Driving is changing before our eyes

24 October 2018

Electric cars

The way we drive is changing forever, due to major technological advances and a push towards greener forms of transport (particularly considering the latest dire warnings on climate change).

Despite some short-term weakness in the autos sector (cooling demand in China, combined with speculation we are nearing the end of the economic cycle), the next wave – mass electrification and autonomous driving – means future mobility is one of the most exciting long-term structural growth themes for investors.

The future is electric

It is very possible many of us will have already bought our last petrol car.

We are close to the tipping point between fossil fuels and alternative power sources.

Volvo, for example, has already committed to stopping production of diesel engines, aiming for 50% of its global sales to be electric vehicles (EV) by 2025.

At the tipping point: electric and hybrids are replacing combustion
Car change chart

Source: Statista, PwC, September 2017. Proportion of vehicle sales in China, US and EU.

EV and hybrid sales are forecast to rise sharply over the next decade. In fact, by 2030, combustion engines could be all but replaced by electric and hybrids in the largest markets, China, the US and European Union. Sales are predicted to drop 61 million (in 2017) to just 4 million, while electric vehicles will have leapt from 1 million to 44 million and hybrids from 2 million to 34 million.1

For now and the future

We are also moving closer to autonomous driving being a reality. Cars classed as Level 1 or 2 (Level 0 is fully driver controlled, while 5 is complete automation) are already moving to the mainstream and estimates for the arrival of the first driverless vehicles on the roads are as early as the start of the next decade.

Autonomous driving
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LEVEL:

This is in part driven by something of an ‘arms race’ between some of the best-known auto brands. German carmaker Audi claims its new A8 is Level-3 ready (allowing the motorist to safely take their attention away from the task of driving). The next Mercedes Benz S Class will also feature Level-3 technology. Meanwhile, BMW believes it can bring its autonomous iNext model to the market by 2021. Not forgetting the contribution of Tesla’s Autopilot, and the attempts by tech companies, such as Google, Uber and even Amazon, to beat each other to market with genuinely autonomous solutions.

Technological advances

The technological requirements become more complex for each level of automation. Levels 1&2, including lane-changing modes and self-park features, require relatively limited tech – cameras, radar and around 6-8 sensors per car. By comparison, the next level up requires a 360-degree view of the vehicle and capability to map precisely where the car is on the road.

At level 5, full-system integration, essentially the brains of the car, gives the vehicle full decision-making capabilities. These higher levels of automation are hugely disruptive to the current auto makers, as they fundamentally challenge the concept of what makes a car and what the future ownership model will be.

How are we approaching this?

What is the best course of action for us as investors? There is no clear winner to the current arms race, although one area we are avoiding is the original-equipment manufacturers (OEMs). Not only are their margins likely to suffer in the short term, but we believe their competitive moats could be seriously eroded in the medium term.

Electric cars

There are companies though, where we believe exposure to these technological developments will see structural growth, leading to sustainable yield in the long term. One area worth attention is in the auto suppliers, who benefit from the increased technological demands from autonomous and EV. For example, Continental, one of the largest auto-supply companies, estimates that electrification of the powertrain means up to 360% content-per-car opportunities (technological aspects such as engine management or thermal-management systems) in hybrid vehicles and 400% for battery EV.2

Similarly, semiconductors are increasingly important to the performance of these vehicles. Auto power semiconductors is one of the fastest-growing areas, and companies like Rohm, which is leading the innovation of silicon carbide chips, will be at the forefront.

Finally, as we move to a future of networks of autonomous vehicles, there is a greater need for connected road infrastructure, such as signs, signals and ramps. This should be beneficial for companies like Transurban, an Australian toll-road operator.

The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable.
1 Source: Statista, PwC, September 2017.
2Source: Continental company reports.


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