Take Cover: Collateral Damage from Next Transportation Wave

Special thanks to Austin Bohlig for his work on this note. 

Last week we introduced our 2040 Automotive forecasts, available here, detailing our projections for electric vehicles, autonomous vehicles and fleet services. We believe the global automotive industry is quickly approaching a transformation during which we expect to see three 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. While we believe these three themes will create enormous market opportunities, we also believe this transformation will upend many multi-billion dollar industries:

  • Traditional car OEMs
  • Oil companies
  • Auto parts suppliers
  • Insurance companies
  • Ride sharing drivers

Traditional Car OEMs. While we believe some traditional car OEMs can and will transition to the autonomous future, we anticipate the road ahead will be bumpy for most and the automotive competitive landscape with see a complete overhaul. Companies such as Tesla and Waymo are meaningfully ahead in the race to fully autonomous systems, and see them as the leading players over the next 20 years. That said, we expect a handful of traditional carmakers to compete on strong brand recognition and leverage their car manufacturing expertise. While some of these traditional car companies will be able to develop self-driving systems internally, we believe the more effective strategy will be to enter the space inorganically.

Oil Companies. We estimate that by 2040, 86% of all new passenger and light vehicles sold will be purely electric, which is up from less than 1% today. Catalysts to the shift to electric cars will include affordability, OEMs focused on electric technologies, government intervention, and the rollout of fully autonomous vehicles. As we migrate towards these systems driven by alternative energy, the world will consume less gasoline. According to The WSJ, transport fuel accounts for ~50% of crude oil demand, with cars alone accounting for 25% of total demand. While leading oil companies such as Exxon and Chevron believe peak oil demand will not occur until after 2040, we believe the shift to electric puts oil companies at significant risk, given the amount of oil the Auto industry consumes. We also believe consumers will increasingly rely on ride sharing services, which could result in the number of total cars on the road to go down, and, in-turn, negatively affect oil consumption.

Funding Budgets. Taxes received on motor fuels is a key source of funding for road construction projects; however, as we consume less gasoline, states will need to find new ways to generate tax revenue. Political leaders have introduced bills and other legislation on ways to tax drivers on the road who are utilizing alternative energy systems. For example, some states charge an annual fee ranging from $40 – $300 to use electric vehicles on their roads. Other states have recommended taxing the number of miles one drives on the road, or we believe states could increase the tax applied to fleet service companies. Bottom line is states will need to be creative to implement new tax initiatives in order to fund infrastructure projects, but at the same time not be too much of a burden on the consumer.

Auto Parts Suppliers. We also believe tougher times lie ahead for auto parts suppliers such as O’Reilly Automotive (ORLY), AutoZone (AZO) and Advance Auto Parts (AAP). Electric vehicles have far fewer moving parts under the hood than internal combustion engine (ICE) vehicles; in-turn, they require less upkeep and maintenance. For example, we conducted a Tesla cost of ownership study in July and found that there are only 18 moving parts in Tesla’s engine, compared to about 20,000 in the average ICE vehicle. While Tesla may be a step ahead of everyone else, we believe other electric vehicles will also have significantly fewer moving parts than traditional cars. With fewer oil checks and other engine related issues, demand for auto parts and services will decline. Furthermore, as more autonomous cars enter the market with vehicle-2-vehicle communication technologies, we believe the number of accidents that occur annually will meaningfully shrink; lower demand for exterior work offers additional headwinds for the industry.

Insurance Companies. With self-driving cars reducing the number of accidents on the roads, not only will the need for body work reduce, but more importantly, the number of casualties caused by car accidents will decline, both of which will reduce insurance premiums for consumers. Additionally, fewer consumers will need to carry car insurance if they rely solely on ride sharing services for their primary source of transportation. While we believe it will take time for autonomous cars to be fully deployed on common roads, we believe 98k Fully Autonomous vehicles (Level 4 and 5) will enter the market in 2020, and soon after begin to ship in higher volumes. Although we believe Level 1 (Driver Assistance) and Level 2 (Partial Automation) systems will still be sold in 2040, we estimate 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.

Uber, Lyft and Taxi Drivers. As the transportation transition plays out, we expect consumers to increasingly rely on ride sharing services. We estimate that in 2016, 5% of all passenger cars and light vehicles were dedicated to ride sharing services. As ride sharing becomes more cost-effective and reliable, we believe that by 2040 68% of all vehicles in use will be dedicated to fleet services. For the foreseeable future, Uber and Lyft drivers alike will benefit, due to the increased demand for these services. However, eventually most fleet services will roll out fully autonomous systems and eliminate drivers from the equation. Both Uber and Lyft are investing heavily in fully autonomous driving technology; we also anticipate Tesla and Google’s Waymo entering the ride sharing market.

Parking Lots. With few car owners and more fleet service users, cities will no longer need the parking capacity to store these cars. While at first this will likely hurt companies that own parking ramps, we believe many of these locations lie on valuable real-estate, which may be sold to commercial and residential real-estate developers for an attractive premium. That said, parking lots will not completely go away because fleet services will need locations to store their autonomous systems when they are not in use.

Bottom Line. While the transition to electric vehicles, fully autonomous systems, and fleet services will create multi-billion and even trillion-dollar market opportunities, it will also come at the expense of other industries such as the traditional car OEMs, the oil & gas sector, insurance companies, and ride sharing drivers. However, we believe the emergence of these themes will be a significant net positive to society, because it will make our roads safer.

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.