Driving into uncertainty
A few weeks ago Emiel showed us a photo of his Panther Kalista classic car. Not to be outdone, I’m including a photo of my car, a Nissan Leaf. It may have less character, but if the Panther is a reminder of car history, the Leaf could provide a glimpse of the car future.
As part of LGIM’s cross-asset Technology Group, Shaunak Mazumder from the Equity Team and I have spent a lot of time over the past few years discussing what that future could look like. We have summed up our views on the future car in a paper called ‘The Driving Machine Transformed’.
It turns out, however, that the future is difficult to predict with any precision. I was reminded of this while listening to a talk from Ben Hammersley who, as a futurist, told us not to trust anyone claiming to know what the world would look like more than three years out.
From an investor’s perspective that means there is little value-add in making bold and invariably wrong point forecasts on how technologies will develop over five or fifteen years. Rather than the precise speed or path of each technological trend we have greater confidence in the direction of travel and we find it more useful in these circumstances to follow the motto ‘don’t predict, prepare’.
Bringing this back to the auto industry, we have high conviction that we are seeing the end of the automobile as we know it. Cars have been ripe for innovation for many reasons:
- Safety: Cars have become safer, but 3,500 people die in traffic accidents every day, US traffic deaths are roughly the equivalent of a 747 jet crash every weekday and some estimates suggest that around 93% of are caused by human error
- Utilisation and cost of ownership: Cars spend the vast majority of their time parked, be it on a driveway, outside a supermarket, or at a train station. The utilisation rate is a meagre 4% and gets even worse on a per-seat basis. Car seats are empty around 99% of the time!
- Inability to multi-task: Cars are huge time wasters. Morgan Stanley estimates that globally around 400bn hours of non-productive time is spent driving cars plus another 200bn hours for passengers
- Environment impact: Even before Dieselgate it was no secret that cars with internal combustion engines are pretty bad for the environment
Technologies are emerging to materially improve all three of these: electrification, autonomous and the sharing economy. We have a high degree of confidence that all three technologies will dramatically change what cars look like, how we use them, who owns them and the dynamics in the auto industry. Our ‘The Driving Machine Transformed’ paper has much more detail on each technology.
But there must be a great deal of uncertainty around long-term projections like Electric Vehicle (EV) adoption. The chart below showing the range of expert estimates suggests broad agreement that EV sales won’t take off dramatically before 2020. But by 2025 the range of forecasts starts at 4.4% of global cars sold and ends at 25%, a pretty dramatic difference, and the gap gets wider if you look at 2030 estimates.
So we can’t know how precisely and how quickly things will change. It depends on a myriad of social, technological and regulatory variables. We have tried to condense these into the signposts below. These help us keep an eye on what matters and should put us in a position to quickly interpret news flow and adjust our views as new information becomes available: don’t predict, prepare.
Electric vehicle signposts
- Battery cost reduction, range capability, charging speed and charging infrastructure
- Consumer take-up rate of EVs versus internal combustion engines, with and without subsidies
- Further regulation tightening of emission targets or subsidies to drive EV adoption
- AI capability to interpret images, road signs and people
- Regulation allowing for Level 4 and Level 5 Autonomous
- Consumer confidence and trust towards AI / computers operating and driving vehicles
- Insurance liability shifting from man to machine
Sharing economy signposts
- Will the social trend towards a sharing economy persist?
- Will the car’s decline in aspiration rankings continue?
- How quickly can fully shared and autonomous models be offered outside densely populated areas?
My Nissan Leaf is only another stepping stone from Emiel’s Panther to the car of the future, but there is another thing they have in common: my wife is only marginally more enthused about my car than Emiel’s is about his. Perhaps an upgrade to a Tesla would change her mind, but then again, it’s difficult to predict.