Monday, March 13, 2017

Real, Real Costs

If more people understood the real costs of owning and driving a private automobile, would ride share be a ‘no brainer’?
By Dave Desmarais, President & Founder, Perinata

Driving is expensive.

The average age of a private automobile in the USA has now risen to 11.4 years, according to the market research firm Polk.  The average number of miles put on each of those cars each year is now 11,100 miles.  The average cost of a new vehicle is $33,800.00.  The average price of gasoline over the last 10 years is $3.00 per gallon.  Then, there is maintenance and repair, insurance, taxes, license fees, drivers license renewals,  tolls, and accessories.  So, put on those rosy glasses, look at the budget and say, “Yes, I can afford that.

How much does someone really spend for the convenience and luxury of driving?

Figure 1 Ten Year Average Gasoline Price in USA

If you add it all up, the average cost of ownership for a privately owned vehicle is $8,698.00 per year according to AAA.*  Columbia University put that number at 85 cents per mile for a driver that puts 10,000 miles per year on a car.

Many people figure their costs differently.  Some believe that leasing is a less expensive option, by paying less ‘up front’ for the vehicle and only paying for the depreciation.  Maintenance and repair is generally cheaper, because the vehicle rarely goes past its 3 year/36,000 mile warranty period when the manufacturer is taking most of the risk of failure and major repair is unlikely.  However, property taxes, insurance and risk of penalties if you violate the terms of the contract or misuse the vehicle may offset the benefit of cheaper up front costs. 

Some people prefer to buy and old ‘clunker’ and believe that the low cost of purchase may save them in the long run.  The risk here, of course is major repair and inconvenience for having a vehicle in the shop being repaired.  There may be safety issues involved as well and those my be extremely costly. 
I am a ‘middle-of-the-roader’.  I have some issues with spending over $40k for a car that sits in my driveway most of its life.  If you drive an average 11,100 miles per year, a car spends 63 minutes a day on the road at an average of 30 miles per hour.  Therefore, it spends 22 hours and 57 minutes of the day parked somewhere, 95.6% of its life.  So, in theory, if I buy a 2 year old car with 22,200 miles and significant depreciation, I should be better off right? 

Well, the sad truth is, that looking at the overall costs, driving is a pretty expensive proposition no matter which way you go.  So, whether you have $35,000 cash, or lease, or finance an old clunker, you are pretty much stuck with paying a high price per mile. 

Below is the gas gauge for just the cost of the transportation, assuming you do not have a catastrophic loss, accident or act of God.

New Car Purchase or Lease                                  
       85ȼ per mile                                                          

  Used Car Purchase
    63ȼ per mile
 ‘Clunker’ Purchase
      52ȼ per mile  
No matter which option you choose, there is a also a ‘hidden’ cost.  Let’s assume for the moment that you have $35,000.00 in cash and can afford to spend it on a new vehicle without financing.  If you put that money in a medium risk stock and mutual fund portfolio, managed by professionals, over the course of ten years, that money grows at 8 to 10% per year, on average.  At 10% (you have a really good investment adviser), you have spent $35,000.00 plus a loss of $55,781.00 in interest over 10 years.  The total is $90,781.00 the vehicle purchase cost you. 

“Sure”, you say, “but, I traded it in after 5 years”. 

I wouldn’t go there.  You took the hit on depreciation at about 60% and then went and spent more money on another vehicle. 

“Did I save that interest money by leasing?”  Yes, you put that money in the bank, about three quarters of it.  But, you kept making those lease payments and an extra down payment to get a new lease.  The math gets a bit more complicated.  You gained about $16,000.00 in interest over 10 years versus if you had the cash and purchased the vehicle.  Note, your experience may vary wildly depending on the vehicle you choose, the state of the economy and how your investments perform.  And, the vast majority of vehicle buyers do not have the cash.  They choose to finance, which changes the dynamics considerably, albeit more loss. 

The point here is that owning and driving a private vehicle is expensive. 

The perfect world cometh?

The same Columbia University study that said driving now costs 85 cents per mile says that the cost of ride sharing in electric vehicles is 15 cents per mile. 

So, think about the future.  You arrange your ride share to take you to work.  The driverless vehicle parks in your driveway at the appointed time.  You have ordered on line on your smart wearable  and the vehicle stops at the Starbucks drive through on the way to pick up your latte.  There is no waiting, because it was prearranged and the robot barista never makes a mistake.

Figure 2 Starbucks Drive Through

You whisk through traffic, because with auto driven vehicles, there is no need for stoplights or traffic jams.  Computers determine the fastest routes to speed your trip along.  You can sit back, enjoy the scenery, sip your coffee, read the electronic book or watch a video, or work on your upcoming presentation.  With 5G Cellular, you can video-conference in 4k resolution with your EU colleagues before they go home for the day. 

If you have an extra minute, you can admire your portfolio, because you have just spent 15 cents per mile to get to work, instead of 85 cents.  Over 10 years, you have saved yourself $70,000.00.  Feeling very smug about yourself, you can smile and remember that you teenager is being safely delivered to high school, as well and not driving dangerously himself.  You have set aside some money of that savings for college.  All is right with the world.

Is it all perfect?

Driving a vehicle today is expensive.  Will majorities give it up to switch to self-driving ride sharing vehicles?  I am not so sure that it is that simple.  The infrastructure to support this is expensive, especially in rural areas where the infrastructure cost is spread over far fewer individuals.  Private transportation choices are very much ingrained in the culture.  In areas of the world where public transportation is pervasive, frequent and government subsidized, consumers clamor for more roads and private automobiles.
There is certain amount of gratification in owning and keeping a private vehicle that only the owner can access.  With all the vehicles for sale out there in high price ranges, it seems that there are plenty of people around who are willing to spend over $100,000.00 on an SUV.  Still, the question becomes, will the future in an IoT world where big data and networked infrastructure controlling access to roadways, be disruptive enough economically to change the culture to self-driving ride sharing as the predominant mode of daily transportation?   Will it be reliable and attractive enough to offset the desire to ‘own your own”?

Elon Musk has said that that may take 20 years.  That remains to be seen.  In the meantime, consider all the benefits and cost savings of video-conference with "real" face-time with your clients.

Dave Desmarais is President & Founder of Perinata

Contact Dave Desmarais at:

Phone: 864-885-1918

*Note:  AAA based their cost number on driving 15,000 mile per year.