Invest in transportation disruption

Everything is going electric

This disruption of the transportation industry hinges on the convergence of a number of technologies around batteries, electric vehicles, autonomous vehicles, ride-hailing, artificial intelligence, massive digital signal processing.

But the first game-changer is Electric vehicles (EV) and a drop in their prices. Still more expensive than traditional cars built around internal combustion engines (ICEs), EVs should become competitive and go mainstream by 2022, according to Nathaniel Bullard, BloombergNEF energy analyst. Wood Mackenzie thinks they could make up 85% of car sales by 2035.

The impetus behind EVs is battery capacity and prices. “For a midsize U.S. car in 2015, the battery made up more than 57 percent of the total cost. This year (2019), it’s 33 percent. By 2025, the battery will be only 20 percent of total vehicle cost.” By then, a buyer will prefer an EV over an ICE-powered car essentially for taste or style considerations, Bullard considers.

Tony Seba, partner at RethinkX, believes people will massively move to EVs for economic reasons. An ICE is only 17% to 21% efficient, houses 2000 moving parts, costs US$ 3,000 a year to refuel while giving you a total run of 200,000 miles. EVs are 90% to 95% efficient with only 20 moving parts and the yearly cost of recharging will on average amount to US$ 300 allowing you to run for 500,000 miles (up to 1,000,000 miles by 2030). Numbers like these, showing 10 times cheaper costs of refueling and maintenance and five times increased durability will further accelerate the adoption of EVs.

Ownership will change as you know it

The biggest game-changer, according to Seba, will be autonomous vehicles (which by then will be mostly autonomous EVs (or A-EVs)), especially when A-EVs combine with the ride-hailing business model to usher in the age of Transport as a Service (TaaS). “A-EVs will soon replace not just cars powered by gasoline, but the very concept of individually-owned cars itself,” states Seba.

Again, the economic equation could prove irresistible and greatly accelerate the TaaS model faster than what most forecasters predict. Owning a car represents an average yearly cost of $10,000, which includes repair, maintenance, fuel, insurance and parking. Fleets of A-EVs, owned by Uber-like TaaS suppliers would constantly roam streets and roads, allowing riders to have a car at their door within minutes. 

Relinquishing individual ownership of cars, American families could save on average US$ 5,600 a year, greatly increasing their commuting safety and freeing up hours of off-the-wheel time. In fact, transportation could become free, at least in some markets, where sponsors would gladly pay for your ride. Consider Microsoft taking the bill while you work onboard with Office applications.

The economic consequences of a dominant TaaS scenario are huge, according to Seba. On the positive side, the US economy alone would benefit from a boost of US$1 trillion in family disposable income and another US$1 trillion boost to productivity, a 90% decrease in finance and insurance costs, an 80% decrease in maintenance costs, and a 70% reduction in fuel costs. Furthermore, the number of passenger vehicles, because utilization time would increase from 4%, presently, up to 40%, would drop from 247 million down to 44 million. Also, claims Seba “huge potential revenue streams will arise from additional services offered by TaaS providers, potentially resulting in free transport”.

On the negative side, up to 5 million jobs could be lost while traditional car manufacturers suffer and oil slumps by 30%.

How you can invest

Backing up such a scenario, countless technology players will prosper, even if Seba’s TaaS prediction doesn’t come true. A March 2019 study by McKinsey identifies ten key sectors that are piling up investments from many horizons, for example autonomous-vehicle sensors and driver-assistance systems and components, AV software and mapping, batteries, connectivity/infotainment, EVs, E-hailing, human-machine interfaces and computing services.

“Since 2010, investors have poured $US 220 billion into more than 1,100 companies across ten technology clusters, says the McKinsey report. (...) The industry invested US$120 billion in the last 24 months as it prepares for the years to come.” In these 10 technology clusters, investors can find star names like Tesla (TSLA), Uber (UBER) and Waymo, but also lesser known ones like LeddarTech, based in Québec City, a leading manufacturer of solid-state LiDAR (laser and radar) sensors destined for autonomous vehicles.

Industry players that investors should be attentive to are not only in hi-tech. While auto insurance companies get hit, some might profit, like Progressive (PGR) which already has a footprint in E-hailing as a commercial insurer for Uber and is developing a data-collection engine called Snapshot.

Also, certain suppliers to players in the 10-industry cluster could be big winners. For example, battery makers, which have already built 35 megafactories, with 45 more on the way, will eventually need massive graphite supplies. That could favour graphite miners like Northern Graphite Corp (NGC) or graphite processing companies like NovoCarbon, both of which are Canadian companies.

If the TaaS model comes on top, “the biggest opportunity and the key determinant of success will lie in monetizing the user base by creating entirely new revenue streams,” writes RethinkX, detailing entire industries yet to emerge. “In a competitive market, these profits will be largely passed on to passengers, opening up the possibility of free transport: advertising, entertainment, sponsorship, selling products and services, grid balancing, monetizing data, the unforeseen”.

The most attractive investment opportunities might just be those: the unforeseen.