Lyrics from The Stanley Steamer as sung by Dinah Shore
The principal interest of this blog is to analyze macroeconomic trends that affect investors. Central bank profligacy, ever expanding entitlements and unfavorable demographics in advanced countries are three such trends and all negative. It seems clear that were interest rates to really spike because of central bank irresponsibility, the stock market would correct dramatically. But nobody is sure about if or when. Endless amounts of words are spent on these subjects in the omnipresent financial media but nobody really has an answer.
But there is one macro trend that is positive and can be analyzed. That is the law of accelerating technological returns and the coming inflection point in human evolution. AI, the cloud, big data, genomics, ever expanding computer capabilities are where investors should be putting at least some of their money, even if the negative trends mentioned in the first paragraph have unfortunate consequences.
One of the important products of these technological factors is the coming revolution in autonomous or driverless cars. This could be called the second automotive revolution, the first being the creation of the auto industry itself. Globally over 1.3 million lives are lost each year in auto accidents, so among other things this is a public health emergency. Investors have to get on board although if the first revolution is any guide, it won’t be that easy.
Some Facts on the First Automotive Revolution
1864 — Austrian Siegfried Marcus built the first gasoline powered combustion engine. (Few people have heard of this guy partly because during WWII the Nazis erased all his work and memorabilia because of his Jewish origin.)
1885—Karl Friedrich Benz invents first practical automobile
1908—Henry Ford launches mass-produced Model T
1895—300 cars in United States, 1905– 78,000 cars, 1910–459,000 cars, 1914—1.7 million cars
1896-1930—Over 1800 car manufacturers in America, the majority formed by the mid-1920s and a high percentage out of business by 1940.
The lesson from the above facts is that the first automotive revolution had a dramatic impact in human life but was not easy to invest in. There were many companies in the business and many went out of business, including the Stanley Motor Carriage Company, maker of Dinah Shore’s (and now Jay Leno’s) Stanley Steamer. General Motors went public in 1910. But others, notably Ford, had an aversion to going public and were not available to stock market investors. Ford only went public in 1956. (A forerunner of today’s IPO reluctant unicorns? Henry Ford was not an enthusiast of the public stock markets and had certain biases. He is reported to have said to his son Edsel, I’ll take every factory down brick by brick before I let any of those Jew speculators get stock in the company.)
The Second Automotive Revolution Has Begun
Investors today enthused about the second automotive revolution have the same problem as investors a hundred years ago, i.e., so where do I put my money? That decision is complicated by a number of technical issues.
The first is defining what fully autonomous really is. The National Highway Traffic Safety Administration (NHTSA) has a rating system, levels 0 to 4 which, at the risk of inducing reader boredom, I’m reproducing below:
No-Automation (Level 0): The driver is in complete and sole control of the primary vehicle controls at all times.
Function-specific Automation (Level 1): Automation at this level involves one or more specific control functions, sometimes called Advanced Driver Assistance Systems (ADAS). An example would be electronic stability control or pre-charged brakes .
Combined Function Automation (Level 2): This level involves automation of at least two primary control (ADAS) functions. An example of combined functions enabling a Level 2 system is adaptive cruise control in combination with lane centering.
Limited Self-Driving Automation (Level 3): Vehicles at this level of enable the driver to cede full control of all safety-critical functions under certain traffic or environmental conditions and in those conditions to rely heavily on the vehicle to monitor for changes in those conditions requiring transition back to driver control. The driver is expected to be available for occasional control, but with sufficiently comfortable transition time.
Full Self-Driving Automation (Level 4): The vehicle is designed to perform all safety-critical driving functions and monitor roadway conditions for an entire trip. Such a design anticipates that the driver will provide destination or navigation input, but is not expected to be available for control at any time during the trip.
Truly autonomous is Level 4. At Level 4 your car doesn’t need steering wheels or other such archaic devices and you can nap, read, watch a movie, have sex and/or drink mojitos during your trip. And that means where 4 is ubiquitous, not just in roped off safe geographic areas like a designated area in law abiding Singapore. When do we get to 4? Forecasts range from 2020 all the way to 2030. 2020 is probably hype but there’s absolutely no consensus on this issue. Kind of important if you are doing a discounted cash flow model! But as we move from 0 to 4, there will be significant profit opportunities as new ADAS features are developed and the engineering and software issues are sorted out.
Outline of Challenges Ahead
Sensors — An autonomous car needs to know what’s around it such as pedestrians, other cars, road signs, lanes etc. Autonomous cars will be filled with sensors. These systems complement/compete with one another with cost and future advances in technology the determining factors.
The recent Mobileye (MBLY)/ Tesla(TSLA) spat partly involved Tesla’s ostensible unhappiness with Mobileye’s camera- centric system.
Mapping – An autonomous car needs to know where it is, the condition of the roads around it etc. and it needs it in real time detail not offered by traditional maps. In my opinion, crowd-sourced user-based maps will be the dominant technology. GPS isn’t precise enough. The crowd-sourced maps will be generated from sensing devices on all the millions of new vehicles that will be on the road. Millions of vehicles will be providing real time updates, sent up to the cloud. The Google probe cars going around mapping San Francisco and other places seem like an anachronism when compared with crowd-sourced mapping. The global auto companies – the “metal benders” as Silicon Valley derisively refers to them – build the cars. They will control who gets the mapping and other Big Data generated by crowd-sourced mapping and sensors.
Crowd-sourced user-based mapping
Probe car based mapping
GPS (probably as back-up)
Software and Chips –The data from the sensors and the maps have to be turned into driving instructions for the car. Pixels from the cameras, for example, have to be converted into these instructions. That means AI, lots of software and specialized computer chips. Right now Mobileye and Nvidia (NVDA) are two public competitors in this space. They sell their services and partner with the global auto companies.
Communications — Autonomous cars are expected to be “talking” to one another and the cloud. That means more need for wireless capacity and the introduction of the 5G wireless protocol which is not expected until 2020. Right now advanced countries use 4G systems.
Regulatory and Insurance Concerns — If you get run over by an autonomous car, whom do you sue? The passenger in what is now a driverless car? The global auto company which made the car? The geniuses who created the AI brain that runs the car? Oh and will anybody need a driver’s license? Also if autonomous cars really do significantly cut down on traffic accidents, the demand for insurance will undoubtably fall.
As this blog went to press, the NHTSA just put out a 115-page series of guidelines for the development of autonomous cars. They claim these are not regulations which would inhibit fast moving technology but … well guidelines. A first for Washington but the government wants autonomous cars to succeed, unlike the coal industry. Let’s hope Washington doesn’t somehow manage to kill this with governmental kindness. A Financial Times article did suggest that the industry would not be happy with some of those guidelines. For example one that required unwanted sharing of data with the government.
There is the second problem of state regulations, some of which may need updating.
Gas vs Electric? — I am not aware that there is any fundamental engineering reason why – Tesla and the government notwithstanding – autonomous cars require battery sourced energy. During the First Automotive Revolution, the market’s invisible hand got to choose among the gas combustion engine, the steam powered engine and the electric powered engine. The invisible hand of the market chose the gas combustion engine. Today the visible hand of the government via subsidies, tax credits and preferential regulations is pushing a somewhat reluctant consumer to electric. We’ll see. The world is definitely not running out of oil.
So Where Do We Put Our Money?
For the public market investor unfortunately the choices are limited at the moment and the rewards if immense are still far out in the future. There are few “pure plays” on autonomous cars, Mobileye being an exception. Nvidia, whose stock has been red hot lately, is a lot more than an autonomous car play. Tesla is sui generis and is as much a play on electric batteries, the company’s new automated manufacturing techniques and Elon Musk’s boundless lust for risk. The traditional OEM suppliers like Delphi (DLPH) are aggressively pursuing this area but they too are valued on their overall business.
The current conventional wisdom is that the global auto companies will be losers in this second automotive revolution since there will be fewer buyers of automobiles. Most cars go unused most of the time and this is a giant economic waste. An expensive car has always been a symbol of success especially for guys. But what gal is going to be impressed by a man where the guy driving his car is a robot? People will just subscribe to ride services which will be fleets of autonomous cars. Worse for the metal benders, supposedly the Silicon Valley Big Tech “brains” will own the profitable software and AI parts of the new autonomous cars.
The real opportunities today would seem to lie in the private unicorn and start-up sectors. There are reportedly lots of them. And of course there are the staggering valuations reportedly being given to unicorns like Uber and Lyft. Who wouldn’t want to be early round investors in these companies? Good luck if you can get into that world.
An interesting question is where will the Big Tech Silicon Valley brains come out on this. Both Apple (AAPL) and Alphabet (GOOGL) reportedly have poured significant resources into autonomous car research. But the global auto companies build the cars and right now Big Tech seems somewhat stymied. Perhaps the best approach for them will be partnerships with the auto companies which we see happening in the case of Nvidia, Mobileye and Baidu (BIDU). But will Apple and Alphabet, huge and well endowed with cash and brains (and arrogance ?) as they are, scare away the bigger auto companies? Apple and Alphabet could of course buy an auto company but do they really want to do that? The rumored—now denied — Apple takeover of the low production, niche McClaren would in my opinion have made no sense at all.