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The global automotive industry is at an inflection point; one that is probably as important as the transition to mass production pioneered by Ford Motor Company in the early twentieth century. Let’s face it, after 110 years the automotive industry is ripe for another disruption. Not only is the internal combustion engine under threat by regulation and alternative sources of power but driving itself may change dramatically with semi-autonomous and autonomous vehicles on the way along with ride sharing (Uber, Lyft) imperilling car ownership itself.

Within this massive paradigm shift are two attractive and investible disruptive sub-themes – the electrification of the automotive fleet, and the proliferation of semi and autonomous vehicles. These two themes are attractive because it is very early in the adoption cycle, the addressable market is global and extremely large, regulation is a positive, not a negative force, and the major players are numerous, well capitalised, and for the most part attractively valued.

Going Electric

Global electric vehicle sales have risen quickly over the past five years, fuelled by generous purchase subsidies, falling battery costs, fuel economy regulations, growing commitments from most of the car companies, and rising interest from consumers. Sales rose 60% in 2015 alone to nearly 450,000, up from 50,000 in 2011. While many of the early adopters were in the United States, Europe and China sales have since ramped up significantly. In most markets though, electric vehicles still represent fewer than one per cent of total vehicles sold. Contrast that with environmentally conscious Norway where electric vehicles are now 25% of sales.


The average price of lithium-ion battery packs used in electric vehicles fell 65% during the 2010 –15 period from $1,000/kWh to $350/kWh and with improvements in battery chemistry, scale, and better battery management systems, the price continues to drop. Costs have fallen further and faster than many had expected. They are now forecast to drop below $100/kWh in the next decade, and if semi-solid electrolytes and silicon-infused anodes are implemented, along with other technological advancements, the price could possibly fall as low as $50/kWh– $60/kWh in the longer term. These changes should make electric vehicles competitive with comparable internal combustion engine vehicles.

Electric vehicles should become competitive with comparable internal combustion engine vehicles as early as 2020 on a total cost of ownership basis, and even earlier for high-utilisation vehicles such as delivery fleets and taxis. Consumer interest is rising: Tesla’s Model 3 launch in 2016 attracted over 400,000 reservations and deposits for a vehicle that will not be available until late 2017 at the earliest. By some estimates, electric vehicles will command a 35 per cent plus market share of all vehicles sold by 2040. (see figure 1)

Figure 1 - Global LDV and EV yearly sales

For a change, the regulatory environment is a net positive for electric vehicle adoption as global and national fuel economy regulations are pushing both hybridisation and electrification of the total vehicle fleet. The U.S, the European Union, and China in particular, have set aggressive targets for automakers to meet. Certainly, some of this will be achieved through improvements to internal combustion engine vehicles, but this will become increasingly difficult as standards tighten further in the 2020s. Car companies and their suppliers are responding by dramatically increasing the number of plug-in and electrified vehicles on offer.

In fact, lawmakers in the German Bundesrat have recently voted to ban vehicles powered by gas and diesel by 2030.The non-binding resolution will place more pressure on the EU to promote zero-emission mobility, even with the long time frame in place. That in part explains the very strong electrification push recently out of European players Volkswagen, Daimler, and BMW.

Electric vehicles still have limitations such as a lack of range and poor charging infrastructure but this only temporary as improvements in battery technology and use of advanced materials (to reduce weight) will soon make longer trips a reality. Tesla is building out its charging network in its major markets. Other companies will follow suit. If Tesla’s current models are any indication, electric vehicles drive as well if not better than internal combustion engine vehicles in terms of acceleration, handling, and braking. As the mass market Tesla model 3 (late 2017) and the Chevrolet Bolt (late 2016) come to market, I expect adoption to accelerate. Electric vehicles are clearly here to stay.

The Rise of the Autonomous Vehicle

The McKinsey Global Institute in its influential 2013 report entitled “Disruptive technologies: Advances that will transform life, business, and the global economy” included autonomous and semi-autonomous vehicles as one of the 12 most economically disruptive technologies with an estimated economic impact of $US200 billion to $US1.9 trillion per year by 2025 due to improved safety, time savings, productivity increases, and lower fuel consumption and emissions. Considering over 1.2 million people are killed on the road every year and we are in a climate change crisis, self-driving vehicles are clearly a “must have”.

The reality is self-driving cars are not some futuristic auto technology; in fact, there are already cars with self-driving features on the road. Tesla cars have been driven coast-to-coast in the U.S. on the “auto-pilot” feature for ninety-seven per cent of the driving time. Google cars have recently surpassed two million autonomous miles on public roads.

As McKinsey points out “Technology is not likely to be the biggest hurdle in realising these benefits. In fact, after twenty years of work on advanced machine vision systems, artificial intelligence, and sensors, the technology to build autonomous vehicles is now within reach as a growing number of successful experimental vehicles have demonstrated. What is more likely to slow adoption is establishing the necessary regulatory frameworks and winning public support.”

Tesla has announced that its customers would be able to summon a car across the country by 2018. The company is also set to equip all its fleet – Model S, X, and the Model 3, with what will eventually be a fully autonomous capability – at an extra cost of course, once the systems have passed rigorous safety tests and as the network “learns” from the miles driven. The major auto original equipment manufacturers (OEM) such as BMW, Ford, General Motors, and Volkswagen are expecting to release their first self-driving cars on the market in 2020–21.


Figure 2 - Price band

Autonomous driving capability is a computational problem and needs powerful in-car computing power capable of handling data from multiple sensors to achieve full surround vision, a key component in the development of fully autonomous vehicles. Many established companies as well as start-ups are working on imaging and sensing hardware to communication modules for wireless connectivity, mapping, and driving data storage. Some of the leading companies in this field are listed in Macrovue’s “Car of the Future” share portfolio.

An attractive sub-theme within autonomous cars is the strong growth trajectory of Advanced Driver Assistance Systems (ADAS) which by virtue of the technology employed, is directly related to self-driving cars and is already in numerous models. Essentially ADAS contains the building blocks for fully autonomous driving.

ADAS technology applications for drivers include adaptive cruise control, adaptive high beam control, autonomous emergency braking, dynamic brake support, forward collision warning, headway monitoring and warning, lane departure warning, lane keeping, and construction zone assistance. ADAS demand will be driven as much by regulators as consumers over the next decade. The EU New Car Assessment Program (NCAP) is awarding higher ratings (4 & 5 stars) to cars with automatic emergency braking. It is expected that by 2017 all cars will need ADAS to achieve a 4-star rating.

In the U.S., the National Highway Traffic Safety Administration recently announced it was adding two automatic emergency braking systems to its recommended safety features. Unofficially some ten auto OEM vehicles will add autonomous emergency braking by 2020 in the U.S.

Drive into the Future – Three Top International Stocks


Tesla has a highly differentiated business model, appealing product portfolio, and leading-edge technology, which some analysts say are more than offset by above-average execution risk and valuation that seems to be pricing in a lot of good news. Tesla is not saddled with any of the pension, other post-employment benefits, and legacy costs which frequently burden large entrenched automakers. Its products are bold, distinctive, elegant, and highly entertaining to drive. The company is led by visionary Elon Musk, backed by a management team with solid functional strength. Although both technology and execution risk seem substantially less than was once feared, Tesla is probably the most controversial name in the group.

Tesla is different. Tesla believes it likely the most vertically integrated automaker in the world, with 80% of the value conversion in the vehicle being done in-house, which would be roughly 3 – 4 times that of a typical OEM. Tesla does its own stamping, body welding, and high-pressure aluminum die casting, and even its own seats and to a large extent its own autopilot system. The biggest payables to suppliers on behalf of Tesla relates to the battery cells sourced from Panasonic, which would change once the famed lithium-ion battery factory named the “Gigafactory” is up and running later this year.

Tesla has affirmed that the work on the Gigafactory is firmly on track to meet the accelerated timeline of production of 500,000 vehicles by 2018. Additionally, Tesla highlighted that the cost per square feet to build the Gigafactory is already half of what Panasonic would have had to invest on similar capacity plans; and additionally Tesla's battery assembly capacity is three times the capacity per square feet achievable by Panasonic on an independent basis, implying on an overall basis one-sixth of the cost per cell relative to what it would cost Panasonic.

Tesla’s takeover of SolarCity (the company designs, finances and installs solar power systems and was founded by two cousins of Elon Musk) is controversial, to say the least. As if producing an electric car from scratch isn’t difficult enough, the addition of SolarCity into Tesla’s company structure does add a further veneer of risk.

That said, Tesla continues to make the case for synergies in combination with SolarCity. It believes SolarCity will allow for best-in-class engineers within both companies to get together to improve the SolarCity product. Additionally, Tesla believes there are revenues synergies from cross-selling solar panels and stationary power storage to some 3 million people who walk into a Tesla store annually and are likely to be the early adopters. In relation to timing, Tesla expects the shareholder vote to take place on November 17 of this year.

Tesla has a market capitalisation of $US30 billion.

Mobileye – NYSE: MBLY

Mobileye NV is a developer of leading-edge automated driver assistance technologies (ADAS) and one of the few “pure plays” on self-driving vehicles. Its monocular vision platform helps drivers improve safety, avoid accidents, and revolutionises the way individuals drive. The company's products contain proprietary software algorithms bundled on its revolutionary EyeQ system-on-a-chip (SoC) and are integrated into vehicle electronic and control systems. Mounted at eye level these systems recognise signage, roadway features, other vehicles, and of course objects such as cyclists, pedestrians, and road hazards. This “machine vision” is a necessary precursor to semi and fully autonomous vehicles.

All of Mobileye’s proprietary image processing algorithms run on the EyeQ chip which took eight years to develop. The Integrated Circuit (IC) and software algorithms are sold as commercial products to OEM customers. The company’s first clients were automotive manufacturers such as BMW, General Motors and Volvo, whose electronics suppliers integrated Mobileye’s technology into their cars, first as an optional accessory, and later as a standard fit in some new cars. Now over twenty-eight global auto manufacturers and suppliers are using Mobileye’s products, including Tesla, Audi, BMW, Toyota, GM, Ford, Honda, Peugeot Citroen, Fiat Chrysler, and Hyundai as well as the Chinese OEMs. Mobileye technology is now available in over one-hundred and sixty car models and the company has flagged up to two-hundred and fifty car models by end of 2016.

Mobileye’s current products are also powering “auto pilot” and near autonomous driving ability in a number of cars from GM, Audi and Volvo. On May 17, 2016 Mobileye and STMicroelectronics (STM-FR) announced that the two companies are co-developing the next (5th) generation of Mobileye's SoC, named the EyeQ®5, to act as the central computer performing sensor fusion for Fully Autonomous Driving (FAD) vehicles starting in 2020.
The EyeQ5's proprietary accelerator cores will be optimised for a wide variety of computer vision and signal processing but will also include machine-learning tasks, including deep neural networks.

Mobileye has a market capitalisation of $US8.2 Billion.

Autoliv – NYSE: ALV

Autoliv Inc. develops and manufactures automotive safety systems for automobile manufacturers. It operates through the Passive Safety Products and Active Safety Products segments. Passive Safety Products include airbags, seatbelts, steering wheels, and restrain electronics. Active Safety Products comprises camera vision, night vision, and radar systems. The company was founded in 1997 and is headquartered in Stockholm, Sweden.

More than half of Autoliv’s active safety revenue currently comes from its ADAS radar products which are used for forward collision warning, blind spot detection, adaptive cruise control, and other ADAS functions. ALV also produces three types of cameras: a mono-vision camera based on Mobileye’s software; a mono-vision camera with internally-developed ALV proprietary algorithms, due to be launched this year; and a stereo-vision camera with internally-developed ALV proprietary algorithms.

Although management acknowledged that they are a late entrant into the ADAS camera space, they are seeing an encouragingly strong number of “request for quote” from customers. Going forward, Autoliv sees strong potential for its night vision products, which currently have a dominant 80 per cent market share, from automatic emergency braking regulations that require functionality at night. Autoliv has a market capitalisation of $US 8.8 billion.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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