A simulated city opened in the US this week, on the campus of the University of Michigan in Ann Arbor, to see if self-driving cars can operate without mowing down pedestrians or causing colossal crashes.

"We had the faculty here at the university design the fully evolved future," Peter Sweatman, head of the Transportation Research Institute, which oversaw the creation of the Mcity test facility, says. "After all, we're replacing humans with machines, and those machines need to be able to operate in a full, rich environment."

Car firms are racing to develop self-driving cars and overhaul their business models for a world where mobility is being redefined as most of the global population crowds into megacities during the next two decades.

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Driverless cars that move in harmony may become essential to keep people and goods flowing safely and efficiently. Mcity, a 13-hectare mini metropolis, seeks to replicate modern urban chaos, with traffic jams and unpredictable pedestrians, alongside suburban streetscapes, superhighways and rural roads. The $6.5 million facility has 40 building facades, angled junctions, a roundabout, a bridge, a tunnel, gravel roads and plenty of obstructed views. There’s even a stretch of motorway with entrance and exit ramps.

Sebastian, a “mechatronic” pedestrian, will step out into traffic to test whether the robot cars will sense him and hit the brakes to avoid running him down, Sweatman says. “We believe that autonomous technology is going to be extremely attractive to consumers. So it’s going to have to be deployed as quickly as we reasonably and responsibly can. We designed Mcity to hyperaccelerate the process.”

Sweatman is also director of the Mobility Transformation Center, formed by academic, government and corporate sponsors, including General Motors, Ford, Toyota, Nissan and Honda. The car firms say that driverless cars may be on the road within five years. The market for autonomous technology will grow to almost €40 billion by 2025, and self-driving cars may account for a quarter of global auto sales by 2035, according to Boston Consulting Group. By 2017 semi-autonomous cars that operate in autopilot mode, park themselves and change lanes automatically will be available in "large numbers", the firm says.

Ford has already tested a driverless Mondeo hybrid in Mcity, mapping all the streets and structures by computer. The automakers will prove their own technology on the course, but they are jointly researching issues such as legal liability and whether robot cars can make ethical decisions when confronted with a crash, according to Greg Stevens, global manager of Ford's driver assistance and active safety research. "We all compete on a technology level," Stevens says. "But when it comes to things like regulatory approaches and legal approaches, that's where you really want to come together and collaborate."

Until now, tests of autonomous cars have been conducted on public roads or private proving grounds. Automakers study robot cars on old test tracks designed to evaluate how fast traditional cars can run laps or how well they handle with humans at the wheel. Google has logged more than 1.6 million kilometres testing its self-driving cars in Silicon Valley and, as of last month, Austin, Texas. Mcity represents an alternative to that.

“If you’re out on the public roadways, certainly all kinds of really unusual things will arise, but they’re only going to arise once,” Sweatman says. “We like the idea of creating challenging situations that we can reproduce as many times as we want.”

Once a technology is proved in Mcity’s controlled environment it can be tested on public roads, he says. Car fims and the university already have 3,000 “connected cars” on the roads in Ann Arbor, capable of communicating with one another and with infrastructure such as traffic lights.

At an opening ceremony for the centre Senator Gary Peters, a Michigan Democrat, said: "The Google folks are kind of strutting their stuff. They've got nothing on us. This is the centre of the universe. This is Michigan; it's not California. "

Google has inquired about testing its driverless cars at Mcity and would be welcome, but the facility’s “Leadership Circle” sponsors, such as GM, Ford and Toyota, get first crack at the track. They are paying $1 million over three years to gain top priority, Sweatman says. Affiliate sponsors, who pay $150,000 over three years, come next. Google is not yet a sponsor of Mcity.