When Alphabet Inc’s Google and Tesla Inc first announced that they were working to develop driverless cars almost a decade ago, the news was met with disbelief and scepticism.
Consumers laughed at the absurdity of it while think pieces bemoaned the fact that even the basic human activity of driving was at risk of being overtaken by artificial intelligence. Experts felt that although the idea was worth contemplating, the viability of the technology was in question.
Fast forward to 2019 and what felt like a pipe dream now looks like a certain future. According to researchers at Intel Corp and Strategy Analytics Inc, the driverless industry is expected to be worth US$7 trillion by 2050 — US$4 trillion from consumer use and US$3 trillion from commercial use. Market research firm CBI Insight says investors committed US$4.2 billion to the segment in the first nine months of 2018 alone — a huge leap from only US$167 million in 2014.
Intel and Strategy Analytics believe that autonomous vehicles (AVs) will drive change across industries, replacing traditional vehicle ownership with mobility-as-a-service and redefining concierge and ride-hailing services. There will also be pilotless vehicle options for businesses in industries such as package delivery and long-haul transport.
Since their invention in the 1880s, cars have solved mobility problems but also created a slew of issues, including congestion and pollution. Internal combustion vehicles have become safer and more efficient, but the driving experience remains relatively unchanged.
That is why full autonomy in transport could result in a seismic shift in the automotive industry, says Jay Jacobs, head of research and strategy at US-based Global X Funds, an exchange-traded fund provider that offers innovative ETF solutions.
“The global automotive industry is massive and represents huge revenues each year. But it is an industry that has not really changed much since the 1900s. AVs are really coming from the tech space more than anything, with the Googles and Ubers of the world pushing those forward,” he adds.
“The movement to electric was the first step in this direction. But then the movement to autonomous has been a complete game changer, especially in how people interact with their vehicles, or they will not have to. They will not interact with them, except to perhaps be on the internet or to keep busy. This is a complete disruption of the transport industry in a way that we have not really seen in the last 100 years.”
Fully autonomous cars are poised to save about 600,000 lives from 2035 to 2045 by reducing the severity of accidents caused by distracted driving, say the data crunchers in the Accelerating the future: The economic impact of the emerging passenger economy report.
Autonomous driving technology makes business sense because once near-perfect, it has the ability to prevent and minimise accidents drastically, says Beijing-based venture capitalist Jing Jia. “With more than 1.6 billion vehicles on the road and over one million deaths caused by distracted driving every year, there is no doubt that people need safer, more convenient, functional and intelligent vehicles to move around.
“The technologies that power AVs have the ability to reduce crashes caused by human error and improve traffic conditions. By not having to be alert while driving, people can increase their productivity during mobility.”
Jing is a partner at Delian Investment and Management Co Ltd, which has been investing in green energy sources and cutting-edge technologies since 2012. Delian has invested about 200 million yuan in AVs and related technologies through pre-A and B-stage funding activities.
Car manufacturers began tinkering with the idea of actualising autonomy at about the same time electric-powered vehicles were being developed. Efforts to reduce carbon footprints and, in turn, the dependence on fossil fuel worldwide have led to the adoption of electric vehicles (EVs).
The continuous improvement in EV technology, coupled with enhanced sensors and software, has enabled the production of intelligent vehicles that can drive on their own, says Accenture. This has set the stage for the “age of the autonomous vehicle”, the consulting firm proudly proclaims in its August 2017 Autonomous vehicles: Plotting a route to the driverless future report.
The long-awaited EV inflection took longer than expected but never derailed, notes Citigroup Inc. That is because these vehicles require a major supply chain overhaul to scale. But once major auto manufacturers develop the infrastructure to accommodate the full adoption of EVs, the prospects are positive for AVs to scale much faster, say researchers in the latest Citi GPS: Global Perspectives and Solutions report titled, “Car of the future V4.0”.
Jacobs says EVs are expected to be at cost parity with internal combustion engines (regular cars) by 2025. “This means if you are shopping for a new car in the next few years, you are more likely to buy an EV than an internal combustion engine — simply because it is cheaper. Not to mention that these cars are easier to maintain and have demonstrated very good performance numbers using newly enhanced technology. We think ultimately, EVs will grow into 100% of the car market as things really shift to electric.”
This makes a strong case for autonomous transport as most of the demonstrated AVs have been fashioned to adopt electric powertrains. As charging points are springing up in cities across the world, along with specialist apps that help drivers find charging points, the outlook is pretty rosy for the AV industry, says Jacobs.
Local hedge fund manager Devan Linus Rajadurai also believes that the outlook for the global automotive sector is positive with the increasing uptake of EVs and investments in AVs by major automotive manufacturers. In the past year, auto stocks worldwide have been affected by the threat of new import tariffs by the US, increasing raw material cost, stricter policies on emissions reduction and cash-flow pressures.
“I think the automotive sector is a safe haven. We are quite bullish on the sector now because stock prices have come down significantly in anticipation of a slowdown in sales,” says Devan, who is CEO and chief investment officer of MTC Asset Management Sdn Bhd.
“So, what we are looking for with all the auto manufacturers in the US, Germany and Japan is their dividend yields, which are still more than 5% on average. We think these are good opportunities because over the last two decades, the big brands such as BMW, Volkswagen and General Motors (GM) have proven that they can come in and out of economic cycles.”
Devan notes that the automotive industry is undergoing a rapid transformation as multinational corporations such as GM, Volkswagen Group, Ford Motor Co and Daimler AG (which owns Mercedes-Benz) race to develop electric cars, AVs and mobility services. “A lot of analysts felt that traditional automakers would not be able to compete in the EV segment. So, they gave high valuations to companies such as Tesla. This encouraged people to sell their shares in GM, Ford and Mercedes. But now, the traditional auto manufacturers are starting to release their EVs and things look very promising,” he says.
Some of the new EVs are expected to make their debut this year, including the Mercedes-Benz EQC and Volkswagen-owned Porsche Taycan EV. The BMW Group, Daimler AG, Ford and Volkswagen are also working together to install a network of 400 high-power EV chargers across Europe by 2020.
“With the ecosystem in place and once they start selling their EVs, their valuations should go up. But you have to be pretty patient. We are buying them at a dividend yield of 5% and we are in it for the long term,” says Devan.
AVs are “the ultimate future of mobility”, be it passenger or business vehicles, says Frost & Sullivan associate partner and senior vice-president of mobility Vivek Vaidya. He is taking a more cautious perspective as the technologies that are being developed to make AVs plausible on a large scale are still being fine-tuned.
“A lot of things need to come together for the AVs to run smoothly. First, the vehicles need to change. They need to have an arsenal of sensors and strong connectivity to the surrounding infrastructure,” he says.
“Infrastructure should also be built smarter, for example, route signs need to change while traffic lights and traffic warnings need to be enhanced. All these need to talk to the car because the car will be making the driving decisions.
“Second, you need to have different kinds of maps or highly drivable maps. The maps that we see and the map that the car sees is completely different.”
That said, Singapore is already preparing for this future. In a Jan 31 media conference, its regulators and industry players issued a provisional set of national standards, known as Technical Reference 68 (TR 68), to guide the fast-evolving industry. According to a media statement by Enterprise Singapore, the Land Transport Authority, Standards Development Organisation and Singapore Standards Council, TR 68 will promote the safe deployment of fully driverless vehicles in the city state.
Channel News Asia recently reported that the TR 68 could be the first of its kind. It added that the standards are meant to guide the industry in the development and deployment of vehicles in the Society of Automotive Engineers Level 4 and 5 bands — in other words, vehicles that are partial and fully autonomous in all driving scenarios.
Where the opportunities are
Despite the fact that the road to full autonomy in transport will likely be long and full of obstacles, this movement is generating a palpable air of excitement. Apart from the forerunners such as Waymo (Google’s self-driving project owned by Alphabet), Baidu Inc and Aptiv plc, auto juggernauts such as GM, Daimler, Ford and Audi AG are also racing to introduce their versions of AVs and their potential to transform the automotive industry.
There are five levels to autonomous driving, which entail the threshold at which the vehicle takes over tasks and interacts with the driver. Currently, most automobiles — cars especially — operate at Level 1 and 2 automation.
The game changers are aiming to achieve Level 4 autonomy. This is where an AV can steer, brake, accelerate, change lanes, turn and use signals without the intervention of the driver.
In the next two to three years, the contenders are expected to roll out vehicles that offer a hands-free driving experience, where the vehicle is able to smoothly cruise along dedicated city lanes at a predetermined speed. According to Bloomberg, no one has demonstrated a Level 5 AV, where the vehicle is so independent that there is no steering wheel.
Delian is one of the early comers in China that is taking advantage of this trend by investing in a variety of technologies that support AVs. Jing says its focus has been mostly on Chinese start-ups working to develop sensors, semiconductors, hardware, software and telecommunications systems.
She adds that the first enablers of AVs are sensors, such as vision systems, radar systems and LiDAR (Light Detection and Ranging) systems, as well as ultrasonic sensors. “The second enabler is the hardware. This includes electrical and electronic architecture, ADAS ECU, passive components, central processing units, graphics processing units and Application-Specific Integrated Circuit (ASIC) for autonomous vehicles.”
ADAS, which stands for Advanced Driver Assistance Systems, is a combination of systems developed to automate, adapt and enhance vehicle systems for safe and better driving. Newer versions of this technology allow for adaptive cruise control, automatic emergency braking, blind spot monitoring, lane change assistance and forward collision warnings.
ADAS ECU is a platform to implement these multiple applications using data from plural sensors, cameras, radars and LiDAR, which then send commands to plural actuators such as the engine, brakes and steering.
“The third enabler is the software, which has a wide application, from decision-making systems and mapping to cybersecurity software, cloud computing, integrating the human-machine interface and entertainment applications,” says Jing.
All these components communicate using V2X — the technology that allows vehicles to communicate with moving parts of the traffic system around them — and 5G communication technology.
“One of our portfolio companies is Abax Sensing, which concentrates on chip-level solutions for LiDAR in an automotive application. The innovative chip-level solution is expected to reduce the cost of LiDAR significantly and it is recognised by Tier 1 automotive vendors.”
Tier 1 companies are considered the most important member of the supply chain as they supply components directly to the original equipment manufacturers that set up the chain.
“Another portfolio company, CalmCar, has developed a vision-sensing system for automated driving. It is the only company in China producing small-scale intelligent environment-sensing equipment,” says Jing.
On Delian’s projected returns on investment, she says it much too soon to reap the rewards just yet. “We are confident this area will create more unicorns, as exemplified by companies such as Waymo, GM’s Cruise, Pony.ai — the start-up whose autonomous driving platform powers the first fully self-driving fleet in China — and TuSimple Inc, an autonomous trucking start-up that is preparing to scale up testing to two full truck fleets in China and the US.”
While the prospects of AVs are looking rosy, the future of driverless vehicles are not without challenges. Detractors have been calling for AVs to be taken off roads following a series of accidents involving Level 2 and 3 AVs since 2013.
Last year, a fatal accident involving a Level 3 Uber AV — a Volvo SUV — that crashed into a pedestrian in Arizona led to an uproar that prompted Uber to suspend operations in the southwestern state.
These incidents have raised numerous questions about whether the technology is ready for mass utilisation, what happens if there is a cyberattack on the software controlling the AVs, and if the robo-driver crashes, who will be held responsible. There are no clear cut answers yet, but stakeholders hope that as the technology improves, these issues will be addressed.
Investing through ETFs
Having observed the breakneck speed at which the technologies are developing and the peaking interest, several ETFs that leverage the confluence of maturing technologies related to driverless cars, EVs and other innovations in the automotive industry debuted last year.
Last April, Global X launched the Autonomous & Electric Vehicles ETF. Listed on the Nasdaq, it tracks 76 stocks on the Solactive Autonomous and Electric Vehicles Index.
The ETF gives investors exposure to companies involved in the development and manufacturing of software and hardware for driverless vehicles as well as those that produce EVs and their components, such as lithium and cobalt. As at Jan 30, the fund had US$11.5 million in net assets. It was trading US$12.90 per share.
This fund complements the company’s Global X Lithium & Battery Tech ETF, which invests in the stocks of companies that mine and refine lithium all the way to battery production, says Jacobs. The ETF, which was launched in 2010, has more than US$608 million in net assets.
Other ETFs include the KraneShares Electric Vehicles and Future Mobility ETF, which was launched in January 2018, and the InnovationShares NextGen Vehicle and Technology ETF, which kicked off in February last year. They are both listed on the New York Stock Exchange
Through ETFs, retail investors are able to get the most exposure to the AV and EV space, says Jacobs. “There are a few ways to invest in this theme and there are different stages. Obviously, high-net-worth investors have access to venture capital and this gives them exposure to really early-stage technology and early-stage companies. But for the average investors, it is more acceptable for them to go through the public markets and invest in more established companies. Usually, this means a lower amount of risk than investments in the venture stage.
“If you want to invest in what we think will be the most disruptive thing to have happened to the transport sector in the past 100 years, it will be investing in the full ecosystem to benefit from that change. We do not know which company will be the winner or the loser. We just want to own the entire space. That involves everything from car manufacturers involved in the electric and autonomous scene, parts manufacturers, battery producers and companies that mine the materials that go into batteries, as well as the technology developers who come up with the software and hardware to power these vehicles.
“The reality is that most investors probably have some of these companies [those tracked by the ETFs] in their portfolios, where they could also hold other very broad ETFs that track the S&P 500 or MSCI Equities. These ETFs probably have a little exposure to these companies [in the AV segment], but it is probably a very small part of the parcel. Even if AVs do really well, they are unlikely to be a big driver of returns in the portfolio through a broad index. So, we came up with the two ETFs because we think people need to kind of overrate the exposure through more targeted ETFs.”
But as it is with all investments, autonomous technology is not without risks. “This is new technology and technological advancements are somewhat unpredictable. But often times, when you have enough investments and enough people solving something, you usually get to the answer you are looking for. However, the risks in this space is that the technology could take longer than expected to develop. Meanwhile, other technologies could come out of nowhere when we least expect it and that could start to take over as well,” says Jacobs.
To counter such risks, one needs to have a diversified portfolio and these investments should not make up more than 5% of the portfolio.
“If you want exposure to the upside, by definition, you have to take the risks on the downside as well. So, if you are a retail investor who feels comfortable with EVs and AVs and you feel that these will be the future, that is great. But it should not be 100% of your investment portfolio. Obviously, this is more of a satellite position in a portfolio, that is, to complement broader funds that will give you diversification around geographies and other relevant factors,” says Jacobs.
An imminent possibility
According to Citi GPS: Global Perspectives and Solutions report titled, “Car of the future V4.0”, the technology is already halfway there as conditional automation (Level 3 automation) will be a reality by 2021. It says there are two distinct autonomous vehicle (AV) development tracks that are taking shape. The first is where a handful of companies, such as Uber and Waymo, pursue various Level 4 robotaxi AV services to build urban rideshare networks in the next two to three years.
“Most of these players are focused on major city environments while a few are focused on very targeted non-city domains,” says the report, which was released last month.
Jay Jacobs, head of research and strategy at US-based Global X Funds, says the mass adoption of AVs will probably start with dedicated lanes in cities. “The challenge now is that in a world where you have some AVs and mostly human drivers, it is very difficult for the technology to interact with human drivers. We are bad drivers and we are not predictable. However, if all cars are autonomous, this would make it a much easier system to manage.
“I am based out of New York. If 5th Avenue is shut down to human drivers and only open to AVs, it would be a much easier street to manage. So, I think we could start seeing adoption in that capacity first, where it is kind of a restricted use. That could happen in three to five years. It really depends on the appetite of local cities to adopt this technology and become leaders in this space. You can already see it happening in Pittsburgh, Arizona and Michigan.”
However, Jacobs doubts that current automobiles will turn into fully autonomous fleets as there are people who would still want to drive. “I do not know if we will ever get to 100% because some people like to drive and will want to take their sports car out of the garage occasionally. I think we will start to see AVs more in the commuter capacity, where driving is more burdensome,” he says.
Next is the continuous evolution of autonomous features on personally owned cars, a trend that is partially enabled by active safety regulations and connected cars. “Initially, this evolution will yield Level 4 driving features such as highway piloting, first at low speed and then at high speed (think within the 2020 to 2022 timeframe). A few years after that, we will see a path for personal vehicles to be sold as AV subscriptions. We view robotaxis and AV subscriptions as most powerful in terms of changing personal mobility,” says the Citi GPS report.
With AV subscriptions, owning a car may become unnecessary altogether. “In the early/mid-2020s, we will see the expansion of AVs into personally owned vehicles that consumers can subscribe to. An AV subscriber network attempts to preserve the value of instant car access “ownership” with a shared network. A ‘lease’ payment for an AV subscriber would include the use of the car plus insurance and maintenance,” says the report.
“In addition to extra AV safety features on the car, the car will drive itself to get serviced in the middle of the night or a new car with enough seats to pick up the whole family at the airport can be sent to your house overnight. The consumer can decide to leverage the network platform for peer-to-peer sharing and have the car make money when it is not being used.”
Ultimately, the robotaxi networks and the AV subscriber network are expected to be integrated and pave the way for new forms of mobility such as the use of airborne vehicles to further revolutionise urban mobility, says Citi GPS. “We estimate the US high-population-density urban robotaxi addressable market alone could exceed US$350 billion — with high margins for the network leaders — yielding nearly US$1 trillion in enterprise value created at 15 times earnings before interest and tax.
“We also see the market for Tier 1 [automotive parts] suppliers in advanced driver-assistance systems and AVs rising to greater than US$100 billion by 2030E from the current US$5 billion to US$6 billion today, and the post-2021 adoption curve for AV being steeper than expected.”
Jacobs says AVs could change the business model of the car industry. “They may retain the ownership of the cars and use their own platforms for people who want to use their rental service. Or, they could potentially securitise the cars because there will be very consistent cash flow associated with them. They can almost make something like a real estate investment trust for vehicles.”