Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation.
Executive summary: our relationship with cars needs rethinking. A car, after a house, is the second most expensive asset most people will ever purchase in their lives. Yet, it can be considered an astonishing waste of money. Most cars get used for just an hour a day on average; in other words, they sit redundant for 95% of the time. Furthermore, during that mere hour of usage, thousands of deaths and millions of hours of lost productivity occur globally, not to mention the notable additional cost to the environment in terms of pollution. However, the emergence of disruptive business models means that there is less and less need to own a car, while cars themselves are slowly becoming both more efficient and more autonomous. A range of investment opportunities (both listed and unlisted) are clearly arising from these developments.
The statistics tell a compellingly shocking story. Car accidents are the eighth largest cause of deaths globally (ranking only slightly behind AIDS and lung cancer), according to the World Health Organisation. Moreover, consultants at Ernst & Young estimate that some 90% of vehicle-related fatalities – not to mention injuries – are the result of human error and driver distraction. Part of the reason perhaps why so many accidents occur is that our roads are congested. In the US, 42% of major urban highways are congested, based on recent figures released by the Texas Transportation Institute. The consequence of such congestion, states the report, is that American drivers spend nearly 5 billion cumulative annual hours stuck in traffic; in a large city such as Los Angeles, this equates to around 60 hours a week. Data from the Federal Highway Research Institute in Germany paints a similarly depressing picture. Vehicles also guzzle gas, with various studies suggesting that automobiles globally may be responsible for as much as 20% of greenhouse gas emissions.
In the future, where the trends of automation, robotics, the internet of things, big data and nanotechnology (all of which have been discussed in previous editions of Helicon Thoughts) develop, mature and converge, it may be possible to envisage a utopian (or ‘autopian’) scenario of fully autonomous and highly efficient cars, where the driver becomes the passenger and the algorithm becomes the driver. Such an outcome may generate as much as $1.3trillion of savings, or 8% of GDP in the US alone, based on calculations from Morgan Stanley which take into account potential productivity gains, reduced accident costs and significant fuel savings. However, the road to full autopia will likely be long and complicated for a whole host of reasons, explained in more detail below. It makes more sense to accept that our relationship to the car will most likely continue to evolve gradually over time. Two main trends are occurring at present, which are already helping to reshape how we conceive of the car: first, disruptive business models mean there is less need to own a car; next, cars are already becoming more efficient and autonomous.
Today, many urban consumers are already beginning to regard cars as being utilities to call upon rather than assets to own. This makes perfect sense if most cars are only being used for an hour a day. It is becoming increasingly easy just to rent cars for short periods of time, or to substitute a journey in one’s own car for a cheap and increasingly ubiquitous taxi-based alternative. Such a shift in mindset is also being encouraged by the proliferation of the mobile internet; indeed, the broad concept of car sharing can be thought of as an effective marriage of mobile technology and fleet management.
Many readers of this piece will be familiar with names such as ZipCar, Car2Go, Lyft, Uber and Didi Taxi. None of these businesses is more than 15 years old, yet their impact is already notable. Founded in 2000, ZipCar (owned by Avis), claims to be the global leader in car sharing, with 900,000 users at the end of 2014 and a fleet of more than 10,000 vehicles located in the US, Canada, UK, Spain, France and Australia. Car2Go, principally owned by Daimler and with seven years of operating history, says it has a similar number of users, with a fleet of 12,000 cars operating across 29 cities in 8 countries. Lyft, in contrast to its more established rivals, is a peer-to-peer ride-sharing service, already present in 65 US cities after less than 3 years of operation. Uber describes itself as a ‘private car or rideshare from your mobile phone.’ Present in 244 cities across 53 countries, it has already become an established alternative to conventional taxis. While no user figures have been disclosed by Uber, China’s domestic equivalent, Didi Taxi, claims to have over 100m users.
The worldwide car sharing market could be worth $6.2bn by 2020 according to Navigant Consulting, up from $1.0bn at the end of 2013. Such growth clearly has ramifications for the car industry and particularly auto manufacturers. One study, conducted by Alix Partners, suggests that for every car-sharing vehicle in existence, 32 personal-vehicle purchases are avoided, while a separate piece of research (by Laffer Associates), highlights that if sharing services were to increase to 5% of all household car rides in the US, then auto sales could halve. Such outcomes would likely result in fewer accidents, less congestion and reduced pollution.
Car manufacturers, however, are not standing by and idly watching as the industry evolves. New regulations (relating to emissions standards and car safety), a growing recognition of the costs of car ownership and the need to remain relevant for their users are forcing a reassessment of traditional business models. Put another way, cars are changing, becoming both more efficient and more autonomous, regardless of who purchases them. In terms of efficiency, modern car manufacturers are progressively embracing lighter materials, better lighting and the adoption of telematics systems. For every 10% weight loss a car undergoes, there is a 5-7% gain in fuel savings. Meanwhile, LED lighting (also discussed in more detail in a previous Helicon Thoughts note) have a lifetime over 20 times longer than conventional halogen lighting, resulting in cost savings as well as additional safety benefits according to many manufacturers.
Turning to automation, the idea is far from novel. Indeed, General Motors first exhibited a prototype of a fully autonomous car called ‘The Futurama’ at the 1940 World Fair. While the vehicle never entered commercial production, modern-day drivers have been familiar with applications such as anti-lock braking and cruise control for some time. Moreover, the rate of automation within vehicles is accelerating, driven by the increasing presence of telematics, which blends computing and mobile phone networks, resulting in embedded connectivity within cars. Contemporary automated driver assistance systems (‘ADAS’ for short) also embrace the use of cameras, laser radar systems and ultrasound sensors and can enable a range of operations including advanced parking assistance, blind spot detection, driver drowsiness detection, intelligent speed adaption, lane departure warning and lane-keeping systems.
Almost every automobile original equipment manufacturer has begun to adopt some form of ADAS within their production process and many have begun to entertain visions of ever-increasing automation. Perhaps the most vociferous advocate of automation has been Tesla’s Chief Executive, Elon Musk. He asserts that by 2017, newly launched Tesla models will be able to self-drive some 90% of the time. A similar view is echoed by Ford, which says that driverless cars may be with us within five years, while Nissan claims that it will put its first autonomous vehicle into production by 2020.
However, it is important to separate hype from reality. Many experts within the industry draw a distinction between partial automation (the stage where the industry is currently) and full automation (where drivers no longer need to use their eyes or minds and the car drives itself, totally unassisted). The transition from the former to the latter will likely take some time. Beyond the obvious question of user acceptance – whether all drivers will ever fully trust computers – there also, fundamentally, needs to be a change in the legal framework. There is no clear consensus, for example, on whether car owners or software providers would be liable in the event of accidents. Additionally, a fully autonomous car would rely upon as well as generate huge amounts of data, but there remain major uncertainties about the legal ownership of such data as well as the risk of it being corrupted or hacked.
Even if the road towards full automation remains some way off, the ADAS market still offers significant growth potential given that fewer than fewer than 5% of all cars globally currently have automated driver assistance systems according to research by Citi. Against this background, Citi forecasts a 25% compound annual growth rate in the ADAS market through to the end of the decade, implying that it could be worth some $40bn by 2020. Forecasts by car manufacturers and components suppliers tend to be more optimistic, suggesting a market value of up to $60bn by the decade end.
As the industry continues to evolve, there are inevitably clear investment implications. Many of the innovative disruptors cited earlier are still privately-owned companies or subsidiaries of larger listed entities. Nonetheless, at a more basic level, there will be a shift of value in terms of what physically goes into a car. Today, around 90% of a car’s production cost is accounted for in terms of hardware and just 10% software; by the end of this decade, the mix will likely be closer to 45% hardware, 45% software and 10% content, based on estimates from several leading manufacturers. Telecoms operators should also benefit medium-term as ubiquitous 4G (or superior) coverage will be essential as cars themselves will near-continuously need to use mobile networks in order to navigate the driving environment.
Listed businesses that look well-placed to benefit from these trends include Valeo and Google in particular. French-based Valeo is currently the world’s leading player in terms of automated driving systems and interior controls. It has shown a consistent track record of innovation and has also developed a series of partnerships with players such as Mobileye and Safran. Other notable players within this field include Autoliv, Continental, Delphi, Denso, TRW and Visteon. Meanwhile, Google offers multiple exposures to the future car theme: it is the largest investor in Uber; it has been developing self-driving car technology in-house since 2005; and, Google has also pioneered the Open Automotive Alliance, a grouping of automotive manufacturers and technology companies aimed at using the Android operating system in cars. Over 40 companies have already signed up. Our relationship with the car will only continue to evolve; currently dominant players and traditional manufacturers may be displaced, and future successful entrants will only likely emerge.
Alexander Gunz, Fund Manager, Heptagon Capital
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Opinions expressed whether in general or in both on the performance of individual investments and in a wider economic context represent the views of the contributor at the time of preparation. Executive Summary: Thematic investing is a core part of our investment process at Heptagon. Since 2011, we have published 50 dedicated pieces of thematic […]
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