While only four states - Nevada, California, Florida, and Michigan - have allowed driverless cars on public roads, many experts agree that self-driving cars could be used in controlled environments like highways by 2020. And a study of 2,000 drivers found that more than 75% of Americans would consider buying a self-driving car.
So let's take it as a given that cars will get increasingly automated over the next few decades. Are there publicly traded companies - auto makers, tech firms, manufacturers, or infrastructure providers - that are well-positioned to capitalize on this huge shift in transportation?
If one of these companies built a driverless car...
From both a hardware and software IP perspective, Google has the largest head start in this space. They've started building 100 adorable two-seaters and will begin testing them by early next year.
It's unclear whether Google intends to make their own cars or license their technology. In any event, they have been granted one patent so far and four more pending: Traffic Signal Mapping and Detection, Zone Driving, Diagnosis and Repair for Autonomous Vehicles, and System and Method for Predicting Behaviors of Detected Objects.
Audi was the second company granted a license to test autonomous cars in Nevada (Google was first). Their research car, a collaboration with Stanford University, autonomously completed a 13-mile, 156-turn circuit in 27 minutes. At the 2014 Consumer Electronics Show, it debuted a vehicle that can drive without human intervention at speeds up to 40 miles per hour. Last weekend, an Audi autonomous car drove unassisted on a German racetrack, hitting 140 miles an hour at one point. They're also working on a self-parking system that will allow drivers to exit a vehicle and let a car find a parking spot on its own. Audi executives predict Japan would be the first market to see such features in their cars, adding that "the traffic and parking situation in Japan is quite outstanding."
Mercedes already has partial-automated driving features on the Mercedes-Benz E and S-Class models. It hopes to have a fully autonomous version of its S-class sedan by 2020. At CES this year, it unveiled a radical new driverless car prototype.
It's also committed to making autonomous trucks-it hopes to have a fully-autonomous truck on the road by 2025, and has already run tests of an autonomous truck on the German Autobahn. According to Daimler board member Dr. Wolfgang Bernhard, "the truck of the future is a Mercedes-Benz that drives itself. The Future Truck 2025 is our response to the major challenges and opportunities associated with road freight transport in the future." In many ways, driverless trucks are likely to happen sooner than driverless cars. Vox lists out the reasons why.
...then they would need to buy from these suppliers...
Anyone implementing the FlexRay protocol: Freescale Semiconductor (FSL) and NXP Semiconductors (NXPI)
According to a new report covered by the IEEE, driverless car-compliant microcontroller and processor units will be a $500 million market by 2020, up from $69 million last year. These units will likely conform to the new FlexRay data protocol, created by a (now defunct) consortium of companies who create electronics for driverless cars. It's 10-times faster than the current CAN messaging protocol used in cars, and is safer since it has two independent messaging channels. Freescale Semiconductor is already a thought leader in the space, leading conferences and partnering with Formula One to investigate potential partnerships. More importantly, it's already trusted by car manufacturers. According to Mike O'Brien, a U.S.-based VP of product planning for Hyundai, "we don't get a beta test with our products-they have to work from the first one," explaining the company's cautious approach to chips in its cars. NXP is also a leader in the chip space, having co-invested with Cisco in a startup that lets cars "see" around corners.
Mobileye's IPO two months ago was the best performing U.S. IPO since Twitter. Their technology senses obstructions and lanes, and can alert drivers of a collision. Their prospectus made clear that they intend to be a leader in this space:
"Our sophisticated software algorithms and proprietary EyeQ system on a chip ("SoC") combine high performance, low energy consumption and low cost, with automotive-grade standards to provide drivers with interpretations of a scene in real-time and an immediate evaluation based on the analysis. Our products use monocular camera processing that works accurately alone, or together with radar for redundancy. We expect to launch products that work with multi-focal cameras for automated driving applications with the same high performance, low energy consumption and low cost starting in 2016."
RBC Capital Markets predicts the company will "experience hyper growth through the end of the decade" with a compound annual growth rate of near 50%, adding that Mobileye is the "only real 'pure-play' for investors looking for ADAS and autonomous driving exposure."
But there are downsides to the stock. Mobileye currently trades at 190-times forward earnings, and the lead underwriter on the IPO, Goldman Sachs, downgraded their rating to "Neutral". After Tesla announced that Mobileye will be powering the autopilot feature on its Model S cars, Mobileye stock dropped ~27%. And the "industry risks" section in their prospectus makes clear they "operate in a highly competitive market" and "it is not known how close Google Inc. is to commercializing its product or whether any OEM has agreed to manufacture an automobile with Google Inc.'s technology. It is possible that a competitor or potential competitor, including Google Inc., could create a competitive ADAS that gains significant market share, although we believe that they would experience the same five-to-seven year development timeline with an OEM as we do."
Who makes Mobileye's chips? STMicroelectronics. They're the leading automotive semiconductor company, and while it's unclear what their relationship will be with Mobileye, Google, and carmakers, they have the infrastructure to manufacture chips on a level few others do. And in 2013, "revenues increased 3.2%, a better performance than the [Serviceable Addressable Market], with the main contributions coming from microcontrollers and automotive products."
After Nokia sold its mobile phone division to Microsoft for $7.5 billion earlier this year, it's a far leaner company with a very relevant core competency: mapping.
The Nokia HERE division owns map data that originally belonged to Navteq, the map data provider that Nokia bought in 2007. HERE Maps use 80,000+ data sources including cars on the ground that collect data through panoramic cameras, laser technology for 3D views, LIDAR sensors, and high-resolution cameras that capture street name signs and speed limits. That division also acquired Berkeley-based Earthmine, adding to its 3D street level image intellectual property. And Nokia HERE already powers 4 out of 5 cars with in-dash navigation systems.
Why is this map data important? Nokia HERE has 90% market share for embedded automotive maps, and its VP of connected driving says Nokia is building a map database specifically for driverless cars. No matter how autonomous cars will become, car companies will increasingly need highly accurate map data. Post-spinoff, Nokia is now a lean map company that will be a prime partner for many car companies, or an acquisition target for a company like Google looking to beef up its mapping IP.
Delphi Automotive (NYSE:DLPH)
Delphi is a spinoff of General Motors that is now one of the largest automotive part manufacturers. Although its CEO has warned driverless cars might be further off than people realize, he has also promised that the company will build parts and sensors whether cars are 10%, 80%, or 100% autonomous. And their mid-year quarterly report emphasizes their commitment to vehicle-to-vehicle communications:
"Our product offerings satisfy the OEMs' need to meet increasingly stringent government regulations and meet consumer preferences for products that address the mega-trends of Safe, Green and Connected, leading to increased content per vehicle, greater profitability and higher margins. With these offerings, we believe we are well-positioned to benefit from the growing demand for vehicle content related to safety, fuel efficiency, emissions control, automated features and connectivity to the global information network."
Autoliv manufactures a variety of car safety sensors, including cameras that can detect pedestrians, a night vision camera that can detect upcoming obstacles, and a smart seat belt that can restrain passengers even before a collision occurs. Their radar systems are already in higher-end cars, and they have the IP to license to autonomous car manufacturers.
...and change the economics of other verticals.
Wireless infrastructure: American Tower (NYSE:AMT)
Why are cell phone towers important? More vehicle-to-vehicle and vehicle-to-web communication means a greater need for wireless infrastructure. American Tower owns and operates 69,000+ wireless transmission sites in 13 countries. And as their annual report makes clear, their sites are well-positioned if every car on the road is communicating with each other.
"Consistent demand for our sites. As a result of wireless industry capital spending trends in the markets we serve, we anticipate consistent demand for our communications sites. We believe that our global asset base, including the assets acquired as part of our acquisition of MIPT, which are predominately located in key markets and have minimal overlap with our preexisting sites, positions us well to benefit from the increasing demand of global wireless services. We have the ability to add new tenants and new equipment for existing tenants on our sites, which typically results in incremental revenue. Our legacy site portfolio and our established tenant base provide us with a solid platform for new business opportunities, which has historically resulted in consistent and predictable organic revenue growth."
Trucking: J.B. Hunt (NASDAQ:JBHT)
Why trucking? Labor is one of trucking's highest expenses - the supply of qualified drivers is limited, and companies need to offer high wages, pensions, and workers' compensation to lure candidates. Most truck companies agree even a large upfront cost to transition their fleet would be worth it. "There would be no workers' compensation, no payroll tax, no health-care benefits. You keep going down the checklist and it becomes pretty cheap," said James Barrett, president of Road Scholar Transport Inc. Fuel is another huge expense, with fuel costs accounting for about 30-40% of trucking expenses.
J.B. Hunt , for example, has ~25% of the U.S. trucking market, 10% operating margins, and 16% expected earnings growth - some of the best in the industry. It seems best positioned to leverage a transition to autonomous trucks, especially given a nationwide shortage of truck drivers.
On the other hand, trucking might be the last to benefit from driverless vehicles. Truck driver unions would likely oppose a move to driverless trucks, and trucks would need to abide by the laws of individual states-meaning they might not be able to drive across the country if some states in between haven't legalized the vehicles.
- What are the top private (or soon-to-be public) companies that stand to gain from driverless cars on the road?
- A study by nonprofit Eno Center for Transportation predicts that if only 10% of cars on the road were self-driving, there would be 211,000 fewer accidents a year, 1,100 fewer fatal injuries, and $22.7 billion in economic savings. How does this affect (1) car sales - fewer cars totaled = fewer cars sold, presumably, and (2) insurance rates - lower chance of collisions = lower deductibles? Initial analysis indicates insurance rates could plunge.
- How do driverless cars affect the elderly and physically impaired? If previously homebound demographics are now free to travel, where will they go? How will consumer spending be affected?
- How will fuel prices affected, given driverless cars will be more fuel-efficient?
People and startups to follow
- @jarden: The UX Design lead for the Google driverless car project, Jenny has presented and shared the intricacies of designing for a completely new transportation medium.
- @CarsThatThink: The IEEE's blog on sensors and driverless cars.
- Cruise: Created by one of Twitch's co-founders, Cruise allows you to retrofit an existing car for autonomous highway driving.
- Peloton Technology: Building connected and driverless trucks.
The last time automobiles faced such a huge potential shift in manufacturing was the assembly line. Ford Motor Company perfected the belt-driven assembly line in the early 1900s, allowing them to manufacture a complete Model T in just 93 minutes. Such a drastic change in worker efficiency meant Ford could product more cars in less time with fewer workers - and pay each worker more.
Never before has it been so clear that the transportation industry is heading in a certain direction. Some companies are better positioned to capitalize on this shift than others. But every long-term investor should look at these companies with a critical eye and imagine a world in which drivers become passengers.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.
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