Investors might be looking in the wrong place for exposure to the revolution in driverless cars if they’re pouring over previews of the A$110,000 Tesla Model X. But the trend has prompted other compelling investment opportunities.
Investors might be looking in the wrong place for exposure to the revolution in driverless and electric vehicles if they’re pouring over previews of the A$110,000 Tesla Model X.
We have seen valuation multiples of futuristic car makers reach sky-high levels and more recently the rising value of battery raw materials such as lithium and copper. This appears to reflect the growing buzz surrounding this potential answer to the effects of transportation upon the climate and congestion.
But the mass-adoption of autonomous vehicles will take much longer than generally assumed due to financial, safety and cultural roadblocks.
We’re not saying autonomous cars won’t contribute towards solving the very real problem of traffic congestion in the United States and other countries with densely populated urban areas – they certainly will. However, given the slow pace of adoption, more varied solutions are likely to be required in the medium term.
Vast infrastructure investment requirements will provide opportunities to established players with unique operational expertise to benefit from this trend, long before the car makers grabbing the headlines today start selling vehicles in volumes that will transform the market.
Those optimistic that the adoption of autonomous cars will be rapid might be looking to the large auto manufacturers’ near-exclusive research and development focus on electric vehicles and self-driving solutions.
But we see strong reasons to suggest that the adoption of autonomous vehicles will be much more gradual than, say, the earlier technological leap from the horse and cart to the motorised car.
This is because the most significant impediment to the proliferation of the autonomous vehicle is that the benefits of greater traffic density can only be achieved when a critical mass of cars are autonomous.
Autonomous vehicles might start allowing greater convenience to enable the ‘driver’ to respond to e-mails en route, but they won’t shorten journey times in their first iterations, which diminishes the incentive to would-be early adopters.
Meanwhile, testing by automakers shows that the early stages of vehicle automation requires a ‘driver’ to be available to take over in certain environments and in some circumstances.
In testing it has been observed that these standby drivers have extraordinarily limited capacity to remain engaged in the task once they can remove their hands from the wheel, taking up to 10 seconds to respond to audible and visual warnings. Such human shortcomings leave some automakers questioning whether evolutionary transition steps to full automation should be skipped altogether, as a number of automakers are now doing.
Governments could hasten adoption by creating dedicated road lanes, but this would result in a significant increase in congestion on the remaining ‘human lanes’, disadvantaging those unable to afford access in the early stages.
Huge initial investment is required to enable autonomous vehicles to function efficiently; each autonomous vehicle generates a daily amount of data equivalent to 2,700 internet users, and cars will likely also need to communicate with the infrastructure itself.
To put this volume of data generation in context, should autonomous vehicles represent 30 per cent of total cars on the road, the amount of daily data creation would be equivalent to 1 trillion people’s worth of web usage.
More simple issues such as refreshing road markings and signs so that they can be reliably read by cameras fitted to autonomous vehicles will require investment in the tens of billions of dollars.
The key questions arising from the practical issues at hand give rise to the question of who will meet the cost of investment and oversight? Is it a cost for the taxpayer or the transport solution provider? Funding by the taxpayer would be viewed as regressive, while assigning costs to the transport solution provider would substantially increase its overall costs and bring into question its viability.
The investment opportunity lies less in the makers of the autonomous vehicles of the future that currently beguile much of the media. Rather it is in the less glamorous infrastructure that will support the new technologies and which will require investment on a large scale and offer the potential of attractive risk-adjusted rewards.
New trend emerging
Historically, infrastructure investment depended on ‘push’ from policy objectives. Now, technological change and experimentation in this area means investment is ‘pulled’ by market forces.
Regardless of whether autonomous cars come to dominate in five years, or 25 years, the direction of travel of future mobility solutions paints a clear picture of the investment needed and those infrastructure providers capable of delivering it.
Therefore, identifying the infrastructure providers best positioned to benefit from the march towards an autonomous vehicle future becomes the real challenge.
Competitive advantage lies with those transportation infrastructure providers with superior understanding of how different segments of commuters value their time, using methods such as dynamic road pricing.
As such, first movers in this market are exceptionally well positioned to capitalise on the autonomous vehicle trend at a very early stage.
There are further investment opportunities in utilities, where greater investment in renewables and charging infrastructure is needed. Furthermore, investment in communications infrastructure will also be required to support the heightened levels of data transmission.
In each instance we believe certain companies within these sub-sectors that enjoy supportive regulatory frameworks will enable investors to benefit from these themes.
In our view, this counters a common perception that listed and core infrastructure firms such as utility, communications and transportation infrastructure operators have growth avenues which are limited, and are little more than beneficiaries of record low interest rates. Instead, investors can gain access to growing, inflation-linked and stable cash flows which combined can offer compelling investment opportunities.
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