Everywhere you look, automotive companies are running into shotgun technology marriages.
BMW (BMWYY) and Mercedes (DDAIF) announced on Feb. 27 a long term agreement to pool their autonomous car efforts. Volkswagen and Ford (F) executives did the same last week.
Autonomy is coming. It’s going to be expensive and may demolish century-old business models.
The first gas-powered passenger car debuted in 1886. The Benz Motorwagen had one cylinder, two strokes and three wheels. It was slow moving and utilitarian, a horseless carriage with a dependable power plant.
Forged in the factories of Wolfsburg, Detroit and elsewhere, cars evolved into emblems of national ingenuity and status. The industry thrived and economies of scale led to lower prices and multi-car families. In the summer of 1969, General Motors employed 853,000 workers worldwide.
Factory automation cut demand for workers. Now, vehicle autonomy cars may kill the industry as we know it.
If cars can self-navigate, they go from being symbols of ingenuity and status to efficient, utilitarian people movers. Most cars sit idle in parking lots or in home garages 95% of the time. They are constantly depreciating in value, while accruing insurance and maintenance costs. A safe, driverless car for individuals or rideshare would drastically change the economics of mobility.
Riders could use their smartphones to summon cars of their choice. Fares would be calculated in advance, and on per mile basis, just like a current Lyft or Uber ride. And when the vehicle was no longer needed, it would drive away to its next fare.
A widely cited 2017 study from researchers at ETH Zurich, a Swiss science, technology and engineering university, predicted current taxi and rideshare fares could be slashed by 85% through the use of autonomous technologies.
You can imagine the immediate implications. Cities would become more dense, with fewer parking spaces. Traffic jams, road stress and fatalities will be largely eliminated. Smog would be reduced. And car ownership would become the domain of hobbyists except for people who wish to travel relatively long distances outside their metro area.
The industry is getting ready. A 2018 PowerPoint presentation from Volkswagen paints the picture of driverless long haul trucks, mobile mailboxes and urban mobility pods. It also plans for private vehicle sales to be as little as 18% of auto sales a decade after autonomous vehicle adoption.
That assessment is not far off the conclusions drawn in “Reimagine Places: Mobility as a Service,” a 2017 research report from KPMG, the global professional services company. When consumers get the opportunity to take back the time spent driving cars, they are likely to seize it with both hands.
There are plenty of skeptics, such as driving enthusiast Jeremy Clarkson. The 58-year-old former host of BBC’s Top Gear, believes autonomous cars will not happen in his lifetime.
Executives at BMW, Mercedes, Volkswagen, Ford, General Motors and every other car company beg to differ. They are not only pooling their resources to get to market faster, they’re also buying up ride-hailing businesses to make sure they are not left out of that market.
Their motivation is fear, pure and simple. Autonomy is coming fast.
They know their private ownership business model makes no sense. They are watching disruptors in Silicon Valley and China push new business models based on miles travelled and future autonomy.
Last October, the Wall Street Journal reported leaked investment banker documents showing an Uber IPO might be worth $120 billion to the ride hailing company. That eye popping figure is more than the combined values of General Motors, Ford and Fiat Chrysler. Lyft’s S-1 prospectus, a roadmap to its pending IPO, was released on Friday.
The way for investors to get ahead of this trend is connected car platforms. These back-end networks ingest the deluge of digital information modern cars produce. Today, this data informs cutting edge driver assisted features like automatic braking, advanced cruise control and lane assist. Tomorrow, the information will be the backbone of autonomy.
The leader, bar none, in that space is Microsoft (MSFT) . The Redmond software giant is quietly working behind the scenes to build what it calls the Microsoft Connected Vehicle Platform, which is built on top of its Azure cloud platform. Renault Nissan became the first to commit to it in January 2017. Volkswagen signed on in October last year.
Microsoft also has cloud solutions relationships with Volvo, BMW, Toyota and Ford.
Boston Consulting Group estimates the market for comprehensive vehicle connectivity will be $159 billion by 2020. The cloud solutions marketplace is expected to reach $66 billion by 2022.
Microsoft shares trade at 25.6x forward earnings. The market capitalization is $860 billion. The stock is up 10.9% in 2019, and 20.5% over the previous 12 months. While this is not cheap, the outlook for the business is extremely strong.
Long term-oriented investors should buy Microsoft into any significant weakness.