Autonomous Vehicles to Join the Subscription Economy

The new software-defined vehicle paradigm that allows for the expansion of vehicles' functionalities overnight through over-the-air (OTA) updates, led mainly by Tesla, requires cars to be shipped with hardware before the software availability. Consequentially, carmakers have to make investments in powerful chipsets with capacity far in excess of the functionalities offered at the Point of Sale (POS), at the risk of not taking advantage of the extra headroom due to lack of regulatory framework or because customers opt for not buying functional OTA updates.

Today, autonomous functionalities are charged a one-off fee, but the high price tags discourage adoption. It is speculated that around 27% of Tesla owners buy the Autopilot/ Full Self Driving (FSD) package, meaning over half of Tesla vehicles on the road today have unused computing. With L2+ autonomous systems costing up to US$10,000, and L4 up to US$125,000 per vehicle, carmakers are yet to develop profitable business models. Many are now considering, or have already launched, pay-as-you-go or subscription plans.  

Despite not being officially recognized by the Society of Automotive Engineers (SAE), L2+ systems will drive innovation and the strongest revenue opportunities within autonomous driving. They deliver advanced autonomous functionalities (e.g., hands-free urban driving) within the current regulation by retaining the driver's responsibility and provide original equipment manufactuerers (OEMs) with an opportunity to monetize AV technologies, and develop and train AV algorithms in passenger vehicles, increasing the likelihood of successful L4 deployment in the future. The route to implement L2+ systems is to take centralized, powerful AV platforms built for full autonomy and scale down to a feature-rich scenario that does not require redundancy due to driver supervision.

There is a consensus among the industry players that L2+ vehicles will be commercialized with reduced features at the POS because of the current lack of regulation and the nature of AV systems. They are designed to evolve gradually based on learning from input from miles driven. Hence OEMs, Tier One, and Tier Two providers need time to validate complex features like automated urban driving based on extensive data collected from the vehicles on the road. OTA updates are critical for the rollout of new functionalities in L2+ systems, leaving significant room for recurrent monetization for OEMs that currently rely on a transactional business model.

Today, carmakers offer autonomous vehicle functionalities for a one-off price fee. For instance, Cadillac's Super Cruise costs an additional US$2,500 to US$3,100 at the POS, while Tesla charges US$10,000 for its Autopilot/FSD. Nevertheless, a movement towards AV subscriptions has already started. Early last year, Tesla announced that it was working on an FSD subscription plan to make its features more accessible. As typical of Tesla, the rollout has been delayed and is now expected in the second quarter of 2021. Prices have not been disclosed yet, but some speculate it will be around US$100 per month. Earlier this ear, NIO announced an "Autonomous Driving As a Service" monthly subscription of US$100 that will be offered as an optional service for its ET7 sedan that should be launched in early 2022. Ford proposed a similar, albeit much more affordable, subscription model with its BlueCruise software that will cost US$600 for three years (US$200 per year).

Likely in an attempt to gather public opinion, VW announced its intention to build new vehicles with complete functionality set and allow owners to lease them on demand, including autonomous driving mode. In the company's example, a driver that needs to travel between London and Southampton could remotely switch on L4 autonomous driving for £6/US$8.5 an hour, instead of paying £30/US$42 for a train ticket. While the idea is interesting, it is hard to envision how US$8.5 an hour charges could offset five-digit dollar AV systems, especially as it sounds like something that drivers would occasionally do.

There is no doubt that AV subscriptions will be the dominant strategy adopted by carmakers moving forwards. However, several questions are still to be addressed, such as a reasonable subscription price, whether one-off payment and pay-as-you-go options will continue to be available, and if these business models can indeed pay off investments. Customer adherence is a significant issue as many seem reluctant to pay monthly fees after buying such expensive vehicles.