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China’s NIO files for IPO in the US in push to compete with Tesla



nio electric

China’s NIO is arguably the furthest along of all the flashy electric car startups that have formed over the last few years. Now it wants to go public in the United States on the New York Stock Exchange, according to a filing with the SEC this past week. But a close inspection of that document shows the company faces potential roadblocks in both demand for and production of its first car, and it also exposes that the company discovered a crucial financial problem in the months leading up to the IPO.

NIO has come a long way for having such a short history. Founded in 2014, it quickly (in automotive industry timescale) designed and produced a small batch of an all-electric supercar called the EP9, which has already broken a few EV and non-EV production car records. The EP9 also autonomously lapped the track at Circuit of the Americas in Texas in late 2016, which helped establish the company’s ambitions to develop self-driving technology.

The company’s first production car, a seven-passenger SUV called the ES8, debuted in December 2017 and went into production in China earlier this spring. It costs about half the price that a Tesla Model X commands in the country, and NIO started shipping them to customers there in June. A smaller five-passenger SUV called the ES6 is already in development, with deliveries starting in 2019. In the push to get these cars out the door, NIO’s global ranks have swelled to over 6,000 employees.
NIO is backed by big names, too: Tencent, Baidu, and Sequoia Capital all have stakes in the company. SoftBank is even reportedly interested in buying some of the public shares. It will need that backing, as the company also has big ideas about changing the car owning experience, from “NIO houses” (which mix service centers with cafe vibes), to battery-swapping technology, to a cute AI-powered assistant on the dashboard.

“Tesla is a company founded in the era of the internet, while NIO was born in the era of mobile internet,” founder Bin Li said in December. “The new era, in which smartphones and apps play a much bigger role in people’s daily lives, gives companies like us a great opportunity to revolutionize the automobile industry.”

The goals of putting a car into production and launching a public offering in the US are shared by a number of NIO’s most notable peers, but the company is about to become the first electric car startup to follow Tesla in doing both. Faraday Future, Lucid Motors, SF Motors, Byton, Rivian; all of these fellow startups are still not in production, and many of them are still clamoring for funding.

But the F-1 form that NIO filed with the SEC this week shows that it still has plenty of challenges ahead.

NIO has shipped just 481 ES8s since the first one left the factory on June 28th, and so its first car has only brought $7 million in total revenue to the company to date.

A slow start might be helpful, according to Doug Betts, who leads JD Power’s global automotive division. “I think if they’re smart they’ll be very careful about trying to have a massive launch and deliver lots of vehicles because the worst thing that could happen to them is quality problems with the early deliveries,” he says. “They need those people to be really excited about what they got to start to build some momentum.”

But even if that’s true, demand for the ES8 isn’t exactly off the charts. NIO says it has only racked up about 17,000 reservations since the SUV’s debut in December, a paltry number in light of the fact that China is the biggest EV market in the world right now, with sales touching 1 million per year. Reservations for the ES8 require a refundable deposit of 5,000 yuan, or about $730, according to the F-1, and 4,989 of those customers have placed non-refundable deposits of 45,0000 yuan, or about $6,500.

If early customers are wowed by the ES8 and the SUV becomes a hit, that could actually complicate things, according to NIO’s own filing. While the company’s goal is to eventually be able to make customer’s vehicles to order within three to four weeks, NIO says in the F-1 that, if all 17,000 existing reservations were to convert to orders today, it would take the company “six to nine months” to fulfill them.
The source of this lag is that NIO isn’t actually making the ES8s itself. NIO currently contracts its manufacturing out to a company called Jianghuai Automobile Group, or JAC. NIO says it plans to eventually build its own cars at a Shanghai factory that’s currently in development. But it won’t be open until at least 2020, so NIO has contracted JAC to build the ES8 and the forthcoming ES6 in the meantime. And NIO admits early on in the document that its “ability to develop and manufacture a car of sufficient quality and appeal to customers on schedule and on a large scale is unproven and still evolving.”

Outsourcing manufacturing is a big reason why NIO is already in production when competitors like Faraday Future and Lucid Motors have struggled to secure funding for their own factories, Betts points out.

But the deal comes with strings, according to the F-1. NIO is paying JAC a fee for every vehicle that the manufacturer makes. NIO also has to compensate JAC for any operating losses that the manufacturing plant incurs over the first three years of the deal, dating back to April 2018 when production began. NIO has already paid JAC 100 million yuan to date, or about $14.5 million. (Two thirds of that payment are “compensation for losses incurred in the second quarter of 2018,” while the rest is “prepayment for manufacturing and processing fees and potential future losses in the third quarter of 2018.)

NIO is farther along than any other well-known EV startup not named Tesla. At its inception, though, production of NIO’s first car faces a bit of a catch-22. Since early demand for the ES8 is somewhat light, NIO has some breathing room to make sure it gets the process right. But if demand stays too low, the company will have to pay more money to JAC. On the other hand, if demand spikes, NIO could face a nearly year-long production backlog that might scare away potential customers.
NIO has lost $1.6 billion over the last three years as it developed the EP9 and ES8, and it estimates $1.8 billion in losses over the next three. It has $668.5 million in cash at the moment.

Securing more money is obviously one upside to going public on the NYSE, and investors here might be more willing to meet the company’s proposed raise of $1.8 billion, according to Sam Abuelsamid, a senior researcher at Navigant Research.

“US investors are more interested in an EV startup like this that ultimately has global aspirations, especially based on the love they’ve shown to Tesla,” he says. “There’s interest in a nontraditional car company that is looking beyond just building and selling cars, but looking on the overall digital ecosystem around the car as well, and being seen as more of a tech company.”

That said, NIO admits in its SEC filing that the company has not completely settled on where all that money would go. Much of it would be split between R&D, sales and marketing costs, and a large portion will go to manufacturing and supply chain. But NIO says there is a certain amount of the potential IPO proceeds that it has not figured out what to do with, and this money’s fate will be solely up to management.

“You will not have the opportunity to assess whether the proceeds are being used appropriately before you make your investment decision,” the company writes. “You must rely on the judgment of our management regarding the application of the net proceeds of this offering.” It’s not yet clear how exactly NIO would split the potential $1.8 billion — the F-1 that was filed is preliminary, and this is one of the sections that remains incomplete.

In fact, NIO’s IPO won’t offer potential shareholders much say in the company overall. Each share being sold in the public offering comes with one vote. Tencent’s shares each come with four votes, while NIO’s Bin Li (owns shares that come with eight votes each. “Due to the disparate voting powers associated with our triple classes of ordinary shares, Mr. Li and Tencent entities will have considerable influence over important corporate matters,” the company writes. This structure, it says, “will limit [investors’] ability to influence corporate matters.”
The F-1 also shows clear signs of growing pains in the push for an IPO. The company admits its existing financial reporting controls “have not kept pace with the expansion of our business.” Worse, the company says that it identified a “material weakness” while prepping for IPO with a Beijing branch of accounting firm PricewaterhouseCoopers. The weakness? NIO did not have “sufficient competent financial reporting and accounting personnel with an appropriate understanding” of the US’s generally accepted accounting principles, or GAAP, which means it wasn’t properly prepared for the financial reporting requirements required by the SEC.

“Wow,” says Minyuan Zhao, associate professor of management for the Wharton School of Business. “If you don’t even have time to understand the GAAP before filing for IPO there’s definitely some rush.”

NIO says it has made a “significant number of adjustments” and “plan[s] to take measures to remedy this control deficiency.” But the company adds it can “give no assurance that our planned remediation will be properly implemented or will be sufficient to eliminate such material weakness.”

“I don’t know for sure if that’s a pretense for potential trouble,” Zhao says, but investors will likely have to weigh their faith that the major investment banks underwriting the IPO — which include Morgan Stanley, Goldman Sachs Asia, Citigroup, and others — will provide enough scrutiny to make sure NIO’s books are right.

NIO is not a total stranger to the United States. It houses over 500 employees in San Jose, California, with most of them focused on design, research, and development. NIO says it will eventually sell its cars outside of China, too. But that won’t happen for a few years. So why would NIO want to go public in a market where it currently offers no tangible product?

As Abuelsamid said, there’s a chance NIO thinks there’s simply more interest in the US from investors who are familiar with tech-forward companies. Beyond that, though, Zhao says another reason is that NIO’s corporate structure prohibits it from being listed in Asian markets. NIO Inc, which is the entity that will be listed on the NYSE, is actually registered in the Cayman Islands. A web of subsidiaries in China, the US, and Hong Kong exist below it that were formed for particular purposes, like R&D or sales.

The NYSE allows these kinds of corporate structures, while China does not, Zhao says.

Zhao says Chinese companies like to go public in the United States because it can show that you’re ready to face greater scrutiny from the financial world. “You expose yourself to this more sophisticated financial market, so it’s a signal that you’re willing to bond yourself to more transparency,” she says.
Spreading into the US could also help NIO separate itself from the rash of EV startups in China, where there are already close to 500 with no signs of stopping. But Zhao cautions that a multinational approach can stretch a company thin. “Yes, you are more global, you’re able to tap into all these resources, technologies, and contacts. But you also increase the coordination costs. To what extent you can get things done quickly and effectively with such a spread out network is not clear,” she says.

NIO, Zhao says, may feel pressured to stand out from from the glut of startups in China. At the same time, NIO might also want to capture what’s left of the investment momentum that has vaulted so many startups to (and beyond) the $1 billion mark in the US.

“So many companies are trying to ride the wave,” she says. “Which ones remain after the wave recedes, we don’t know.”


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How To Play Shares Of NIO, China’s First Premium EV Maker





NIO, a Chinese electric vehicle startup, debuted Wednesday on the New York Stock Exchange.

The first of several hyped “Tesla fighters” planning to go public, NIO originally hoped to raise $3 billion from the offering, but bankers handling the deal reset the target to $1.8 billion. The IPO ended up yielding $1 billion.

There were good reasons for the early optimism. NIO’s first product, the ES8, looks, feels and performs almost as well as the head-turning Model X and Jaguar I-Pace. But trade tensions and concerns about when electric cars will be become profitable weighed down market sentiment.

So, does the lower-than-hoped-for IPO price make NIO a good buy? Or was the fledgling firm overambitious from the start?


EV Demand. Chinese demand for EVs is expected to eclipse 1 million units this year, about half the world’s total. That number will go to 5 million by 2025, propelled by government quotas and incentives.

Massive Luxury Market. Chinese consumers will buy twice as many luxury vehicles this year as Americans. Audi, Mercedes and BMW earn close to 40% of their global profits from China.

Performance Specs. The NIO ES8 comes with formidable performance chops. Zero to 60 in 4.4 seconds, just a whisker behind Tesla. The battery range is a respectable 240 miles on a full charge. NIO has also built a network of 3-minute battery swap stations.

Technology. The ES8 also features Nomi, the dash-mounted AI assistant that responds to voice commands. From behind the wheel last month, I said: “Hey, Nomi, open the sunroof 50%.” The top window opened halfway and stopped. Impressive.

Price. The ES8 starts at $67,000. That’s about half the cost of an imported Tesla Model X (after tariffs).

Backers: Early investors in NIO include Hillhouse Capital, Sequoia Capital and Tencent—powerhouses all. Founder William Li is a self-made billionaire who grew up in a rural town in hardscrabble Anhui province. He knows how to win.


Competitors. NIO is far ahead of where Tesla stood after its first four years. But Tesla enjoyed a grace period of zero competition in the EV arena. German automakers (and other Chinese EV startups) are preparing their own stunning new products for market launches in the coming months.

Scaling Up. Will NIO be able to rapidly increase production and sales? Tesla’s painful experience at the Fremont, California, plant no doubt keeps NIO leaders awake at night. Then there is the sales challenge. NIO is going with a direct-to-mobile approach in lieu of dealers, which is unprecedented in the industry.

Allure: NIO is doing many smart and inventive things to build the brand, including its flagship NIO Houses in Shanghai and Beijing. Will they be compelling enough to win over Chinese buyers who love their BMWs, Mercedes and Audis?


Some market commentators have recently been quite critical of NIO, suggesting that the company is heavy on “show” and light on substance. With any startup, there is always a place for healthy skepticism. But NIO has developed a remarkably competitive vehicle, replete with world-class technologies.

What rightly gives pause to investors is the needling question of how soon makers of electric cars can make a profit. Steadily declining battery prices suggest that day is coming sooner rather than later. This makes NIO look a little bit like a buy-low-now and sell-high-later opportunity.

The risks are there for sure. But as Clint Eastwood says: “If you want a guaranteed thing, buy a toaster.”


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What Happened To GM Testing Self-Driving Cars In New York City?




gm cruise

General Motors previously touted plans to bring its fleet of self-driving cars to New York City in early 2018, but so far, robo taxis haven’t invaded the big apple. Is the NYC plan dead-on-arrival?

Jalopnik reported on Monday that it appears things are stillborn at best. After investigating the manner, and requesting public records filed with the New York Department of Motor Vehicles, the documents turned up an intriguing answer, or the lack of documents, to be precise.

“After a diligent search, the Department is not in possession of any records responsive to your request,” the DMV told Jalopnik.

GM has not filed to obtain a permit to test self-driving cars in the state as of September 4, 2018, and both the DMV and GM Cruise, the automaker’s self-driving car subsidiary, offered up similar responses to the discovery. Both said the application process is ongoing and noted the complex regulatory environment. Neither said the program was dead.

A non-profit group pushing for GM Cruise to roll out self-driving cars in NYC also declined to comment on the matter. Tech:NYC threw its support behind GM this past March to help bring the self-driving car tests to the city.

There may also be a political wing to the story. When GM announced its intentions to bring self-driving cars to NYC, Governor Andrew Cuomo championed the announcement. New York City Mayor Bill de Blasio offered up a different response.

“We have very real safety concerns. We are obviously looking forward to some detail on this idea before any cars hit the streets,” a spokesperson for the mayor’s office said at the time of the announcement. The governor’s office reportedly never consulted with the mayor over GM’s intentions.

In a new statement, the mayor’s office said, “The previous GM pilot was announced by the State without first consulting the City or NYPD, exacerbating those concerns.”

Despite the setbacks, GM still maintains a presence in NYC for its future fleet of self-driving cars. The automaker continues to lease space in the Tribeca district, which reportedly houses a few employees.


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How Far Can Driverless Cars Take Us?




autonomous vehicles

Driverless cars and trucks—or autonomous vehicles (AV)—offer a tantalizing promise of safer and unclogged roadways. In 2017, 37,150 people died in accidents on America’s roads, reports the National Highway Traffic Safety Administration, up sharply from 32,479 in 2011, and far worse per capita than anywhere else in the Western world. And the United States has ten of the 25 most congested cities globally, according to the Inrix transportation intelligence group. Cars that drive themselves could reduce crashes to a small fraction of today’s totals, while moving people about more efficiently, in larger groups and at faster speeds.

For now, though, these positive outcomes remain speculative. Even as companies start deploying driverless cars on America’s streets, no data exist yet on whether the vehicles are consistently safer than those with human drivers and, if so, under what circumstances. The safety of driverless cars will depend in part on policies adopted by federal, state, and local officials—just as speed limits help keep human drivers from inflicting carnage.

Autonomous vehicles pose a particular challenge for dense cities like New York, which have always had an uneasy relationship with the automobile. But if cities handle the introduction of this new technology right, the potential payoff won’t just be improved street safety; it will be an improved quality of life for everyone—by car, on foot, or on bikes.

As it has done with many recent technological advances, America’s military ignited the autonomous-vehicle revolution. Back in 2000, Congress directed the Defense Department to set a goal that “by 2015, one-third of the operational ground-combat vehicles” would be unmanned. Following the directive, the Pentagon’s Defense Research Projects Agency, DARPA, began holding contests for driverless vehicles, which would be raced by their private-sector and academic sponsors across the Nevada desert for prize money.

The technology advanced so quickly that, in 2007, DARPA “made it an urban challenge,” Ryan Chin, CEO of Optimus Ride, a Cambridge, Massachusetts–based software company, recently told an Urban Land Institute New York conference. The military had AV teams compete in a mocked-up suburban environment, awarding points for their vehicles’ ability to follow California traffic rules. “Most self-driving vehicle companies around today can be traced back to the teams involved in this challenge,” Chin observed.

Yet confusion remains over exactly what AV tech can do today. At a think-tank gathering held before the Washington (D.C.) Auto Show in January, Talal Al Kaissi, a representative of the United Arab Emirates, got car wonks buzzing when he announced (perhaps jokingly) that he had set his Tesla to autopilot and let the car drive him to the conference, while he wrote his presentation. Bryan Reimer, associate director of the New England University Transportation Center at MIT, is more circumspect. Autonomous vehicles won’t be street-ready in “the next 12 months,” he says, but it won’t take “a thousand years, either.” Standard and Poor’s predicts that driverless cars will make up a 2 percent to 30 percent share of vehicle sales by 2030.

An autonomous vehicle relies on external sensors—camera, radar, and laser-based lidar—to “see” what’s around it. Digital maps guide it. Massive processing power enables the car to “decide” instantly what to do with all the millions of data inputs—how it should respond, that is, to what’s going on around it. The technology is fast-evolving. Each vehicle “learns” as it drives; as research and development accelerate, the learning process does, too. Waymo, the driverless-car arm of Alphabet, took six years to complete its first 1 million driverless miles, which happened late last year. It took just three months, in early 2018, to reach 5 million miles, and as of mid-2018, the company has logged 6 million.

The industry and its regulators have quantified the AV capability of a vehicle with a six-level scale, designed by the Society of Automotive Engineers. A Level 0 car is an old-fashioned car, without automation. Level 1 means that a car allows technology to take over for specific well-defined functions, which aren’t critical to life and limb, such as parallel parking. In a Level 2 car, partial automation lets a human operator relinquish more important functions, like steering and braking, but the driver must monitor the environment. A Level 3 car has “conditional automation,” meaning that the driver doesn’t have to monitor the environment but must take over quickly if the car asks him to. A “high automation” Level 4 vehicle can do all driving tasks in “certain circumstances,” with no need for the driver to pay attention. Finally, a “full automation,” Level 5 car can do everything, anytime, anywhere.

From Massachusetts to California, Americans have become gradually familiar with cars in each of the categories. Most people likely associate AV technology with a handful of firms. Starting in 2009, Waymo was the first to experiment with strange-looking cars, outfitted with an array of external sensors, and driving themselves around the American West. Earlier this year, Waymo deployed driverless, Level 4 taxis on select routes in Arizona, producing videos of passengers cheerfully taking selfies in the backseat as the steering wheel in the front moves by itself (a remote operator monitors activity and can take over).

For nearly two years, until a crash in Arizona suspended the experiment, Uber was running an AV taxi in Pittsburgh that qualified as Level 2, with human operators ready to take the wheel. Tesla’s Model S and Model 3 cars and X SUV offer partial Level 2 capability. The vehicles can do much of the work on many stretches of road, but with human drivers required to keep hands at the wheel. Cadillac’s “Super Cruise” feature, sold in the CT6 sedan model since last September, is the first commercially available vehicle that lets drivers take their feet off the pedals and hands off the wheel along stretches of divided highway; the car stays in its lane and maintains distance from other vehicles automatically. Cadillac says that it will implement the technology on all models, as well as other GM brands, starting in 2020. Beyond these leading companies, virtually every global auto firm is involved in autonomous development, often partnering with startups providing mapping software, radar hardware, and other support services.

But even Waymo’s Level 4 car isn’t autonomous everywhere, and even the most sophisticated AV technology can operate only in certain well-defined areas—such as the places in Arizona where Waymo has made extensive maps. Uber’s Pittsburgh shuttle confined itself to small geographic areas. And the highest-grade tech is not close to being commercially available. Waymo, Uber, and competitors devote extensive capital investment, maintenance, and care to each autonomous vehicle and cannot mass-produce them at present. Commercially available technology is installed only on select luxury cars; it performs best in navigating on divided highways with clearly painted lanes, with few (if any) stoplights or intersections and with limited or no access for pedestrians and cyclists.

The self-driving Uber shuttle in Pittsburgh underscores the difficulties posed by the greater complexity of urban environments. Things that wouldn’t faze most human drivers confused the shuttle, the Detroit News’s Henry Payne noted last fall—a construction barrier obstructing part of the car’s travel lane, say, or a four-way stop sign. The shuttle’s robotic reactions weren’t always encouraging. While it might have “seen” a worker unloading a truck close to a travel lane, it wouldn’t give that person as wide a berth as a conscientious human would, instead coming too close for the worker’s comfort. “I was surprised how frequently the driver took control of the robotic car,” Payne wrote.

Recent crashes demonstrate the current fallibility of AV technology. In March 2018, a Tesla Model X in “autopilot” mode—in which it can maintain its lane, change lanes, speed up or slow down, and brake—veered at high speed into a barrier on a Mountain View, California, highway, killing the driver, an Apple engineer. In May 2016, a Tesla Model S in autopilot steered into a large truck crossing a northern Florida highway, also killing the driver. This March, too, an Uber prototype SUV in autonomous mode, with a human driver in the front seat, hit a pedestrian in Tempe, Arizona, killing her (and leading Uber to suspend testing around the country).

The need for humans to take over a car within milliseconds after they’ve sat disengaged from the road for a long period may be one of the biggest perils of intermediate AV technology. In all three crashes, the human operator was supposed to be paying attention. But in at least two cases—the Florida Tesla crash and the Arizona Uber crash—the driver stopped doing so, perhaps because the technology encourages complacency. (The Apple engineer’s death remains under investigation.)

With a much longer track record in traditional research and development in the automotive industry, Cadillac is attempting to navigate these difficulties. Cadillac’s Super Cruise technology is “not something we describe as autonomous,” says Donny Nordlicht, product and tech communications manager for the brand. The company describes the car’s capacity to operate hands- and pedal-free as “driver-assist,” intended to reduce fatigue. The technology is enabled only when the car is on a divided highway, previously mapped by the firm to a degree of accuracy six times that of a cell phone’s schema. Cadillac has incorporated other safety features, too. An internal camera monitors the surface area of the driver’s face to ensure that he is engaged. “If I’m staring at my phone, it will start to alert me,” says Nordlicht, and, eventually, after multiple escalating missed warnings, “come to a complete stop with the hazard lights on.” (Tesla, which didn’t discuss its crash, also has warning systems to grab zoned-out drivers’ attention; one mystery is why some drivers seem to ignore them.)

There’s no point in prognosticating on when most Americans will be driving—or riding in—Level 4 or 5 cars; it will happen when it happens, if it does. The good news is that we don’t have to wait to make the leap from cars that operate at the whims of human drivers to cars that drive themselves fully before benefiting from tech-enabled safety advances. The most obvious gain: braking. Over the past decade, automakers have added collision warnings and automatic emergency-braking mechanisms to higher-end vehicles, and the Insurance Institute for Highway Safety (IIHS) and the Highway Loss Data Institute, both insurance-funded nonprofits, have found that cars equipped with both technologies have reduced rear-end crashes by 50 percent; crashes with injuries dropped 56 percent.

Such improvements may not have pushed overall traffic deaths down because the technology is only beginning to be installed. As of 2016, only 1 percent of registered vehicles on American roads had automatic-braking technology, says IIHS spokesperson Russ Rader. As people replace cars and as the hardware and software get cheaper, the feature will become common. Last year, more than half of new Toyotas came with automatic emergency braking. Twenty U.S. automakers—including the foreign firms that make cars here—have agreed to make the technology standard by 2022. As Meera Joshi, New York’s taxi and limousine commissioner, observes, the Toyota Camry, now equipped with standard automatic braking, is a popular model for New York City’s for-hire car fleet. Because owners must replace heavily used taxis and other for-hire cars more frequently than average household cars, New York should see a faster improvement in safety.

As AV tech advances, new public issues will arise. One will be determining the legal responsibility for crashes. “The biggest change in liability,” predicts Randy Maniloff, attorney at White & Williams in Philadelphia, will be a shift to blaming the product, at least in part, for accidents. “Right now, when there’s a car accident,” he says, “one person sues the other person.” In the future, though, “manufacturers of [AV] cars are going to be named as defendants.” Matters of law will not be as straightforward as figuring out whether a part was defective but could also involve human drivers’ interaction with hardware and software. Automakers already worry that they may incur legal risk if they allow drivers to override safety features, such as speed limits, when mapping technology recognizes the legal speed limit on any stretch of road.

For now, the more pressing need is establishing the right kind of safety regulations for autonomous vehicles. It’s almost taken for granted in tech circles that autonomous vehicles will be safer than human-driven vehicles. Elon Musk, Tesla chief, has accused AV skeptics of “killing people.” Yet there’s reason to be skeptical in the absence of data. The government measures vehicle deaths per 100 million miles. Waymo, the AV sector’s most advanced participant, has logged 6 million miles—too few to know if its technology performs better or worse than human drivers. Another metric involves deaths per 100,000 residents, but with early market leader Tesla having sold about 250,000 autopilot-equipped cars to a select group of affluent Americans, the data here, too, are still sparse.

Differences in state approaches to regulation highlight the wisdom of a federalist system, in which states can experiment in how best to handle this disruptive industry. Massachusetts and California, America’s centers of academic and private-sector tech creativity, have each adopted a safety-first stance as driverless-car companies have left simulated environments for real-world tests. In 2014, after months of public hearings and workshops, the Golden State’s department of motor vehicles issued the state’s first AV regulations. Before they could use an autonomous vehicle on public roadways, firms had to certify that they had extensively tested their vehicles under real-life conditions at research sites. A trained operator would have to sit in the driver’s seat of any car, ready to take over at any time. The application, while stringent, wasn’t a deterrent to innovation: more than 50 companies, from AutoX to Zoox, now hold California permits.

Massachusetts has taken an even more conservative approach, leaving important details up to individual cities. Boston says that it’s adopting a “very graduated” philosophy. Since last year, it has approved three firms, including Chin’s Optimus, for testing in limited areas in cars with a safety driver on board. Boston requires companies to master simple driving conditions before okaying them to move on to more difficult levels, like bad-weather conditions or more complex roads. Nearby Cambridge requires two test drivers per vehicle. Like Boston, the city requires firms to prove a “clear progression of increasingly difficult situations,” city council member Quinton Zondervan told the Harvard Crimson. (New York State’s rules for future tests in lower Manhattan, the first in the city, are just as strict: companies must have a trained driver and a second observer up front, and must notify the state police of each route beforehand. GM, the holder of the first permit, has quietly postponed its tests, originally slated for early 2018.)

Until recently, Arizona had taken a much looser approach. In December 2016, contrasting itself with California, Arizona’s department of transportation issued a statement saying that “part of what makes Arizona an ideal place for Uber . . . to test autonomous vehicle technology is that there are no special permits or licensing required.” (Uber had refused to apply for a California permit the same month.) The potential problem with Arizona’s stance became apparent earlier this year, when the Uber car inflicted the first-ever pedestrian death by autonomous vehicle. Since then, the state has tightened its laws. Arizona has a much higher tolerance for auto deaths in general, with a rate of 13.9 per 100,000 residents, compared with 5.7 and 5.2 for Massachusetts and New York, respectively, and with California, at just under 9.2. Uber did not benefit from Arizona’s lax framework: the pedestrian death has set its AV research and development back by months, if not longer.

That different state laws have already coincided with different safety outcomes, even at such an early stage, suggests how important regulatory arrangements will be. As the cars reach the commercial stage, the jockeying for who is in charge will doubtless grow fiercer, but local and state governments should have the ultimate say over their streets.

One regulatory dispute has already flared. The federal government regulates automobiles’ physical safety design, but state governments, through their DMVs, regulate who can drive cars. In cars with no drivers—or with drivers some of the time in some circumstances—this division creates an obvious jurisdictional overlap. A bill languishing in Congress, called AV Start, would resolve this issue in Washington’s favor.

Car design alone doesn’t determine safety: road design and traffic law—responsibilities left mostly to state and local governments—are also key. Consider the March Uber crash in Tempe. Under the general rules of almost any road, the Uber vehicle was at fault. Leading up to the crash, its human operator is shown on video as distracted. She never tries to take over, even as the vehicle approaches the pedestrian, 49-year-old Elaine Herzberg, as she wheeled a bicycle across the road. Yet the area’s poor road design and high speed limits were also factors. The road, like many in busy suburbs, is a high-speed arterial, with a narrow sidewalk, few official crossings, and no bike lanes. Better AV technology may have averted this crash; Waymo executives have said that their driverless prototype would have seen Herzberg. But road infrastructure and speed limits that encourage pedestrian safety would have reduced the risk, too.

Driverless cars may be safer—but for whom? Two years ago, a Mercedes-Benz executive noted that, when an autonomous car has a “choice” between saving its driver or, say, a pedestrian or another driver, it may be best for it to choose its own driver. “If you know you can save at least one person, at least save that one. Save the one in the car.” The comment sparked a backlash, but existing practice isn’t completely at odds with it. After all, heavier SUVs are meant to protect occupants in crashes, but they have contributed to a 46 percent increase in pedestrian deaths since 2009, according to the IIHS. Still, a distracted driver who slams into a bicyclist on a road’s shoulder isn’t acting consciously, or even subconsciously, to sacrifice the cyclist over herself. Reducing the number of these crashes involves fixing road and speed conditions, installing bike lanes and more pedestrian crossings, and cutting speed limits.

These are questions for local and state government officials, not for driverless-software designers. States already take vastly different approaches to road design and governance, with commensurately different results. In Rhode Island, the crash-death rate per 100,000 residents is 4.8; in Mississippi, it is 23.1. In recent years, New York City, in particular, has defied the national trend of higher auto deaths, largely by redesigning its streets to make more room for pedestrians and cyclists and by discouraging high speeds.

The introduction of autonomous vehicles shouldn’t change a state’s or city’s responsibility—and right—to design and govern streets to keep citizens safe. But bad regulations could make it easy for autonomous vehicles to degrade urbanism. If a fully autonomous car can’t consistently “see” a cyclist crossing an intersection in a bike lane, or if it gets “confused” by a mass of pedestrians, it’s sensible for city officials to ban that car from operating on its roads. If Congress prohibits that solution, however, another tempting but damaging way to deal with this problem would be to restrict access for pedestrians and cyclists. Cities could “end up with pedestrians and cyclists effectively not being able to use urban areas,” warns Oliver Carsten, transportation-safety professor at Britain’s University of Leeds.

In the mid-twentieth century, cities changed their infrastructure to fit cars, often for the worse. Government rammed big highways through cities to compete with the quickly populating suburbs, which could handle lots of traffic; city neighborhoods emptied out even faster as a result. Government ripped out streetcar lines and neglected mass transit, only to reverse those decisions decades later. In the future, cities may have to resist pressure to build more limited-access highways to avoid “confusing” driverless cars, or to set traffic lights to favor caravans of fast-moving driverless cars rather than pedestrians and cyclists. “Didn’t we learn in the twentieth century about how many mistakes can be made with the automobile?” asks Carsten.

Tellingly, few AV experts seem interested in how pedestrians react to driverless cars. Wendy Ju, assistant professor in Cornell Tech’s information-science program on Manhattan’s Roosevelt Island, is one exception. Without research, she says, “we’re all guinea pigs.” Ju and her former colleagues at Stanford, where she previously taught, conducted a decidedly low-tech experiment on Stanford’s campus: concealing a driver in a regular car (in a costume that blended in with the front seat) so that the car appeared to be operating autonomously, and seeing how pedestrians reacted. “People did not seem shy to walk in front of the car” at crosswalks, Ju and her colleagues concluded. Of 67 observed pedestrians, “only two people clearly tried to avoid getting in front of the car by walking around it.” Some people explained that their actions were motivated by trust in government and corporations: “a lot of people thought that the car would definitely not be allowed on the road if it couldn’t see them,” she found.

As Ju explains, “the way that cars and pedestrians interact . . . is not completely cooperative.” New Yorkers, in particular, “are very good at this game,” she says. Employing a conservative AV safety model, where a car automatically stops at any hint of pedestrian encroachment, rather than “understanding” that the pedestrian has already correctly judged the spacing and the risk, could create more gridlock—and another temptation to reduce pedestrian access to streets. Though Ju’s research is at an early stage, she notes that “when we’re designing the interactions we have to do a lot more to model people’s behavior.” That behavior, in turn, differs from place to place; in New York, pedestrians expect cars to defer to them; in much of the rest of the country, even when pedestrians have the right of way, such as at a crosswalk, they defer to cars.
Congestion is indeed a concern, and not just because of autonomous cars stopping too often. If cheap driverless cars proliferate, they could overwhelm cities as well as suburbs with more traffic. New York has already experienced an early version of this, with the explosion in the number of Uber and Lyft cars contributing to record-low traffic speeds in Manhattan over the last five years. “If you make autonomous vehicles convenient . . . this induced demand is going to be a problem,” says Optimus Ride’s Chin. In one possible AV future, then, pedestrians and cyclists would have to contend with a new crush of traffic. They would have to wait longer at intersections for the crossing light, as the city will have reengineered the streets to favor long caravans of self-driving vehicles. There would be fewer cyclists and pedestrians, anyway, as they will have succumbed to the temptation of the ever-available, ever-cheaper autonomous car. A dwindling number would use an increasingly unreliable subway, and poor, mentally ill, and eccentric people would make up a growing percentage of the pedestrian population. Safety could suffer for people within cars, at least marginally. “Even if driverless cars are 90 percent safer” than driving oneself in a car, says Sam Schwartz, former city traffic commissioner and the author of an upcoming book on the topic, “transit remains 95 percent safer” than driving oneself. “So if we take people out of transit . . . and put them into robo-cars, on a per-mile basis, they will be less safe.”

With regard to congestion, just as with safety, what cities do with the new technology will matter profoundly. In dense urban environments such as Manhattan, a congestion fee could deter some people from taking driverless cars instead of a train. Dedicated traffic lanes for driverless vans and buses would favor carpooling over individual hailing. This more efficient use for road space could mean less need for traffic lanes, and more room for pedestrians, cyclists, and even parks.

Outside of urban areas, too, the social impact of driverless technology will depend on public and private choices. Efficient public transportation has never taken hold in American suburbs because it isn’t convenient to how they are built, with schools, after-school activities, stores, restaurants, dentists, and doctors often placed miles away, in different directions. Density, not technology, encourages carpooling and public transportation because it increases the chances that many people will want to go to and from the same points simultaneously. Without more urban-style density in suburbs, driverless cars won’t reduce congestion; they may add to it.

Which future we pick won’t depend on the technology, but on us.


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