Special thanks to Austin Bohlig for his work on this note.
Today, we are introducing our 2040 Automotive Model, available here, detailing our projections for electric vehicles, autonomous vehicles, and fleet services through 2040.
The global automotive industry is quickly approaching a transformation that should fully take shape by 2040. While 20 years doesn’t seem very far away, keep in mind that technology is advancing at an accelerating pace — the next 20 years of innovation will see changes equivalent to what we’ve seen over the last 50 years. We expect to see three major automotive themes emerge: 1) the transition to electric, 2) fully autonomous vehicles, and 3) a higher percentage of people relying on ride sharing services as their primary source of transportation. We believe these three themes will create enormous market opportunities. While some of the traditional auto players will capitalize on these emerging themes, the competitive landscape will change dramatically as more technology companies enter the space to bring these revolutionary technologies to market.
Theme #1 – Transition to Electric
According to Bloomberg New Energy Finance, 84.0M new passenger cars and light commercial vehicles were sold globally in 2016, up ~5% y/y. Of all vehicles sold, 81.5M were internal-combustion engine (ICE) vehicles, 2.0M were hybrid, and 440K were electric. While electric vehicles only accounted for <1% of new vehicles shipped in 2016, this segment of the market has seen tremendous growth over the past 4 years, and we believe we are nearing an infection point for demand of electric vehicles. By 2033, we believe electric vehicles will surpass 50% of total market share. By 2040, we believe 86% (87.9M) of new cars sold will be electric vehicles; from 2020 – 2040 the electric category will experience an ~18% unit CAGR, while ICE vehicles will decline ~13% over that same time period.
Over the next 20 years, electric vehicles will become more affordable, but due to the advanced sensors, onboarding computing processors, and other components that will enable fully autonomous driving capabilities, we expect electric car ASPs to increase modestly. That said, in order for ICE and hybrid vehicles to compete, these categories will see prices steadily decline. In 2040, we believe the global passenger and light vehicle automobile market will represent a $3.8T annual market opportunity, up from $2.9T in 2016. The bulk of the growth will be driven by electric vehicle demand, which we anticipate to increase from $20B in 2016 to $3.4T in 2040, representing a ~18% CAGR.
While affordability will be a meaningful catalyst to electric car adoption, there will be multiple additional catalysts driving the shift to electric vehicles:
- OEMs Focus Towards Electric – Today, and for the next 20 years, we believe the leading electric car OEM will be Tesla, but we anticipate almost all other traditional car manufacturers will eventually switch their focus to electric vehicles. Volvo was one of the first to do so, and recently announced all new cars they manufacture will be electric or hybrid starting in 2019. We anticipate other OEMs to make similar announcements in the coming years, providing additional tailwinds to the industry.
- Government Intervention – We believe we will see legislation over the next 5 – 10 years enticing consumers to buy electric vehicles through subsidies; gas powered vehicles may even from the road. France and Britain plan to ban the sale of gas and diesel vehicles beginning in 2040. Scotland recently announced similar plans but with an implementation date of 2032. While this may seem extreme, it’s not unprecedented, even in the US: In the early 1900s, when the Model T began shipping in volume, the government banned horses from operating on the same public roads as automobiles.
- Transition To Fully Autonomous – Although autonomous cars can take the form of ICE or hybrid vehicles, the majority of autonomous vehicles deployed will be electric cars because there are many synergies between the technology implemented in electric vehicles and what will be incorporated in fully autonomous systems. In addition, given our thesis that most car OEMs will switch their focus to electric, it only makes sense autonomous cars will follow suit.
Theme #2 – The Rise of Self-Driving Vehicles
Today, 99.9% of all passenger and light commercial vehicles on the road have little to no automation capabilities. However, Tesla and a few additional OEMs have made great strides in introducing what the industry classifies as Level 2 (Partial Automation). By 2040, we expect that over 90% of all vehicles sold will be “Highly” and “Fully” autonomous systems, classified as Level 4 and 5 automation, respectively. Here’s a brief definition of the different forms of automation according the National Highway Traffic Safety Administration (NHTSA):
- Level 0: No Automation – A human controls all the critical driving functions.
- Level 1: Driver Assistance – The vehicle can perform some driving function, often with a single feature such as cruise control, but the driver maintains control of the vehicle.
- Level 2: Partial Automation – The car can perform one or more driving tasks at the same time, including steering and accelerating, but still requires the driver remain alert and in control.
- Level 3: Conditional Automation – The car drives itself under certain conditions, but requires the human to intervene upon request with sufficient time to respond, but the driver isn’t expected to constantly remain alert.
- Level 4: High Automation – The car performs all critical driving tasks, monitors roadway conditions the entire trip, and doesn’t require the human to intervene. But self-driving is limited to certain driving locations and environments.
- Level 5: Full Automation – The car drives itself from departure to destination, and the human is completely removed from the process.
This will not be a gradual transition from one level to the next; we expect most players to skip Level 3, going straight from Partial Automation to High or Full Automation. We also view Level 4 and 5 as very similar levels of automation; Level 4 has a steering wheel but Level 5 does not. So, in our forecast we combine Level 4 and Level 5 into one category labeled “Fully Autonomous.”
Self-Driving Car Rollout Begins in 2020, Inflects in 2028
We estimate that ~130K Level 2 vehicles will be sold in 2017; over the next few years, the industry will see a significant acceleration of Level 2 vehicles delivered, occupying a growing percentage of new vehicles sold through 2033. However, we believe 98K Fully Autonomous vehicles (Level 4 and 5) will enter the market in 2020, which is when the transition to self-driving will start to take shape. While some Level 1 and 2 systems will still be sold in 2040, the two groups combined will account for <6% of all new vehicles delivered, and >94% of systems will take the form of fully automated vehicles. It will take time for fully automated vehicles to gain meaningful traction, largely due to legislative hurdles, but beginning in 2028 we believe the industry will see an influx in demand for Level 4 and 5 automobiles. We expect the industry will go from shipping 98K Fully Autonomous vehicles in 2020 to 96.3M in 2040, representing a 41.2% CAGR over that time frame.
Leaders in Autonomy
While there will be many companies that will benefit from the transition to fully autonomous vehicles, a few companies are already positioning themselves to be early key players:
- Tesla – Tesla has already established their dominance in the electric vehicle market, and we expect their commanding market position to prevail through 2040. We estimate that Tesla currently controls ~20% of the global electric vehicle market, and although we anticipate competition to increase in the years to come, we believe Tesla can maintain low-to-mid teens market share through 2040. Almost all Teslas today incorporate Level 2 driving automation, and while Tesla is hoping to get fully autonomous cars on the road by 2019, we believe their near-term focus will be ramping production of the Model 3 and less on getting fully autonomous cars on the road. That said, we view Tesla’s leadership around autonomous driving technology and AI is a step up from almost everyone else, and expect larger deployments to begin in 2020.
- Waymo – It is still not completely clear what Waymo’s go-to-market strategy will be with regards to autonomous cars, but the company will have a meaningful presence. Waymo’s biggest competitive advantage thus far is the millions of miles their self-driving cars have driven and the terabytes of data gathered, which they can use to train their self-driving car algos. Waymo has already launched a ride sharing service in Phoenix, AZ, and we wouldn’t be surprised if they sell a Waymo branded self-driving car or develop a self-driving car OS that they license to third party car OEMs.
- Traditional OEMs – It will be a significant challenge for traditional car OEMs to compete as we transition to electric and full autonomy, but there will be some legacy car brands that effectively transition by leveraging decades of car manufacturing expertise to compete with Tesla and Waymo. Ford is one traditional car company that has begun the transition, including promoting a CEO with deep autonomous experience and acquiring leading startups in the space (Argo). While some of these traditional car companies will be able to develop self-driving systems internally, we believe the more effective way will be to enter the space via acquisition.
- Start-Ups & Others – The self-driving car industry is still in the very early innings, and other tech giants such as Apple, Uber, Lyft, and relatively unknown startups will deliver meaningful innovation. There are many technological gaps that still need to be solved before self-driving cars are fully deployed on public roads.
- Apple – We continue to expect Apple to play in the self-driving car market, possibly bringing a self-driving car to market, or, more likely, developing an autonomous system for self-driving cars. We’ll cover this with more detail in a future note.
Theme #3 – Transition to Ride Sharing Services
In addition to the world transitioning to electric and autonomous vehicles over the next 20 years, we expect an increasing number of consumers will forgo owning a car and rely fully on ride sharing services for transportation. While we anticipate the number of cars sold will continue to increase through 2040, many of these new cars will go directly towards ride sharing services.
We estimate there were 1.3B passenger and light vehicle cars in use in 2016, of which 5% were dedicated to ride sharing services. In the coming decades, as ride sharing becomes more cost effective and reliable, the percentage of cars dedicated to ride sharing services will increase steadily. By 2040, we estimate that 68% of all vehicles in use will be dedicated to fleet services. As a result, the number of cars personally owned by individuals will decrease at a -2.0% CAGR from 2020 to 2040. Today, companies such as Uber and Lyft dominate the ride sharing market, but we anticipate other leading tech companies (Tesla, Waymo, etc.) and traditional car OEMs to introduce a ride sharing services as well. We also envision a future where individuals that own an autonomous car are able to deploy the system to a fleet service when they are not using the car (e.g., while at work), extracting value from the car’s dormancy.
The global automotive industry is quickly approaching a paradigm shift, and the types of vehicles on our roads and the competitive landscape in the car market is going to change significantly by 2040. Level 1 and 2 automated vehicles will still be sold, we estimate that >94% of new cars sold will be fully automated in 2040. Some of the traditional auto players will successfully transition to these emerging themes, but several tech companies are most likely to become leaders in the space. Over the next several decades, the biggest headwinds to full autonomy will likely be legislative rather than technical, but the safety and efficiency benefits of autonomous cars will provide a strong tailwind to broad public acceptance and rapid market growth.
Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.