After more than a century of incremental change, technological advances and consumer demand are accelerating the drive towards electric and autonomous cars. In its Q3 Horizons briefing, LGIM addresses the road to vehicle revolution and what it means for investors.
Anton Eser, CIO at LGIM, says, “With the hardware and software improvements required to address efficiency issues now within reach, futuristic vehicles are on the horizon. Much like Henry Ford’s original low-cost assembly line, these innovations are capable of redefining the future of transportation – with significant implications for investors as well as consumers.”
But it is unlikely to be a seamless transition, he adds.
Gas guzzlers a bump in the road
Headlines predicting electric vehicle penetration in the short term are underestimating the impact of cheap oil.
“Over the next four years, demand for petrol is expected to remain robust,” says Analyst Court Gilbert. “Falling oil prices in recent years has led to an uptick in gas-guzzling car sales in the US, which has in turn put the brakes on fuel efficiency improvements.”
So what will be the catalyst?
“Over the next four to eight years, we believe urban congestion in emerging markets will be a limiting factor for cars and therefore oil demand. Beijing is already limiting car licences, and this could be adopted across other congested emerging markets. The picture for oil demand is set to become extremely sensitive to the adoption rate of electric vehicles.”
From evolution to revolution
According to Fund Manager Shaunak Mazumder and Strategist Lars Kreckel, the automotive industry has been ripe for innovation for some time.
“Safety, utilisation and cost of ownership, the inability to multi-task in a car and environmental impact are the key drivers of change, and technology can improve all of these issues.”
“The breakeven point for electric vehicles will arrive sooner than markets expect, driving adoption. Car manufacturers and analysts estimate that battery costs will continue to decline, moving closer towards cost parity with internal combustion engines (ICEs) over the next decade.”
“There is also a sharp rise in regulatory compliance on existing ICEs. A growing number of countries are tightening emission norms, but the room to improve a mature technology like the ICE is very limited. The only realistic way to reduce the overall emissions is to sell more electric vehicles.”
Cars: the next iPhone?
Shaunak and Lars add, “Cars have the potential to become the next technology super cycle.”
“Smartphones have existed for less than a decade, and yet they have become an integral part of people’s lives across the world. We expect electric and autonomous cars to do the same – bringing more capability and freeing up people’s time, with considerable social implications.”
“Within five years, an autonomous car is expected to have the computing power of five CPUs and transmit close to one terabyte of data a month: 1000x that of a smartphone.”
Change is coming – but from where?
Shaunak and Lars point to three main sectors well positioned to capitalise on the revolution: incumbent car manufacturers – also known as original equipment manufacturers (OEMs) – technology bellweathers, and auto suppliers.
While investors have to date focused on the disruptive technology leaders such as Tesla and Uber, Shaunak and Lars contend traditional OEMs and auto suppliers may yet gain an edge.
“OEMs need to dramatically shift their manufacturing facilities to adapt towards electric or hybrid solutions. They will also need to become more tech-focused, going beyond their traditional roles as manufacturers.”
“If they can successfully transition, a few companies could become bigger and more profitable than before. Currently the risks are factored into the price; opportunities are not.”
“Automotive supply companies are also well positioned to benefit by supporting OEMs through the transition with practical electric and autonomous solutions. They can use product innovation to capture market share and leverage their position in the value chain.”