What's Next for Avis Budget Group in the Connected-Car Space?

Avis Budget Group (NASDAQ: CAR) is no longer just a car-rental company. Last June, the company announced a partnership with Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) to provide service for Waymo's fleet of self-driving vehicles, and that was just the opening salvo of a push to better align the business with some potentially revolutionary tech trends.

I recently had the chance to discuss Avis Budget Group's connected car, autonomous vehicle, and fleet-management-as-a-service (FMaaS) initiatives with the company's chief innovation officer, Arthur Orduna. Read on for a deeper dive into some of the moves that Avis Budget is making in order to capitalize on big changes that are on the horizon for the mobility industry.

Keith Noonan: As chief innovation officer at Avis Budget Group, you've got a unique vantage on some of the big trends that are reshaping an industry that most people interact with daily. How do you see the mobility industry changing going forward?

Arthur Orduna: We envision a world where mobility is completely connected, integrated, and on-demand. In this world, consumers are free to allocate time and money to more productive, meaningful, and healthier pursuits; companies will increase productivity and innovate new products, services or even entirely new business models; and communities will streamline the movement of people and goods and facilitate greater connectivity between citizens.

Consumers and businesses in the not-too-distant future will access mobility via distributed, on-demand fleets of shared, electric, connected – and ultimately autonomous vehicles. Today, the race to win that future is occurring at every level of the mobility stack -- from those who provide mobility services, to those who make the vehicles to those who take care of the vehicles themselves.

Our belief is that fleet management and operations are a critical and often overlooked component of the mobility stack. In order to enable the distributed on-demand fleets of tomorrow, operators will need to add value in the service provisioning level, above and beyond maintenance and repair. Operating at this level requires a company that is truly global (with people, facilities, and systems), is deeply experienced in fleet management, has a scalable technology platform and experience building products and services around consumers who embrace mobility as a service. Avis Budget Group is exactly that company.

Noonan: The partnership with Waymo and broader move into autonomous-driving services are big opportunities for Avis. What do you see as some of the risk factors that come with that opportunity and what is the company doing to prepare for and overcome them?

Orduna: We are currently focused on rapid learning and further enhancing our operation with digitization. The latter is likely the biggest opportunity and challenge, because with digitization comes lots of data -- and we are preparing ourselves for how to best analyze and utilize that data for the benefit our customers and operations, initially. We currently have the largest connected car fleet in the world and are aiming for a fully connected fleet by 2020. These connected cars deliver critical data including mileage, fuel level, and vehicle condition, and leveraging this data will greatly benefit both our operations and our customers' user experiences. Operationally, for example, these cars send us specific data in real time so we address maintenance needs quicker and more efficiently, which means the right vehicles are available for customers in record time and with the greatest optimization of resources. For customers, minimizing or eliminating warning lights on the dashboard during a rental, because of the connected car's ability to give us pre-emptive information on systems and conditions that we can address before renting the vehicle, makes for a much more enjoyable and hassle-free journey.

More broadly, this is an opportunity for learning and leveraging new technology and new data insights to better serve our customers, including municipalities. To that end, we recently launched our first-ever "Mobility Lab" that serves as a test bed for fully connected vehicles and operations in the greater Kansas City, Missouri, area. Avis Budget Group's Mobility Lab comprises more than 20 Avis Car Rental locations, including Kansas City International Airport and Nebraska's Eppley Airfield and Lincoln Airport, and features a fleet of 5,000 connected cars. This connectivity allows for seamless communication with the company's fleet-management platform and the Avis mobile app. The Mobility Lab also enables us to collaborate with the city of Kansas City, Missouri, which happens to be one of the most advanced "smart cities" in the world. The pilots we are planning to do with KCMO will help us to also work with other municipalities around the globe as they move forward with smart city initiatives. For example, a smart city could partner with us to use our connected vehicles as data collectors for depth and accuracy regarding real-time street condition data, traffic volume data, etc. -- a win-win for both the city and its residents as well as for our fleet operations and our customers' journeys. Such a partnership has potentially profound positive implications for safety and city planning in the future.

Noonan: What types of changes has Avis made at its Phoenix locations in order to accommodate Waymo's fleet?

Orduna: Avis Budget Group has enhanced its locations to meet specific requirements given to us by our partner, Waymo, including the installation of canopies and fuel pumps to meet Waymo needs, additional security elements, and more wireless broadband capabilities. Avis Budget Group is also providing the manpower to handle washing and cleaning of Waymo vehicles as well as tolling. We have also undertaken vehicle registration efforts in emerging markets (California, Arizona, Michigan, etc.). And, Avis Budget Group's real estate has played an integral role in where these vehicles call "home" when they are not in use.

Avis Budget Group, however, is doing more than just cleaning and servicing vehicles, and acting like mini DMVs locally in each state for Waymo, since we are well versed in quickly registering cars anywhere, buying hundreds of thousands a year and can put cars legally onto streets. We are setting the stage for learning how we ourselves would manage, maintain, and operate AV vehicles that would be part of our fleets in the near future, and how our facilities, resources and processes should evolve to support current and new business models, products, and services enabled by AV. We think that the platform and data insights we are learning from managing our connected fleet, and our KCMO Lab, will eventually combine with the lessons we are learning in supporting Waymo in Phoenix, and put us in leading position to manage our -- and others' -- fleet of the future.

Noonan: Avis' infrastructure and global reach give it competitive edges when it comes to managing autonomous-vehicle fleets for third parties -- and your company has indicated that it plans to pursue deals with mobility companies and fleet owners beyond Waymo. Do you see the adaptations you've made to accommodate Waymo's fleet as largely "one-size-fits-all" solutions or do you expect that there will be a good deal of specialization required as you take on new partners?

Orduna: We hope the lessons and enhancements from Phoenix, as well as KCMO, will translate broadly, and globally, as AV and connected capabilities continue to spread, and that this will allow us to support our future fleet and others' as well. Avis Budget Group's data-driven intelligence and global muscle are what set us apart from other mobility companies. We are no longer just a rental company -- we are becoming a technology platform -- and our operational footprint is both global and hyperlocal, which is part of our value proposition. Avis Budget Group's subsidiary, Zipcar, the world's leading car-sharing network, puts Avis Budget Group at a unique vantage point for fleet management. In addition to operating an industry-leading consumer brand, Zipcar also maintains a proprietary hardware and software platform to manage its distributed fleet network, along with unique capabilities in distributed fleet management (i.e., distributed locations planning, demand data analysis, distributed light maintenance, and cleaning, etc.).

These capabilities complement the Avis and Budget brands' efficient, centralized fleet management network, particularly in an urban and campus setting. In addition, Zipcar maintains the "Local Motion by Zipcar" offering, a hardware and cloud-based software solution for privately owned fleets looking to create more efficient, accessible and data-driven closed fleet networks.

Additionally, Avis Budget Group is actively extending our platform such that it can be used by other fleet companies -- from corporate customers to shared mobility providers to car manufacturers. We see opportunity in developing a sophisticated middleware layer of business logic that connects our fleet management capabilities to the growing ecosystem of shared use mobility -- whether it's car share, ride hail, ride share or private fleet.

Noonan: Waymo announced in November that it had become the first company to have a fully autonomous-vehicle fleet operating on America's public roads. How is Avis using the data gathered from these early trial runs to guide the evolution of its fleet-management-as-a-service business? Is there anything that's been surprising to your team?

Orduna: Again, the Waymo partnership is an effort to establish rapid learning as we further enhance our operation with digitization. We're not just managing the care and maintenance of Waymo's fleet, we're also readying Avis Budget Group for the eventual introduction of autonomous vehicles to our own fleet and mobility modalities. To that end, our connected fleet data and the lessons being learned in our KCMO Lab are equally, if not even more, critical to our growth, and to shaping our fleet-management-as-a-service strategies and business. As for surprises, we are genuinely learning new things every day in both KC and Phoenix, and that's a great benefit.

Noonan: How do you see the rollout of 5G networks shaping Avis Budget's initiatives in the connected car and autonomous vehicle spaces?

Orduna: Taking a step back for a moment, our understanding is that 5G is designed to enhance the existing 4G network, not replace it, as previous iterations have done. As such, we will need to support a 4G/5G hybrid network topology from our broadband network partners.

Current networks are well suited for the telematics requirements of today's connected vehicles, but we are keeping our pulse on the rollout of 5G. 5G should really come into play further down the road -- for autonomous cars -- and by then, by fact of inclusion, telematics and non-autonomous connectivity will be built into the cars themselves. We are also exploring other new and emerging network technologies that could help our connected fleet growth and also our connected customer experience, such as advancements in ATSC 3.0 and low-power wide area networks (LPWANs).

Noonan: In an earnings call back in November, your CEO Larry De Shon indicated that Avis is looking to have roughly half of its fleet connected this year, moving toward a fully connected fleet in 2019 or 2020. What changes should we expect as Avis approaches full connectivity? Is the long-term view that this will have a significant, beneficial impact on fleet-management costs?

Orduna: Yes, absolutely. You can start to see the benefits of a fully connected fleet particularly when you look at the Mobility Lab that Avis launched in Kansas City, which includes a fleet of 5,000 connected vehicles (our entire fleet in that market). This is a critical first step in a major evolution of both the consumer rental experience as well as advances in operational efficiency and cost savings.

The connected and digitized fleet will also offer unparalleled opportunity to streamline our operations, from cars that tell us their ready-state, more accurate fuel levels, mileage, and service needs. In addition, the data that comes from the entire connected fleet will improve our ability to plan fleet sizing, location, and customer preferences.

We look forward to sharing more lessons learned and potential benefits as we continue our testing and piloting this year and beyond.

Noonan: Does Avis see opportunities in using the experience it's gaining in fleet-management-as-a-service to launch your own autonomous vehicle fleet? Or is the focus mostly on FMaaS for third parties right now?

Orduna: Both, actually. We are testing and learning with autonomous vehicles, leading the charge with connected cars and the first and largest player to roll out a Mobility Lab while also spearheading our FMaaS offerings and partners. We're poised better than other mobility companies to take all of these on given our global muscle and data-driven intelligence. With more than 70 years of experience in managing global fleets, Avis Budget Group is well positioned to thrive as a FMaaS provider. In 2017 alone, our brands managed nearly 39 million transactions and 154 million rental days spanning 11,000 locations and 620,000 vehicles worldwide, including hourly, one-way, daily, weekly, and months-long reservations. Our hope is that our fleet management capabilities will become a necessary and welcome enabler, not just a value-add, for any sustainable mobility company or smart city partner.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Keith Noonan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.