Traditional gasoline-powered cars and trucks are being transformed into sophisticated, technology-rich vehicles by automation, safety needs, electrification, data management and connectivity. Regulators, insurers and market forces are driving these changes.
But what is the industry's evolution likely to hold from an investment standpoint?
As investment professionals, we see that more sectors than just automakers will be impacted as tidal waves of innovation wash over the industry, with far-reaching implications. A significant dispersion will develop between "winners" and "losers," across numerous sectors, ranging from component suppliers to insurers to property developers — with one industry's gain possibly another's loss.
Tomorrow's auto industry could look much like today's smartphone industry, in which most assemblers make no money — but suppliers owning critical parts do. Already, some technology companies are cooling on becoming car assemblers, with growing emphasis on key components viewed as truly integral to future vehicles' success.
The technology industry envisions future vehicles as giant smartphones on wheels — with mobility services such as navigation and entertainment likely accounting for more than a fifth of auto revenue by 2030, compared with virtually nothing today, according to consulting firm McKinsey. This is a must-win battle for technology and data industries faced with slowing smartphone and PC demand growth.
Considerable industry disruption will occur before well-priced, fully autonomous vehicles arrive — and applications of onboard technology and connectivity are already rapidly expanding.
For better or worse, many industries will feel the diminishing dominance of human-driven, gasoline-powered vehicles.
Take cobalt — key to the lithium ion batteries in electric vehicles. Cobalt could face a supply crunch, so some mining companies are planning to boost production, anticipating a demand surge. Already, cobalt prices have reached a near-decade high.
Utilities could benefit. Additional electricity demand from EVs could help offset overcapacity and falling demand in developed markets, while EV demand in emerging markets could complement rapid growth in renewable energy.
Insurers could see changing prospects over time: Advanced digital safety features could help improve road safety and benefit auto insurers by reducing claims. But ride sharing may eventually create a big enough risk pool for automakers or fleet owners to self-insure, eventually eroding the market share of personal insurers.
Meanwhile, auto fleet or leasing service operators will face falling values for outdated vehicles and the need to invest heavily in new-technology models.
Tomorrow's vehicles will be rife with opportunity as well as pitfalls. Here are three principles that we believe will shape specific investment prospects: