Second Order Thinking and Beyond
Capital Thinking • Issue #165 • View online
“I still think autonomous cars will create more billionaires in real estate and retail than in tech or manufacturing. Just as cars did.”
- Ben Evans
OK, it’s no secret that I like Ben Evans. His annual presentation alone has enough information and data to keep you thinking for quite a while.
Here’s the deal: Most of can make simple connections.
You know, “a+b = c”, but very few continue past that point - not just to see the possibilities, but to get the tiniest glimpse of what could be.
I’ve clipped a few parts and bolded a few others to help get you up to speed. But really, take some time to read through this little piece written over a year ago.
Whether you’re in real estate, or banking, the legal profession, a politician, city planner, or even a medical doctor - these changes will affect you, your industry, and your life.
Everyone says they’re looking for answers. So why is it so few of us are willing to put in the work to get them?
From Cars and Second Order Consequences:
There are two foundational technology changes rolling through the car industry at the moment; electric and autonomy.
Electric is happening right now, largely as a consequence of falling battery prices, while autonomy, or at least full autonomy, is a bit further off - perhaps 5-10 years, depending on how fast some pretty hard computer science problems get solved.
Both electric and autonomy have profound consequences beyond the car industry itself.
Half of global oil production today goes to gasoline, and removing that demand will have geopolitical as well as industrial consequences.
Over a million people are killed in car accidents every year around the world, mostly due to human error, and in a fully autonomous world all of those (and many more injuries) will also go away.
However, it’s also useful, and perhaps more challenging, to think about second and third order consequences.
Moving to electric means much more than replacing the gas tank with a battery, and moving to autonomy means much more than ending accidents.
Quite what those consequences would be is much harder to predict: as the saying goes, it was easy to predict mass car ownership but hard to predict Walmart, and the broader consequences of the move to electric and autonomy will come in some very widely-spread industries, in complex interlocked ways.
Still, we can at least point to where some of the changes might come. I can’t tell you what will happen to car repairs, commercial real-estate or buses - I’m not an expert on any of those, and neither can anyone who is - but I can suggest that something will happen, and probably something big.
Electric:
Moving to electric reduces the number of moving parts in a car by something like an order of magnitude.
It’s less about replacing the fuel tank with a battery than ripping out the spine.
That remakes the car industry and its supplier base (as well as related industries such as machine tools), but it also changes the repair environment, and the life of a vehicle.
Roughly half of US spending on car maintenance goes on things that are directly attributable to the internal combustion engine, and much of that spending will just go away.
Next, gas itself is bought in gas stations, of which there are about 150k in the USA. Those will also go away (unless there are radical changes in how long it takes to charge an EV).
Since gas is sold at very low margins, these retailers make their actual money as convenience stores, so what happens to the products that are sold there? Some of this demand will be displaced to other retailers, and some may be going online anyway (especially if an Amazon drone can get you a bag of Cheesy Puffs in 15 minutes).
But snacks, sodas and tobacco sell meaningful proportions of their total volume as impulse purchases attached to gasoline.
Some of that volume might just go away. Tobacco in particular might be interesting - well over half of US tobacco sales happens at gas stations, and there are meaningful indications that removing distribution reduces consumption - that cigarettes are often an impulse purchase and if they’re not in front of you then many smokers are less likely to buy them. Car crashes kill 35k people a year in the USA, but tobacco kills 500k.
Autonomy:
The really obvious consequence of autonomy is a near-elimination in accidents, which kill over 1m people globally every year.
In the USA in 2015, there were 13m collisions of which 1.7m caused injuries; 2.4m people were injured and 35k people were killed. Something over 90% of all accidents are now caused by driver error, and a third of fatal accidents in the USA involved alcohol.
Looking beyond deaths and injuries themselves, there is also a huge economic effect to these accidents: the US government estimates a cost of $240bn a year across property damage itself, medical and emergency services, legal, lost work and congestion (for comparison, US car sales in 2016 were around $600bn).
A similar UK analysis found a cost of £30bn, which is roughly equivalent adjusted for the population. This then comes from government (and so taxes), insurance and individual pockets.
It also means jobs, of course. Parking is another way that autonomy will add both capacity and demand.
If a car does not have to wait for you in walking distance, where else might it wait, and is that more efficient? Does that enable better land use, better traffic routing and more or less congestion? And, in parallel, everything that you do to make traffic, driving and now also parking more efficient tends to generate more demand.
Pulling all of these threads together: if parking goes away, road capacity increases by, perhaps, several times, and an on-demand ride is the cost of a coffee, then one needs to start thinking much more generally, not just about cars, trucks and roads but cities, land use and real-estate.
In fact, one needs to think about cities. Cars have remade cities over the past century, and if cars are now going to change entirely, cities will change too.
So, big-box retail is based on an arbitrage of land costs, transport cost and people’s willingness to drive and park - how does autonomy change that?
How do cities change if some or all of their parking space, especially in town centres, is now available for new needs, or dumped on the market, or moved to completely different places?
Where are you willing to live if ‘access to public transport’ is ‘anywhere’ and there are no traffic jams on your commute?
Does an hour-long commute with no traffic and no need to watch the road feel better or worse than a half-hour commute stuck in near-stationary traffic staring at the car in front?
How willing are people to go from their home in a suburb to dinner in a city centre on a dark cold wet night if they don’t have to park and an on-demand ride is cheap?
What happens to rural pubs if you don’t have to worry about drink-driving anymore?
There is so much more here. Do yourself a favor and click the link: