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Ashley Nunes is a senior research associate at Harvard Law School, where he explores the impact of innovation on economic growth.

A million Tesla robocabs will soon hit the market. That’s according to company chief executive Elon Musk, who made the prediction at a recent investor meeting. According to Mr. Musk, the technology will generate hefty profits, something Tesla Inc. desperately needs. The company has been plagued by production problems and lost more than US$700-million in the first quarter of 2019 alone. A self-driving taxi armada will purportedly help curb these losses, boost balance sheets and deliver a fiscal windfall.

Competitors such as Ford Motor Co., General Motors Co. and Volkswagen AG agree. These companies, like Tesla, are investing in robocabs and their motive, like Tesla’s, comes down to money. Although automakers sell millions of cars annually (total sales volume in 2018 alone topped 83 million), margins remain slim. Manufacturers often earn just US$2,000 in gross profit for a vehicle that sells for upward of US$34,000. Add to that weak demand for new cars (sales in 2019 are expected to dip, with dealer lots increasingly filling up instead of being emptied out) and automakers are desperate to find new, more profitable revenue streams.

Enter the robocab – a concept that promises to boost balance sheets. The idea is simple: For taxi services, driver salaries are the biggest cost. Cut out the driver and costs drop, and when costs drop, margins rise. That’s where self-driving technology comes in. Sensors and software don’t complain about working long hours, don’t demand breaks and don’t ask for pay hikes. Perhaps more importantly, driverless algorithms don’t need to be paid at all. Robocabs are a seemingly surefire way to permanently lift profits.

Ride-hailing companies such as Uber Technologies Inc. and Lyft Inc. are also spending millions on perfecting driverless technology. Despite substantial growth, the cost of running a ride-hailing business still exceeds revenue. Uber and Lyft’s largest cost? Driver salaries. Self-driving technology will purportedly change this.

According to GM, the shift from human to algorithmic muscle could produce margins up to 30 per cent. The result? What Daniel Ammann, CEO of GM’s Cruise self-driving-car unit, has called “the biggest business opportunity since the internet.”

If only it were that simple.

Paying humans to drive is admittedly pricey. But those drivers only get paid when the backseat is occupied. That’s a problem because human-powered cabs often struggle to find passengers. In fact, in major cities such as Los Angeles and Seattle, cab drivers spend as little as 39 per cent of their time earning fares. The rest is spent finding them. This inefficiency shrinks a driver’s earnings and, where robocabs are concerned, cuts into margins automakers may realize by eliminating those drivers.

If robocabs are to boost balance sheets, automakers and ride-hailing companies alike will have to raise revenue. And that means either selling passenger data or pooling rides. Neither option is particularly good for consumers.

Cars today are a playground for electronics. Complex onboard sensors – powered by millions of lines of software code – can continually monitor everything from the vehicle’s oil temperature to coolant levels to tire pressure. This allows automakers to pro-actively address safety problems. But sensors can also follow where you go, how often you go there and for how long. Software can track who you call, when you call them and what radio stations you listen to while on the call. Automakers can (and do) use this information to cash in on the hours the average driver spends stuck in traffic.

The practice makes fiscal sense. Businesses after all, need cash to survive. But monetizing passenger data raises privacy questions – things such as who owns the data? For how long? Can passengers keen on a robotaxi ride refuse to share their data while still accepting the ride?

Volvo Cars CEO Hakan Samuelsson recently took a firm stand against monetizing passenger data: “We should not make try to make business dealing with consumer data. That data is owned by consumers … and we should not in any way try to monetize that,” he said.

But this position is the exception, not the norm. Other companies have been more coy about what they plan to do with passenger data.

Balance sheets could also be boosted by pooling rides. Cramming more fare-paying passengers into the backseat increases revenue at a marginal cost. But, as economists say, there’s no such thing as a free lunch. Notwithstanding general angst over pooling (you never know who you may be sharing your ride with), more passengers mean more stops. And more stops make rides longer. And if rides take longer, why use robocabs at all compared with, say, riding the bus?

This doesn’t mean automakers should abandon the robocab idea. Rather, they should be honest with consumers about the potential downsides of the technology. Doing otherwise is, at best, disingenuous and, at worst, willfully obtuse.

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