Otto and Uber: Pioneering Autonomy in the Shipping Industry

Uber’s acquisition of Otto, the leader in AV’s for the shipping and long-haul freight industry, has the potential to redefine how we transport goods globally

In the summer of 2016, Uber found itself in a difficult strategic position.  It had initially launched as a premium on-demand service for black-cars before moving down market into the taxi market with UberX and most recently group transportation with UberPOOL.  As the average price for ride started to decrease and margins started to lessen (greater ridership helped top-line revenue still grow), the race for scale was starting to bankrupt Uber, who was burning billions of dollars a year to launch and stay afloat in the hundreds of markets in which they operate.

Uber operates as a marketplace, a glorified mobile-enabled dispatching service connecting riders and drivers.  Margins typically were in the 15% range, with the driver collecting 85% of the fare.  As Uber continued to drop prices, it became increasingly difficult to manage their most valuable asset: their driver community.

Eating 85% of their gross margin, labor presented the largest cost for Uber, and the greatest area for potential savings to help the company ultimately build a sound unit economic model.  In the personal transportation market, automation and AV’s were on the verge of early adoption, with competitors such as Tesla, Lyft, Volvo, BMW, Ford, Toyota and GM all having made massive investments in the space and with plans to roll out on-demand offerings.  Uber was in a strong position still, with the most valuable brand in on-demand transportation as well as the largest active user base, who all kept their credit card stored on file within the app.  But as the long term strategic importance and value their most valuable asset (their drivers), started to deteriorate in a self-driving world, they needed to figure out what was next.

Shipping and long-haul freight present arguably the largest opportunity in the world of automation and AV’s.  There are currently 1.8m truck drivers in the US, the most common job in 34 states.  Labor laws only allow truck drivers to be on the road for 60 hours a week, so including the 5 hours it’s estimated they spend working but not driving, means that shipping in the US is only working at 31% capacity.  If trucks can run 22 hours a day, this presents the opportunity to move goods 3x faster and at lower costs per mile due to the benefits of driving during less peak hours and greater gas efficiency as cars drag.

As Uber saw greater competition in the personal car market, they decided it was time to both a) bring in high quality robotics talent into the company and b) enter the shipping industry by acquiring a Bay Area AV business named Otto.  Otto, which spun out of the Google self-driving car group, is retro-fitting 18 wheelers to make them “Level 3” autonomous. While a driver currently needs to be in the front seat to make sure everything is going according to plan, Otto allows the truck to travel fully autonomously on the highway as well as on and off ramps.  When you think of the implications for the global shipping industry, the opportunity to move goods and services 3x faster at a cheaper cost per mile is absolutely enormous.

Otto will have a profound impact on other industries as well.  Food and beverage, especially perishable grocery, will see spoilage rates seriously reduce as perishables reach grocery stores 3x faster.  Flights will be less needed as shorter routes that still needed freight shipped by air can now be on the ground.  Same day delivery for numerous industries now become a much more realistic option.  Under-utilized inventory in trucks can now be matched in real time as the same way UberPOOL optimizes two people on the same route, Otto can now do with shipping.

Traditional shipping carriers that don’t take advantage of automation will certainly see business decline, with longer trip time and more expensive cost per mile relative to their competitors.  They may have to win on service or focus on segments of the trucking market (such as minerals, mining, natural resources), that are slightly more regulated and require more industry specialization.  Regardless, it will be tough for them to compete which leads many industry experts to believe that once autonomy hits the shipping industry, it will escalate faster than most people can imagine.

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Works Cited

Bergen, Mark. “We Took a Video Tour of a Self-driving Semi from Otto, Uber’s Newest Purchase.” Recode. Vox Media, 23 Aug. 2016. Web. 18 Nov. 2016.

Lee, Timothy B. “Self-driving Trucks Are Here, but They Won’t Put Truck Drivers out of Work – Yet.” Vox. Vox Media, 25 Oct. 2016. Web. 18 Nov. 2016.

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14 thoughts on “Otto and Uber: Pioneering Autonomy in the Shipping Industry

  1. Excellent post, Pete! I am very interested in the supply chain industry and it appears this whole segment will be immensely impacted by automation with AVs, drones and the like.
    From what I understood, Otto is in the prototype stage, so I believe a few questios are still unanswered. For example: what are the regulations for drivers on “Level 3” AVs? Are they still limited by the 60 work-hour weeks? Also, how has AV development been impacted by Tesla’s recent accident?
    Finally, I still see a conflict of interest between Uber and AVs while the company heavily relies on drivers to support its current network effect. Do you have any information on how company drivers have responded to Uber’s massively announced investment on AVs? Isn’t there a risk they abandon the company before investment on AVs have fully developed?

  2. Wow. Great post. Crazy to think that driver-less trucks are within grasp of modern technology. I’m curious if the plan for the future is to continue to have a cautionary driver behind the wheel in case things “go wrong.” Without a driver behind the wheel it will be difficult to determine liability when mistakes are made. That being said, having a backup driver behind the wheel continues to limit what the technology can do as I imagine there will be similar regulation of the amount of time the driver can operate each week. There is likely a fairly intense conflict within Otto to both innovate and move forward quickly to be first movers but also to be conservative and ensure there are no accidents early on. Public perception will be very important for this company and operation model to be successful.

  3. Very interesting post, Pete. I find it very interesting that Uber critically needs to be a frontrunner in the world of automobile automatization. As you rightfully mention in your post, labour accounts for the largest share of costs for Uber. It seems that Uber will have no choice but to replace drivers by self-driving cars. It is important to note that Google is a big investor in Uber which might accelerate the adoption of self-driving cars for passenger transportation as demonstrated by the pilot currently running in Pittsburgh, PA.

  4. As one of the most common jobs in 34 states in the US, I wonder how this will impact the lives of these 1.8million American’s nationwide. I would argue that the skill set that these folks have may eventually become irrelevant in the new world of autonomous vehicles. These people will have a tough time finding a new job. When the industry first started permitting dual-trailer carries for highway long-hauls the workforce was significantly impacted by the increased efficiency/productivity. Inevitably, an increase in “workforce” productivity will result in a reduced demand for jobs. That being said, I think that the positive implications of this make for a great case to explore. Perhaps the increase in efficiencies will result in lower total landed product costs and in turn improve cost competitiveness of US based companies. This change in cost competitiveness could then increase demand for good quality US based jobs and workforces in other areas. The sacrifice in trucker jobs could be offset by a massive increase in other job opportunities!

  5. Very interesting post, Pete. Thank you for sharing. It is fascinating to think of the future world of driverless cars/trucks. It is unclear to me what the broader implications of this shift are. What effect will driverless cars have on the labor market? How will transportation time and safety change?

  6. Interesting post Pete!!

    Curious to get your thoughts on the regulatory side to leveraging Otto to automate driving and deliveries from large trucks. Presumably, the regulatory hurdle is a little lower given the fact that trucks are less “consumer” facing. However, they still represent a very real player on roads and can potentially still cause issues with other human drivers on the road. With this being said, do you foresee regulation hurting the adoption or will it be a case where the logistics industry can convince the Department of Transportation to rethink their regulations and promote the use of automated trucks to productivity and efficiency. Additionally, do you think regulation will end up factoring in that truck drivers are one of the largest occupational groups in the US as you mentioned and what doing away with their jobs may mean in the broader economic / social / public context?

  7. Another excellent post by the greek god! On one end, this technology will significantly reduce cost for shipping and long-haul freight companies not just because trucks will be able to be on the road for longer periods of time but also because of lower legal expenses. A lot of accidents happen on a daily basis because of truck drivers and I’d imagine some of these come with lawsuits. On the flip-side, when this technology is implemented, what happens to the 1.8 million truck drivers, the most common job in 34 states. Given this technology essentially makes their skill-set obsolete, will they be receptive to its implementation or will they fight it as long as they can. Furthermore, will shipping companies want to deal with the negative publicity that comes with firing millions of workers.

  8. Great post! I now have a much better understanding of the opportunity that autonomous vehicles create for the shipping industry. What intrigues me is 1) The shift in labor cost from low-cost drivers to high-cost engineers and 2) the availability of labor for high quality engineers that are needed to build this business. Shifting from low-cost drivers to expensive engineers demands significant upfront investment. It seems like Uber was willing to pay for the foundation of the platform in the Otto acquisition, but how much more investment is needed and are they willing to commit? Further, given the small size of the market of robotics engineers, how will Uber attract and retain the talent needed to pull this off? Lastly, great photo!

  9. Great post! If I’m Uber, I’m still worried about the major automakers beating me on the autonomous vehicle front. I see Uber remained the market maker between customers and self-driving vehicles, but can Uber really scale manufacturing to the level of a Ford or GM once the technology gets figured out? The retrofitting technology for trucks is a more defensive play, but in the long run I doubt they can keep up. If I’m Uber, I look for a partnership with Ford or Toyota ASAP.

  10. Very interesting post and great that you point out such a substantial opportunity that most of us would not recognize on the surface. Self-driving cars look to be on the horizon and what is interesting is all the external changes the technology will cause. You point out how many truck drivers there are in the country so what do you think is going to happen when eventually the vehicles are fully autonomous and these people are out of a job? Also have you thought what complementary services and products will arise to service this technology and changed industry?

  11. Very interesting topic. I’m wondering if this investment in AV does anything to stop Uber from ‘burning billions’ as you mentioned was currently their biggest issue. While I can definitely envision a future with driverless cars and trucks that can drastically increase operational efficiencies, I fear that there is a long road ahead before this becomes a reality. Federal regulation is certainly a concern, but I also see challenges at the state level, and inconsistencies in inter-state law becoming an issue even between two states that endorse the technology. What I think would be a much better short-term direction for Uber to take would be to address the underutilization in the shipping industry with their existing technology platform. Are the long-haul trucks at full capacity (let-alone driven at capacity)? What if Uber used an UberPool-type platform to match manufacturers shipping routes and product-types? This would benefit individual manufacturers can through reduced shipping costs while the trucking companies would benefit from an increased capacity utilization.

  12. Really interesting update on how Uber is evolving! With Uber’s investment into robotics to further explore self-driving cars and it’s acquisition of Otto, Uber is essentially mitigating the risks that labor presents to the Company. If Uber’s policy of categorizing drivers as independent contractors is ever successfully challenged and uber is forced to recognize its drivers as employees, this will present significant additional costs on the Company. However, by investing in self-driving cars and acquiring Otto, Uber is positioning itself to operate in a world where it doesn’t need drivers.

    My question is how does a world without drivers impact Uber’s operating model? One of Uber’s greatest competitive advantages right now is that the business is able to operate in an extremely asset light model by not owning any of the cars and employing its drivers as independent contractors. But in a world without drivers, will Uber need to own the self-driving cars and fleet of autonomous 18-wheelers? How does owning the assets alter Uber’s financial profile and competitive advantages?

  13. Thanks Famous Pete – glad to see you going back to your Greek roots with the shipping theme.

    Totally get why Uber is needing to rethink its strategy – liked how you drew out the evolution of its most profitable assets as the market has changed. Do you really think shipping is the long-term answer for Uber though, as the industry itself has been going through one of the steepest re-ratings of the last decades? Or do you see the move as more of a short-medium term move? My concern would be with global growth slowing (thus pushing down the demand for global shipping) and increasing emphasis on things like eco-ships, the goalposts for Uber might keep changing.

    That said – if there’s an industry that’s in need of disruption, shipping could be it..

    On that second point, in your reading did you come across much on eco-ships? Thoughts on how they might fare in an automated world?

  14. Great post Pete. I can´t believe we are already discussing AV as a reality. As I said in class, the entire idea of AV, although it presents some huge opportunities for businesses and consumers, it´s a major threat to the work and life of the current 1.8m truck drivers in the US. How is Uber and/or the government preparing for this? How are we going to solve the social problem that the introduction of AV is going to generate? How will this impact UBER´s business negatively?

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