GM/Cruise Is Off And Running! Get Onboard! (NYSE:GM)

Last Thursday, the California Public Utilities Commission (CPUC) approved Cruise (a division of GM (NYSE:GM)) and Waymo (a subsidiary of Alphabet Inc. (GOOG) (GOOGL)) to offer paid rides in autonomous vehicles across San Francisco (CPUC Ruling). This groundbreaking decision allows them to operate without a human driver or restrictions on the number of vehicles or hours of operation. It’s a significant milestone, with Cruise already moving forward in earnest.

I have previously discussed the considerable potential of autonomous ridehailing services (ARS) in SA articles. This new technology has enthusiastic supporters and vocal critics, a common issue when innovative technologies emerge.

The lessons of history can be instructive here. As Confucius is sometimes quoted, “Study the past if you would define the future.” Consider the example of Apple in 2007 when it launched the then-controversial iPhone. At the time, criticism was widespread and intense. However, Apple’s revenue grew from $25 billion in 2006 (mostly from computers) to over $100 billion five years later, primarily from the iPhone, increasing its market cap from $85 billion to $500 billion. Today, Apple (AAPL) is valued at nearly $3 trillion. Drawing a parallel, Cruise could become to GM what the iPhone became to Apple: a transformative product for a vast market. However, I’m not suggesting a multi-trillion market cap for GM.

Autonomous ridehailing services (ARS) are no longer merely plans or prototypes. Waymo has been testing its technology for over ten years across ten states and has accumulated more than 20 million miles of real-world driving experience. Tens of thousands of riders have used Waymo’s autonomous ridehailing service in cities like Phoenix and San Francisco. Cruise already averages 1,000 daily autonomous rides in San Francisco.

Cruise disclosed that it operates around 300 autonomous ridehailing vehicles in San Francisco, and Waymo revealed about 250 (Ricardo Cano August 8, 2023, Francisco Chronicle). Cruise has also announced (announcement) plans to expand into eight additional metropolitan areas by year’s end, including Phoenix, Austin, Dallas, Houston, Miami, Nashville, Los Angeles, and recently Atlanta. The ARS market promises to be vast and profitable, and both Cruise and Waymo have carved out clear leadership positions. GM projects that Cruise will generate $1 billion in revenue by 2025 (Cruise on Track to $1 billion by 2025), scaling to as much as $80 billion by 2030. I think these projections appear to be realistic.

We’ll begin by explaining autonomous ridehailing, including its market potential, the technology required, how it will be offered in metropolitan areas by fleets, and its cost advantages. Then we will examine GM/Cruise’s strategy and competition. Finally, we will consider the potential value of Cruise to GM and the extent of the investment opportunity.

Understanding Autonomous Ridehailing Services (ARS)

To appreciate the significance of this investment opportunity, you need first to understand the market, technology, and economics of autonomous ridehailing services. In the simplest explanation, ARS is ridesharing, like Uber, without a driver. Autonomous ridehailing services (ARS) will be the earliest application of autonomous vehicles (AVs), preceding personal autonomous vehicles (PAVs).

Various terms describe autonomous ridehailing services, such as mobility, mobility as a service, transportation as a service, personal mobility, and robo-taxis (although I wouldn’t say I like this term as it conjures an image of a robot at the steering wheel). For this discussion, I will use the term “ridesharing” to refer to the current services provided by companies like Uber and Lyft, where drivers use their own vehicles. I will use the term “autonomous ridehailing services” (ARS) to refer to the driverless version of this service.

The Ridesharing/ARS Market

Ridesharing serves as a precursor to autonomous ridehailing services in many ways. It involves arranging rides on short notice or through scheduled bookings using a smartphone app. Passengers schedule a ride and get matched with a driver through the app, which uses GPS to determine their location and allows them to enter their desired destination. The app also estimates the cost of the trip in advance. Ridesharing drivers use their own vehicles, receiving around 70% of the fare, while passengers are billed on a credit card and can tip the driver. ARS works similarly.

In 2022, the gross bookings of the ridesharing market in the U.S. amounted to approximately $72 billion. Uber (UBER) primarily dominates this market, accounting for about 76%, with Lyft having 24%. The ridesharing market in the U.S. has experienced significant growth in the past five years, approximately doubling. It is projected to continue growing rapidly. ARS will increasingly cannibalize this market and expand the combined rideshare/ARS market even more as prices decline substantially.

According to Zippia (“Uber and Lyft are responsible for 6% of the vehicle miles traveled across the U.S. That’s up from only 1% in 2016, meaning that these ridesharing services make up over 5x the VMT in only five years. Further, in San Fransico, that number is up to 13%.” This explains why San Francisco is an attractive market for Cruise and Waymo.

Autonomous ridehailing services (ARS) will initially disrupt the traditional ridesharing market by offering more convenient and comfortable rides at comparable prices. Then ARS prices will drop, accelerating the ridesharing market cannibalization as ARS is introduced in more cities. The cost advantage arises from the capital/technology-intensive nature of ARS, which replaces the labor-intensive model of traditional ridesharing.

As ARS prices continue to decrease, the rideshare/ARS market will experience rapid growth by displacing more expensive car ownership for some people and replacing other transportation options like short-distance air travel and public transportation.

ARK Invest research (ARK Invest Big Ideas 2023) suggests that global autonomous ride-hail platforms will create $14 trillion in enterprise value, based on $4 trillion in revenue during the next five years. It projects that the addressable ridership for ARS in Western markets could approach $1 trillion at a price point just above $1 per mile and potentially reach $2.4 trillion at $0.60 per mile. It projects an eventual cost as low as $0.25 per mile. I see $1 per mile as feasible, but I can’t reach a possible cost of $0.60 per mile yet.

ARS will create new market opportunities and transform the transportation landscape. GM’s executives, for instance, believe that Cruise could be part of an $8 trillion global market in the future.

ARS Sufficiently-Autonomous Technology

An extremely critical point to understand is that autonomous ridehailing service (ARS) vehicles need only be sufficiently-autonomous, not fully-autonomous. This means they are only required to navigate specific routes to predetermined destinations rather than possessing the capability to drive autonomously everywhere.

The technology required for this level of autonomy in ARS vehicles is less complex than fully-autonomous technology. These vehicles utilize detailed, predefined High-Definition (HD) maps that guide their travel routes. The routes for ARS vehicles are geofenced, confining them to roads that a sufficiently-autonomous vehicle can safely traverse.

When a passenger uses an app to request an ARS trip, the system will verify whether the desired destination and route are approved and feasible. The app will not offer that trip if the possible route or destination is not within the system’s defined parameters.

Upon introduction in a specific metropolitan area, the ARS might have a limited range of destinations and routes. However, as the service develops, accessible roads and routes will grow to cover almost all critical locations within the metropolitan area. Distinct remote destinations, such as alleyways or less-frequented streets, may remain exceptions.

The combination of requiring only sufficiently-autonomous driving, the initial capability to restrict destinations and routes, and the possibility of selective deployment make ARS a viable early-stage autonomous driving service.

ARS Metropolitan Areas and Fleets

A key feature of autonomous ridesharing services (ARS) is that their deployment will be localized to metropolitan areas rather than being rolled out across the entire U.S. simultaneously. ARS companies will first introduce their services in a few select municipalities, gradually extending their reach to more over time.

One notable early advantage of ARS is its use of detailed mapping within a defined geographical zone, specifically the city or municipal area where the service operates. By introducing the service city by city, companies can develop these maps as necessary.

Initially, ARS will be launched in metropolitan areas more conducive to their operation. These are areas with government regulations that permit ARS, favorable climates, and high concentrations of ridesharing services. Early markets for ARS include Phoenix/Scottsdale, San Francisco, Las Vegas, Austin, Dallas, Houston, Miami, Los Angeles, Nashville, and Atlanta.

Once a foothold is gained, ARS companies will aggressively expand their services into more metropolitan markets, aiming to establish their presence before competitors. The local deployment of ARS by metropolitan areas also enables companies to manage fleets of ARS vehicles effectively.

ARS companies will establish fleets of autonomous ridehailing vehicles within a given metropolitan area, managed by a local fleet operations center. These fleets can range in size from several hundred to thousands of vehicles.

The local fleet operations center is tasked with managing its designated municipal area. This includes liaising with local government authorities to obtain necessary approvals for their services and coordinating enhancements to local road systems. Such improvements might include optimizing traffic signals, setting up designated ARS drop-off zones, etc. The fleet operations center will also cooperate with local police and emergency services.

The local fleet operations center will designate the roads and routes the ARS vehicles will serve, effectively geofencing the municipal area. It will also maintain and regularly update detailed high-definition (HD) maps as needed. While the routes offered in a new municipal area will initially be limited, they will gradually expand until most of the metropolitan area is covered.

The local fleet operations center will also handle the municipality’s ride request and dispatch platform. This includes adding new routes, adjusting existing routes due to traffic or construction, and potentially setting local pricing. Passengers can contact the local fleet dispatch center for questions, issues, and emergencies. The center can also dispatch roadside assistance when required.

In addition to these duties, the fleet operations center is responsible for the upkeep of its autonomous vehicle fleet. This includes routine cleaning, sanitizing, recharging, and regular maintenance. Moreover, the center may also frequently recalibrate vehicle sensors and update onboard computer software.

ARS Cost Advantages

ARS services have significant cost advantages over current ridesharing. Uber’s financial statements state that ridesharing costs total 72% (based on revenue percent of gross bookings)of the fares charged (Uber 2022 Annual Report), equating to $2.13 per mile of the estimated $3 fare per mile. These include driver-related expenses, vehicle maintenance, and a 1% credit card processing fee. Uber has yet to prove it can be profitable on its revenue share.

In the case of autonomous ridehailing services, my estimated direct cost per mile is approximately $0.45, calculated as follows:

• Fuel: $0.05 per mile (assuming electric vehicles)
• Depreciation: $0.15 per mile (based on the Cruise Origin, which has a manufacturing cost of $50,000 and is allocated over four years and 85,000 billable miles per year)
• Cleaning/Maintenance: $0.18 per mile (estimated at $15,000 per vehicle per year, distributed over 85,000 billable miles)
• Insurance & Taxes: $0.07 per mile (estimated at $6,000 per year per vehicle)

In addition, ARS companies will have fleet operations center costs, typical operating expenses, and R&D.

The stark difference between the direct cost comparison of $2.13 and $0.45 per mile sheds light on the competitive advantages of autonomous ridehailing services (ARS). Furthermore, the labor-intensive nature of ridesharing will likely result in rising costs due to inflation and local and state regulations affecting driver compensation and benefits. On the other hand, the capital/technology-intensive nature of ARS will likely lead to declining costs over time as technology becomes more affordable and vehicle utilization increases. The cost/mile for ARS goes down as utilization (trips/day) increases.

Even after including fleet operations center costs and operating expenses, I estimate that ARS can be highly profitable at an average price of $1.50 per mile. (The complete modeling is too extensive to be included in this article). Some estimates are even lower. This price advantage will make ARS more attractive to many riders.

Cruise ARS rides cost (Here’s How To Get Robotaxi Rides in San Francisco-and What It Will Cost).

• $5 base fee, plus additional costs for mileage and ride time:
• $0.90 per mile
• $0.40 per minute

Uber’s San Francisco Bay Area Uber Prices (Uber Estimate San Francisco Bay Area) for UberX are:

• Base Fare: $2.00
• Per Minute: $0.20
• Per Mile: $1.24
• Booking Fee: $1.15
• Minimum Fare: $6.15
• Cancellation Fee: $5.00

And for UberBlack are:

• Base Fare: $7.00
• Per Minute: $0.50
• Per Mile: $3.95
• Booking Fee: $1.15
• Minimum Fare: $15.00
• Cancellation Fee: $10.00

Cruise’s current pricing in San Francisco is a little more expensive than UberX but much less expensive than UberBlack, with a service quality closer to UberBlack. A 5-mile, 15-minute ride with Cruise would be $15.50, UberX would be 12.50, and UberBlack would be $35.40. Uber Black drivers use luxury vehicles, such as sedans or SUVs from Mercedes-Benz, BMW, Audi, and Lexus. The Chevrolet Bolt EV used by Cruise and the Jaguar I-Pace used by Wayno are both electric SUVs considered to be luxury vehicles, with the Jaguar I-Pace being more expensive. The Cruise Origin is designed exclusively for ARS.

GM/Cruise ARS Strategy

Cruise has convincingly demonstrated the technical and operational feasibility of its autonomous ridehailing service. It has autonomously driven more than 1.5 million miles, primarily in San Francisco and Phoenix. Last Thursday, it received formal approval from the CPUC to offer paid services in San Francisco with no restrictions. It also had some notable achievements in 2022 (Cruise Annual Impact Report 2022), including:

• Covering 846,000 autonomous miles across San Francisco, Austin, and Phoenix.
• Receiving over 10,000 5-star ride ratings.
• Providing riders with over 4,500 hours of reclaimed time by eliminating the need to drive.
• Achieving an average trip occupancy of 1.87 passengers.

Cruise also reported in its 2022 Impact Report that it received positive feedback from riders, with 94% expressing trust in Cruise after just one ride and 89% considering the Cruise AV as a competent driver.

Steps In Cruise’s Strategy

Cruise has a very aggressive ARS strategy. Here it is step-by-step:

1. Initially, prove its ARS technology and create a viable autonomous ridehailing business in San Francisco. With the extensive number of successful trips and miles carrying passengers autonomously in San Francisco, combined with CPUC approval to expand paid services 24/7 throughout the city, it has accomplished this crucial step. You can’t overestimate how important this is.

2. Roll out its expansion throughout San Francisco. San Francisco is a sizeable ridesharing market, so the opportunity for Cruise is substantial. The San Francisco County Transportation Authority estimates 38.5 million ridesharing rides in 2020 in San Francisco. (TNCs 2020: A Profile of Ride-Hailing in California). Assuming a 10% annual increase, this would be more than 50 million trips in 2023.

I think it’s reasonable for Cruise to expand its San Francisco fleet from 300 autonomous vehicles and 1,000 rides per day to a couple of thousand vehicles and tens of thousands of rides per day. It will grow its service in the city by offering its service 24-hours a day, attracting more riders, expanding its coverage of destinations and routes, and expanding its service to the airport and surrounding areas. Waymo disclosed that it has more than 100,000 people on its waiting list (August 11, 2023, Waymo’s next chapter in San Francisco), and Cruise could have that many or more. I estimate that Cruise could have 1,500 ARS AVs in the city, providing approximately 10 million trips annually (20 trips/day/vehicle) by 2024/2025. This would be about 20% of my estimate of the current combined ridesharing market of 50 million trips in 2023. This would equate to about $200 million in revenue annually in San Francisco alone.

3. Launch its ARS into additional metropolitan areas. Cruise has already jump-started this step in its strategy by preparing to enter eight additional metropolitan markets by the end of this year: Phoenix, Austin, Dallas, Houston, Miami, Nashville, Los Angels, and Atlanta. These additional markets could increase Cruise’s ARS fleet to 5,000 – 8,000 by 2024/2025. With an estimated revenue of $150,000 per ARS vehicle, this would yield revenue of more than $1 billion annually.

Entering new metropolitan markets is relatively easy since autonomous driving technology is almost identical for each area. It simply needs to create HD maps of the new area, determine the routes and destinations it will serve, modify the software for any unique conditions, and establish a fleet operations center.

Here is how Kyle Vogt, the CEO of Cruise, describes the process of adjusting to a new city:

Our theory was simple: if we can make AVs work in a city like SF – with its fog, hills, and traffic – they’ll work just about anywhere. We tested this in Phoenix and Austin last year. It took some work to adapt to these new cities, but most of the systems worked well as is. What we had to do was find the areas where our AV system didn’t generalize well and fix it. In some cases it was as simple as retraining our ML models using data from the new city. In other cases we found we had to redesign parts of a system.We also improved the ability to adapt to unusual things like pedicabs, pedal taverns, and even donkeys – but without hard coding rules. Our systems associate the visual appearance, radar signature, and shape of an object with how it moves or how the AV is expected to respond. This kind of system is fairly robust to things it has never seen before (the “long tail” of unique situations).By the time we rolled into Houston and Dallas, most things were good to go. It took much less work than before to adapt to these cities. Since each new city requires less work than the last, we’ve been able to ramp up the rate at which we launch in new cities. On top of all that, each time we add a new city, the performance in our current cities keeps getting better.We’ve got a playbook running now. Scout a city, augment our datasets, retrain, validate, and go. Once we’re up and running, the data keeps streaming in. It’s mostly automated now, too. This is the really remarkable thing about AVs. They just keep getting better, and that progress is showing no signs of slowing.

And Cruise has indicated that its expansion is just getting started. It could continue to add 8-10 new markets each year without even getting into cold weather markets for several years. It is also beginning to form metropolitan market clusters that will open up more opportunities. For example, with operations in Dallas, Austin, and Houston, it can provide economical services between these cities at a similar cost as air travel for a single person. For several people traveling together, the cost will be dramatically lower. And the convenience of avoiding travel to/from airports will be attractive to many.

4. Reduce the ARS costs to below $1/mile. Cruise can significantly reduce its costs per mile. According to the Crusie CEO, operating costs per mile for Cruise autonomous vehicles have fallen by an average of 15 percent monthly over the first half of 2023. He added that costs are being cut sharply in four key areas: optimizations, infrastructure, automation, and “process improvements” (GM’s Cruise Operating Cost Per Mile Improving).

He also pointed to efficiency improvements helping reduce the costs of simulation and machine learning used to test and improve AV performance. He cited the ground-up autonomous vehicle built by Cruise, the Cruise Origin, as a significant source of savings once the NHTSA eventually approves it. The Origin is designed for simplicity, longevity, and reliability, all of which help cut costs.

“We’ll start to see costs head below $1 per mile, the magic threshold at which robots actually become cheaper for most people than owning a car,” Vogt said about the impact he expects from the AV architecture and microchips Cruise has developed for future use.

With a cost of less than $1 per mile, Cruise can initiate aggressive price competition with ridesharing.

5. Introduce the Cruise Origin. Cruise still has another competitive advantage to introduce. Cruise developed multiple iterations of autonomous first-generation ARS vehicles based on the Chevrolet Bolt EV. It is a dedicated self-driving, electric sedan and the primary vehicle to test its ARS in San Francisco.

Cruise has also developed a second-generation AV, the Origin, explicitly designed for ARS. The all-electric Origin looks like an autonomous shuttle, but it has no manual controls that allow a human to take control, such as pedals or a steering wheel. This allows more passenger space and can be built at a lower cost for greater durability.

Cruise, GM, and Honda, a minority owner in Cruise, designed the Origin. GM will build the Origin at its Detroit-Hamtramck plant. It originally stated a goal to make thousands of (GM’s plan to deploy self-driving Cruise Origin on hold as feds weigh exemption request) Origin vehicles in 2023. However, this has been delayed until federal regulators grant its request to exempt the vehicle from federal safety standards. The NHTSA regulates safety guideline standards for motor vehicles, but regulating autonomous vehicles is new for the organization. NHTSA’s approval process for vehicles that do not have a human driver, such as the Cruise Origin, is required because current federal safety standards are written for cars with human drivers requiring a steering wheel, mirrors, and pedals. The NHTSA has not yet issued any regulations specifically for Cruise or autonomous vehicles, but it is expected to do so very soon.

Competition

Developing and implementing autonomous ridehailing services have proven to be far more challenging and costly than initially anticipated. I estimate that more than $20 billion has been invested in ARS (when you add up the disclosed investments and losses from GM, Ford, Waymo, Uber, Aurora, and others). Several competitors have withdrawn from the market. For example, Ford (F) Argo AI halted its ARS operations earlier this year after investing billions of dollars. Uber divested its Advanced Technology Group ARS business to Aurora for a nominal sum in 2020, and Aurora subsequently shifted focus to autonomous long-haul trucking, temporarily exiting the ARS market.

Waymo, an Alphabet Inc. subsidiary, is a leading player in the ARS industry alongside Cruise. Until recently, Waymo had an edge over Cruise, but that advantage has diminished over the past two years. I’ll discuss Waymo in more detail in an upcoming SA article. GM’s opportunity with Cruise is more significant than Google’s with Waymo because GM’s valuation is considerably lower than Google’s. Other competitors include Motional, a joint venture between Aptiv and Hyundai, actively testing its ARS in Las Vegas with Lyft, and Amazon’s Zoox, which, although lagging others, offers intriguing technology backed by Amazon. WeRide and Pony.ai are also in the running but are considered longer-shot competitors.

A potential major player behind the scenes is Apple. It has invested billions in autonomous driving technology, secured hundreds of patents, and has 181 autonomous vehicles in California, which have collectively logged over a million miles. While Apple’s intentions remain unclear, it is widely speculated that it will enter this market once the market has matured sufficiently, consistent with Apple’s usual strategy.

Impact of Cruise’s Strategy

The beauty of Cruise’s strategy is that it drives exponential growth; as revenue increases, the rate at which it grows also increases, leading to growth that accelerates over time. That’s because multiple growth drivers are working simultaneously: increased adoption as more riders get comfortable with autonomous ridehailing services, expansion of routes and destinations in each metropolitan area, more ARS vehicles deployed in a metropolitan area, and rapid expansion into new metropolitan areas. For example, Uber’s growth rate was more than a couple of hundred percent annually in its first five years.

And then, as Cruise and other ARS competitors lower their prices, the ARS market will expand. At $1.50 per mile, and even more so at $1.00 per mile, more people will choose ARS over owning a car. This will be particularly true for families with multiple cars and those who pay expensive parking costs. This is how ARK Invests estimates the ARS market to grow to more than $1 trillion.

Value of Cruise to GM

Cruise has over $10 billion in funding and support from prominent names in the tech industry. General Motors owns 80% of Cruise, while Honda, Microsoft, and Walmart own the remaining 20%. In May 2018, Cruise announced a $2.25 billion investment from SoftBank Vision Fund and an additional $1.1 billion from GM. In October 2018, Honda disclosed a $750 million investment in Cruise, followed by an additional $2 billion over the next 12 years. In March 2022, GM acquired SoftBank’s Cruise stake for $2.1 billion, increasing its ownership to 80%.

Based on these investments, Cruise could be valued at $30 billion, but GM carried Cruise with a goodwill value of $574 million on December 31, 2022, and 2021 in its 10-Ks.

Since GM currently has a market cap of only $47 billion, clearly, the market isn’t valuing Cruise at $30 billion. It most likely has attributed no value to Cruise or even devalued it since GM loses more than $3 billion a year on Cruise, dragging down its profits by almost 25%. Would GM be worth 25% more a share without Cruise?

Cruise has the potential to be worth more than GM is today. I won’t try to estimate a specific value or timeframe, but I want to emphasize the substantial long-term potential. What’s the value of a technology-based company with recurring revenue that is the market leader with tens of billions in highly profitable revenue doubling or tripling annually?

Uber has a market cap of over $90 billion, hasn’t made a profit, may never make a profit, and will be cannibalized by Cruise, Waymo, and others. It’s worth twice as much as GM. Go figure. Historically, a technology/capital-intensive business model always wins over a labor-intensive competitor. I’ll write about Uber’s vulnerability to ARS in a later article, but it’s important to note.

Cruise provides a little-appreciated enormous investment opportunity that just achieved a critical milestone proving the technology’s viability and market acceptance. I believe now is the opportunity to invest in GM, either in the stock or long-term options.