At the beginning of April 2017, the electric car manufacturer Tesla (TSLA) first overtook Ford (F), and a few days later GM (GM), to become the largest US car manufacturer in terms of market capitalisation. This is astonishing, given Tesla’s relatively small production of only 77,000 cars in 2016 vs. 10 million for GM. The market perceives Tesla not as a normal car manufacturer, it is a symbol of new automotive technology – a technology which culminates in the self-driving car. It has proven a disruptor to the car industry as consumers and investors alike are fascinated by its product. So far, the company has served the luxury segment, but recently announced plans to enter the truck segment and the mass market. Tesla is launching its mass-market Model 3 sedan in the second half of 2017 and intends to quickly ramp up its production capability to reach a target of 500,000 cars per year in 2018.
Tesla is not the only challenger to the traditional car industry. Technology firms, most prominently Alphabet (GOOGL), have made forays into the sector. Alphabet’s self-drive project, now called Waymo, is one of the most advanced and most ambitious undertakings in the field of fully self-driving cars. Waymo has been developing the technology since 2009 and ran up over two million self-driving miles in prototype cars, some of it on public roads. While Apple (AAPL) is often rumoured, based on patent filings and hiring of specialists, to be developing an iCar, it has no product to show so far. However, rather than building a car, its efforts seem to be concentrated on developing self-driving software that extends its ecosystem seamlessly from Mac and iPhone into the car.
Most of all, the car technology of the future requires an immense amount of computing power. Data from sensors placed around the car, information from navigation systems and connected infrastructure must be interpreted accurately and instantaneously. Artificial intelligence transforms the data into safe driving decisions and learns from past driving experience. The providers of powerful chip technology are thus to gain an additional market for their products. The chipmakers’ efforts to establish themselves in the automotive market are illustrated by Intel’s (INTC) acquisition of Mobileye in March 2017, a technology company that develops vision-based advanced driver assistance systems (ADAS) providing warnings for collision prevention.
Incumbent car makers, spurred by Tesla’s initial success, too, invest greatly in the development of new systems, and most importantly, hybrid or electric vehicles (EV). EV’s or hybrids are a necessity for a self-driving car, as the electric engine consists of significantly fewer parts and the driving software can integrate more easily with an electric device compared to a combustion engine. Ford has stated its goal to have a fully autonomous vehicle on the road by 2021. To that effect, the company is doubling its 130 strong team in Silicon Valley in 2017 and is collaborating with several technology start-ups (source: Ford company website).
The trend towards increasingly autonomous cars also benefits some established vehicle part suppliers, for example Delphi (DLPH), which records growth in the segments used in ADAS, connectivity (vehicle-to-vehicle or vehicle-to-infrastructure) or in-car entertainment systems.
While the relationship between incumbent carmakers, vehicle part manufacturers and new entrants from Silicon Valley is sometimes portrayed as a competition, we at Quantifeed view it as a symbiotic relationship. The different industries bring different skills to the table. The tech companies supply computing power, connectivity, integration, innovation and artificial intelligence that have found use in other domains and are now being transferred to the automotive industry. The carmakers are familiar with the industry-specific long planning and development cycles (several years), the management of a vast supply chain, and the high safety requirements. Safety is central to consumers and regulators alike. Self-driving cars are programmed to be cautious drivers and data from accidents is shared between all companies in order to learn from the experience. Indeed, an expected decline in road fatalities is often quoted as one benefit of self-driving cars to society.
A further crucial element for the success of the self-driving car is strong demand. Surveys (for example Accenture Research, April 2016) find that consumers are willing to pay a premium for technologically advanced cars. Despite the interest of private car owners in self-driving cars, fleet operators in metropolitan areas are the likely early adopters. Ford sees its 2021 autonomous car as part of a ride sharing or ride hailing experience. It is no surprise then, that ride sharing pioneer Uber is also participating in the effort to put a self-driving car on the road.
Despite the fact that self-drive long-distance travel and individual ownership might not be on the cards for the next few years, Bill Gate’s famous quote might well apply to the emerging technology of self-driving cars: We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.
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