergency braking (AEB) and automatic emergency steering (AES). As a result, US and European OEMs across all market categories have created these characteristics, with more than 90% of all automobiles produced in these regions having L1 capabilities as a minimum.


Currently, there is enough legislation in place, especially in the United States, China, Israel, and now Europe, to allow businesses to test out robo-shuttle services in urban areas. Over the following few years, businesses will continue their test-and-learn processes with the robo-shuttle pilots before entering a phase of steady operations. Global standards for AD functions used in private automobiles are still lacking, but various agencies are working on them.


The adoption of L3 AD for speeds up to 60 kph is governed by a rule on automated lane-keeping systems from the United Nations Economic Commission for Europe. The World Forum for Integration of Vehicle Regulations (WP.29) of the UN is also developing further regulations for the use of AD features at greater speeds. With the regulation taking effect in 2023, this group intends to expand the usage of sophisticated self-driving cars to speeds of up to 130 kilometres per hour. A European OEM was able to introduce the first real L3 capability in the current version because of Germany’s extensive AD laws. Japan has enacted similar laws, and France just approved it as well. There is little doubt that work is being done to create international Autonomous Driving standards for private passenger cars.


Having success in the market for passenger cars

OEMs and suppliers will probably need to alter their business practices in order to be successful in the driverless passenger vehicle market. This may call for a fresh take on research and development (R&D) that emphasises software-driven development methodologies, a strategy for using fleet data, and adaptable, feature-rich products across vehicle classes that take into account consumers’ different price points. Since the AV architecture may then be utilised, decoupling the development of hardware and software for AD platforms would enable manufacturers and vendors to keep design costs more manageable.


Automobile manufacturers might also create a customer-focused go-to-market strategy to win over customers. In addition, with the end-to-end (E2E) business case in mind and taking into consideration the complete life cycle of the autonomous vehicle, leaders can investigate various ownership structures and sales techniques. Finally, in order to support all of the aforementioned changes, leaders may need to establish an organisation.


Developing a new R&D plan

The attitude of OEMs may need to alter in order for AD to succeed. Simply said, previous methods of operation are no longer appropriate. OEMs that are successful should concentrate on enhancing internal capabilities like superior software development. Despite the fact that the automobile industry has mastered the art of distributing development work across several suppliers and collaborators, the sheer complexity of an L3- or L4-capable Autonomous Driving stack restricts the possibility of working with a wide variety of experts.


In fact, building AD capabilities demands considerably stronger ecosystem ownership in addition to the capacity to jointly create hardware and software, particularly processors and neural networks. This implies that top OEMs should either have strong internal skills or collaborate with top tech companies to supply the whole driving platform.


OEMs will also gain from organising their roadmaps for creating AD features and product lineups holistically. When feasible, they should make sure the Autonomous Driving architecture is adaptable and reusable. Additionally, systems must be simple to upgrade in order to maintain competitiveness over the course of a vehicle platform’s life. It is going to be crucial to develop novel methods for gathering fleet data, choose pertinent testing situations, and use the data to train and evaluate the AD system.


Creating customer-focused go-to-market plans

When consumers choose to purchase a car with AD capabilities, they confront a number of concerns that OEMs and their dealer networks should try to eliminate. The majority of customers have not yet experienced an autonomous vehicle, despite their continued interest in AD. Throughout the car-buying process, consumers are exposed to a variety of (and perhaps conflicting) messages, from sites that extol technology to others that raise serious safety issues. OEMs and dealerships may need to provide extra marketing training so that staff members may promote AD systems to customers and thoroughly explain the technologies to allay customer worries in order to gain the trust of consumers.


It’s crucial to provide customers the chance to experience AD firsthand, thus automakers could wish to provide a test drive that introduces the Autonomous Driving platform. Customers could find it simpler to afford an AV if the business model switched from a one-time licence to a recurring subscription plan, which would also benefit OEMs. According to our analysis, all three business models—one-time purchases, membership pricing, and pay per use—might produce sizable sums of money in the future. This suggests that in order to sell subscriptions, OEMs and other businesses may need to modify their go-to-market strategy. OEMs could think about providing subscriptions for in-car connection or other services that go beyond Autonomous Driving features and prospective vehicle ownership.


Creating a complete business case

OEMs may need to reconsider how they determine the business case for their cars and move toward E2E marketing methods as new income streams emerge from subscription-based and pay-per-use offers. This entails taking into account subscription costs and duration, sales of upgrades, software upkeep, and potential upselling to more sophisticated systems. OEMs will probably incur greater upfront expenses for subscription pricing since they must provide all vehicles with the necessary technology to enable AD capabilities. They could anticipate increased client usage and earnings throughout the course of the vehicle’s life.


According to consumer research and business case studies, only premium D-segment vehicles (large automobiles like sedans or wagons) and above may initially be economically feasible, especially those that currently generate greater income from ADAS/AD functionalities. Since the E2E business model sacrifices short-term profitability in return for long-term income, OEMs may need to modify their internal key performance indicators (KPI), financing arrangements, and investor communication tactics.


Restructuring the business

Software is the fundamental difference for AD, thus businesses must succeed in a number of areas, including recruiting top developers and having strong simulation and validation tools. It’s important to remember that top AD players may not always have the largest development teams. In actuality, some of the major disruptive players’ development teams are frequently far smaller than those of certain other sizable OEM organisations and tier-one suppliers. This emphasises how crucial it is to have the greatest personnel, together with efficient development procedures and world-class tool chains.


More resources may not always be better, according to experience, which might lead to further fragmentation and unnecessarily difficult communication for businesses overseeing development initiatives. This is why putting managers in charge of the software development teams for AD systems who have backgrounds in hardware or embedded software development is frequently a losing strategy.


Consequences for suppliers

Adapting to new industry success criteria may be necessary for suppliers as well. They are up against severe competition for full-stack solutions, which can eventually cause a player consolidation. Suppliers need to be focused and agile to compete. Offering OEM clients a variety of delivery options, from standalone hardware solutions to fully integrated Hardware-software solutions may be advantageous to them. In exchange, new possibilities for creating cooperative business models closer to end consumers may arise, including the option for revenue sharing.


Companies will require access to a lot of fleet data to train algorithms for cutting-edge AD solutions in order to achieve a low-enough rate of failure. While vendors must rely on partners or important customers to acquire access, OEMs have fleet access and just need to locate the right technology for gathering data from their customers’ fleets. Therefore, finding a close lead client early on for co-development and fleet access is crucial for providers looking to create cutting-edge AD systems.


The number of businesses that can effectively offer full-stack AD solutions will undoubtedly be constrained by a lack of access to significant volumes of fleet data, money, and adequate people. A “winner takes most” market dynamic might arise as a result. Since they will have a greater opportunity to enhance their technology and outpace their rivals, businesses with the greatest accessibility to data and money are likely to have a significant competitive edge over those without it.


As a result, only a small number of businesses, both in the West and China, may be successful manufacturers or tech firms capable of supplying a comprehensive AD system. Joint software and chip development for the first generation of Autonomous Driving systems may improve overall system performance and efficiency while reducing the possibility of late integration problems. This may reduce the number of prospective industry winners even more.

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