Once the stuff of sci-fi shows like Knight Rider, self-driving cars have evolved from the stuff of imagination to reality.  I still talk with people who aren’t aware that the Taxis of Skynet are already a technological reality- they are here, they are functional, and they are roaming the streets of Phoenix and Philadelphia as we speak. 

I am often asked by investors for ideas on how to invest in companies who stand to benefit from advances in technology and softening of regulatory environments to accommodate them.  In the spirit of the college basketball playoffs whose trademarked name I cannot mention here, I will draw a comparison to the world of athletics in this endeavor.  One can pick their favorite “team”, which I will be providing a cursory overview for you as it pertains to the current environment of the self-driving car industry, or one can attempt to capitalize on the success of the “sport” itself, which in the case of self-driving cars are those companies who focus on providing parts, components, chips, and sensors to the industry.

The industry has changed a lot since Tesla’s initial attempts at what they called “autopilot”, which was really just an Advanced Driver Assistance System and not one which was intended to allow drivers to watch Harry Potter movies while behind the wheel.  Though an NHTSA investigation following a fatal crash involving a Tesla and a tractor-trailer in 2016 noted that crash rates involving Tesla vehicles dropped by 40% after Autopilot was installed (nhtsa), in its current form it is not a true self-driving vehicle- yet. 

Beginning as lane departure warning systems first brought to market by Citroen in 2006, these ADAS have literally evolved into KITT in about a decade.  Though the technology companies have brought the loins share of innovation to the table, it is really the auto manufacturers to credit for paving the roads to today’s reality of fully self-driving cars by providing huge financial incentive for companies to pursue advancements and innovations to these systems.  A few examples of such systems include Volvo’s IntelliSafe Assist and Pilot Assist, Mercedes-Benz’s Distronic Plus with Steering Assist, Audi’s Adaptive Cruise Control with Lane Assist and Traffic Jam Assist, BMW’s Remote Control Parking and Driver Assistant Plus, and the list goes on.  And each of these names are part of a technology and manufacturing “team” which is aggressively pursuing and/or producing vehicles fully capable of functioning as self-driving cars.

Getting back to Tesla, all of their vehicles produced in the Tesla factory now have the hardware needed for full self-driving capability.  So what’s holding them back?  Stated specifically on their website is the following statement regarding regulatory approval:  “Please note that Self-Driving functionality is dependent upon extensive software validation and regulatory approval, which may vary widely by jurisdiction. It is not possible to know exactly when each element of the functionality described above will be available, as this is highly dependent on local regulatory approval.”  They go on specifically mention ride sharing for revenue:  “Please note also that using a self-driving Tesla for car sharing and ride hailing for friends and family is fine, but doing so for revenue purposes will only be permissible on the Tesla Network, details of which will be released next year” (tesla).   This leads me to believe that they could be planning to enter this market currently being dominated by Uber & Lyft as either a partner or a “green” competitor, and gives us insight into the huge potential societal impact of this technology.

To elaborate on such likely and possible impacts, here are a few points of consideration:

THE GOOD:  Three changes which will impact modern society more than we can possibly imagine

Real, pure, unadulterated (or minimally adulterated, you know those politicians) access to capitalism for the “little guy”:  Think about it.  You invest the capital to own a self-driving vehicle.  You read the Economist or listen to a podcast in the back seat with your feet up as your car takes you to the office, where you know you’ll be for at least the next five hours.  Make that ten, you packed your lunch today and don’t have to be anywhere offsite until the evening.  Your car drops you off, you hit a single button on your smartphone app, and off your car goes to earn you some cash while you’re at work doing the same.  Now you have an asset literally working for you, which only a few years ago was a privilege typically reserved for the business-savvy, employees of company-sponsored retirement plans, and the wealthy.    

Traffic Optimization:  From an emotional perspective, humans make dismal drivers at best.  We’re essentially monkeys with apposable thumbs and a nasty case of Alopecia.  We rubber-neck at accidents, we swerve through lanes while texting (oh act like you’ve never done it), we get all hot and bothered when someone cuts us off, and we muddle through traffic all stop-and-go in constant pursuit of the fastest (or least slow) lane as our blood pressure steadily creeps up throughout it all. 

From a logistical perspective, our entire traffic system was built to accommodate our monkey-brains.  Red left-turn arrows, really?  A 45 mph speed limit at 4:30am when there are eight cars in a 1 mile radius?  And don’t get me started on carpool lanes.  If there was even a single lane dedicated to self-driving vehicles which could travel a couple feet (or even a few inches, these new chips are insanely fast) from each other, this would do wonders to decongest traffic and slash commute times for everyone.  They would also be able to safely travel at faster speeds.  This will not only save us our most precious asset, our time, but also dramatically reduce the negative environmental impacts associated with driving like monkeys.  

Reduced and/or shifted costs onto the users:  From an economic perspective, roads are a raw deal.  They are a cost generated from a percentage of earned income regardless of usage, and the benefits are disproportionately utilized.  A trucking company has a lot more vested interest for an interstate highway system than a technology executive who lives in Silicon Valley and racks up airline miles like the North Carolina offense scores points.  A free-market solution in which the economic beneficiaries of our road systems absorb the full or bulk of the associated costs is a reality in a world in which data can be easily collected on economic gains versus miles driven.  A data-driven system would reduce government overhead, slash tax burden, and dramatically increase the efficiency of our road systems via funding transportation corridors based on quantifiable economic impact versus the whims of city planner.

THE BAD:

Hackers:  This has already happened.  Hackers have already hacked everything from infotainment systems to keyless entry systems to do everything from accessing a vehicle to taking control of its systems to turning it off entirely while its occupants cruised down the freeway at 70mph (2025ad).  There is no way to make any system 100% hacker-proof.  It has, it does, and it will continue to happen.  Because (at least in part) of this concern, there will likely be a segment of the population which will never want to personally adopt a fully-self driving car.  This means that, at least on public roadways, regulations and traffic systems must be designed or retrofitted in a manner which is accommodative to both self-driving and human-driven vehicles.

Lawyers:  A self-driving car carrying a single occupant detects it is about to get into an unavoidable collision (probably due to the fault of some human driver).  Within milliseconds it has already identified its only two viable options:  Swerve left, likely sparing the lives of three pedestrians and two occupants of another self-driving vehicle but likely killing its own occupant, or swerve right, which would likely save its own occupant but likely kill three pedestrians and possibly kill or injure the two occupants of another vehicle.  Which does it choose?  And what if the vehicle which caused the accident wasn’t a human driver but was hacked, whose liability is it outside of the hackers’?  The vehicle’s manufacturer?  The owner?  The human backup driver?  We are living in a time when the philosophical, legal, and ethical considerations associated with this technology are lagging the actual technological capabilities themselves. 

Politicians:  After California played hard-ball with Silicon Valley, Uber, Google, and Tesla took their testing across state lines to Arizona.  Arizona and Philadelphia are currently the two major testing grounds for this technology, as the politicians of these states have decided to bind the companies with more accommodative fetters for the privilege of operating on “their” roads.  Much like a fickle young person seeing their former lover happy with a new mate, California appears to have changed their tune all within the last month as their regulators are now reportedly aiming to allow self-driving cars on California roads by the end of the year (cnn). 

As Uber took years (and is still held back in some places) to break through to markets “protected” by syndicates of crooked politicians nursing at the teat of taxi cab lobbyists, there will undoubtedly be a combination of real-world issues to solve (liability, infrastructure) as well as bureaucratic red tape to wade through as this industry reaches the mainstream.  To complicate things further we have regulatory measures which vary on a state-by-state basis proposed by multiple departments (DOT, DPS) as well those to contend with on the Federal level (NHTSA).  Though I’m not certain which “team” will come out with the best technology or make the most profits, I have no doubt in my mind that the politicians will make a mess of things as they play.

Other Nuisances:  Back to the monkey brains.  You’ve had a bad day, you’re running a few minutes late to an important meeting, and this machine-car has the gall to cut you off.  Or at least that’s the way you see it- hello, adrenalin.  You know that it is programmed to be a defensive driver, so it’s time to teach that stupid machine a lesson.  You catch up, cut into its lane about to ‘pit maneuver’ yourself, and it slows down allowing you to merge in front of it.  Sweet victory!  I imagine that a roadway sprinkled liberally with machine drivers would be a lot like driving through the streets of Portland, Oregon.  You’re just visiting, so there you are changing lanes every 10 seconds while trying to follow your GPS.  Everyone must be 15 minutes ahead of schedule to get to their yoga class because they’re all slowing down way beyond what is appropriate to allow you to merge in front of their Prius.  And here you are trying to predict their moves, but since you’re from the Southwest you’re used to everyone driving like stimulant-addicts 10 minutes after a relapse.

In any world where public roadways are occupied by a combination of machine and human drivers, I suspect that there will be a sizable segment of the latter which learns the driving habits of the former and becomes accustomed to taking advantage.  And if a software update comes along to mitigate this issue and suddenly changes the driving habits of the machines, if the monkey-driver doesn’t get the memo that next bully-move could have some nasty consequences. 

Self-Driving Cars:  The Teams and their Players

So now that I’ve covered some societal considerations, let’s get back to the task at hand – a look at some of the companies and the teams they have formed to contend for the dominant position in the self-driving vehicle market.

Uber and Volvo:  The #1 Seed

Volvo’s partnership with Uber makes it a force to be reckoned with.  With Uber controlling between 84%-87% of the US ride-hailing market (inc), they appear to have the most to gain in the short-term with the advancement of self-driving cars – for now.  They continue to invest and expand their squad; in August 2016 Uber spent $680 million on Otto, a self-driving car startup led by former Google engineers (cnn). 

Lyft and GM: The # 2 Seed

GM has invested $500 million in Lyft, and together they have rolled out “Express Drive” which allows new Lyft drivers who don’t have a suitable car for Lyft, to rent a GM vehicle at a special discount rate subsidized by Lyft.  They have also planned on testing a fleet of self-driving cars. 

According to The Information, GM wants to purchase the remaining 89% of lyft which they don’t already own, but Lyft has turned them down (theinformation).  GM also spent over $1 billion to acquire Cruise Automation in 2016 (fortune), which originally developed a system to make existing cars into self-driving vehicles. 

Team Tesla:  The Dark Horse

If Tesla is able to actually put together and monetize a ridesharing app for its customers it could be a fantastic opportunity for their company, and one which sounds to me like a move out of Elon Musk’s playbook.

What’s more exciting is that their website claims that users who want to monetize their vehicles for ridesharing must go through their channels, but even if they allow their vehicles to be used for Uber or Lyft (likely for a fee), the adoption of their own systems would likely be huge not only from the environmentally-conscious crowd, but also due to a simple force- The power of default. 

Remember when Apple Maps first came out?  You had a program which was complete garbage at worst and a pathetic attempt to compete with Google Maps at best, and yet it gained massive adoption because it was the default choice.  It’s essentially status quo bias- default is easy.  Monkeys like easy. 

Even if its drivers choose not to monetize the vehicle for ridesharing purposes (much of its fleet are higher end luxury cars, after all), given the hardware to enable self-driving capability already installed on all new Tesla vehicles they seem to be in a very strong position.

Intel and BMW, Mobileye:  The Power Team

Intel, the 800-pound (or $170+ billion) gorilla of the chip world, went the “growth by acquisition” route and recently announced the purchase of what many consider close to the “pure play” on self-driving cars, ADAS industry-leader Mobileye.  Mobileye’s system-on-chip design in the EyeQ family of products currently serves 27 OEMs (mobileye) in the pursuit of “self-driving-car championship status”, and had supplied hardware to Tesla before it switched to Nvidia.  This strategic move appears to pit Intel against Nvidia on the consumer side.  Intel also has partnered with BMW to provide chips for their self-driving car which they are hoping to produce by 2021 (nytimes). 

NVIDIA and Audi, Bosch:  The Diversified Offense

Nvidia has their hat in the game, and seems to be going the machine learning route; they announced recently that they had created a car computer system capable of recognizing patterns and learning behaviors with impressive accuracy, on the order of 24 trillion calculations per second.  They teamed up with Bosch, which supplies sensors and parts to Tesla’s self-driving cars, and Audi will be putting their processing units into their newest models.  They also have a diversification strategy in its partnership with PACCAR to develop self-driving system for trucks, as autonomous trucking may be an even larger market than autonomous cars.  From a logistics perspective, the gains in efficiency could be dramatic given safety legislation governing mandatory break periods for human drivers to accommodate sleep.  Legislation aside, no amount of triple espresso shots will ever empower a human to compete with a machine on this front. 

Team Google/Waymo

Google, via their spinoff Waymo, has equipped vehicles from Toyota, Audi, and Chrysler as well as developed their own custom vehicle.  They have been investing heavily in their mapping and navigational technology long before any self-driving car hit the road, and you can already order an Uber straight from Google Maps.

Baidu & Ford, Velodyne: The Globe Trotters

Last year Ford and Baidu both invested $150 million into Velodyne LiDAR in an effort to help them reduce the cost of their LiDAR systems.  Many other companies, including Waymo, also use the Velodyne LiDAR systems for their self-driving vehicles.

Like all good managers, the ‘captains’ are continuing to grow their teams.  In February 2017 Ford announced it would invest $1 billion over five years into Argo AI, a startup group led by Google and Uber veterans, to assist their existing team in developing their self-driving car.

The Play: How to Position for Self-Driving Car Madness

Ride-hailers such as Uber and Lyft probably have the most to gain from adoption of self-driving cars, as lobbyists, lawyers, special interest groups (taxi companies), and politicians seem ever keen in efforts to consider the 10-99 contractors “employees” to pursue lawsuits for unpaid benefits and overtime. 

You could look at investment opportunities in the auto manufacturers from your favorite aforementioned “team” as well, and there’s a strong case for that.  The average age of automobiles is constantly hitting new all-time highs, and has steadily increased since the 90s as demonstrated in the chart below:

Chart from Bureau of Transportation Statistics

With an opportunity for the owner to generate revenue from their purchase, it could be the final motivational prompt to get consumers to the dealership for a new purchase, which of course would be great news for the stockholders of auto manufacturers.  If that turns out to be the case, on the surface it may seem that this might mean rough times ahead for auto parts companies like Autozone or Checker O’Reilly (ORLY).  Explore this further and you realize that if a wave of new vehicle purchases did ensue, the corresponding increase in supply of older vehicles listed for sale would decrease those prices to more affordable levels to open up opportunities for growing families to purchase second/third or special-purpose vehicles and allow lower-income families the opportunity to purchase a vehicle who would not otherwise be able to afford them.

Picking teams competing in this arena can be exciting, but regardless of how much of a basketball fan you are it is a few clicks south of impossible to pick a perfect bracket for the college playoffs.  It will be even more so to predict how the race to a scene from i-Robot will pan out.  As it pertains to the college playoffs, we can be certain about a couple of things- the television networks will get increased viewership, and manufactures of team jerseys (especially the winning team) will generate increased sales. 

I am equally certain that regardless which automotive and technology alliances capture the most market share in coming years, they will all be using the same types of technology to operate- chips, sensors, and cameras, to name a few.  So instead of putting my “chips” on any particular team or bracket order this year, I think that some of the best opportunities are in the chips themselves. 

Intel (INTC), Nvidia (NVDA), Qualcomm (QCOM), and Texas Instruments (TXN) are the big four, and though they stand to greatly benefit by advances in the utilization of self-driving cars, these are large and well-diversified companies and are not gambling their success on the future of self-driving cars.  A purer play might be sensor companies like Delphi Automotive (DLPH), Bosch, and Mobileye (recently snatched up by Intel) who focus on this sector specifically. 

Other chip manufacturers with some exposure to automotive technology include NXP Semiconductors (NXPI), which has a portfolio of automotive hardware like temperature sensors and infotainment systems.  Cypress Semiconductor (CY) supplies hardware including memory, chips for wireless radio, power management, and other one-off functions to automotive manufacturers.  On semiconductor (ON) develops imaging sensors for parking assistance and camera systems used for rear and surround-view, while Xilinx (XLNX) makes embedded chips for cameras and vision systems, which in a self-driving car are all over the place.  Also of note is Maxim Integrated Products (MXIM), as they develop chips for infotainment systems, electric car battery management, and high speed communications for vehicle cameras. 

Last Word

To say that self-driving cars is an exciting technological advancement is a laughable understatement.  Just around the corner is a world of individual economic empowerment for not just a small fraction of society, but for the whole.  While intermediary companies like Airbnb delivered a convenient portal to the powers of passive income from capital for the middle-class, self-driving cars have an opportunity to deliver an even easier portal to those who cannot yet afford the down payment or do not yet have the credit worthiness required to purchase a home.

With a little bit of cooperation from our governments (a dramatic speculation, I know) the costs associated with our road systems can be more equitably distributed, leaving more money in the pockets of consumers to be able to spend on economically-stimulating goods and services.

The impacts to our environment, physical health, and well-being will be a breath of fresh air (see what I did there?).  The time saved will be nice, but at over 33,000 per year (cdc) the lives saved will be even more profound.

There will be plenty of hurdles to overcome along the way and several missteps will no doubt be made throughout the process.   From an economic perspective though, this technology not only presents some attractive opportunities from the standpoint of investment opportunities in the manufacturers and technology companies themselves, but the societal changes which will likely ensue will themselves serve collectively as a catalyst for global economic expansion.

Sources: 

• http://money.cnn.com/2017/02/10/technology/ford-argo-self-driving-cars/
• https://www.forbes.com/sites/samabuelsamid/2016/08/16/ford-and-baidu-lead-new-150-million-investment-in-lidar-maker-velodyne/#2a03ab121de7
• https://www.bloomberg.com/news/features/2016-08-18/uber-s-first-self-driving-fleet-arrives-in-pittsburgh-this-month-is06r7on
• https://arstechnica.com/cars/2016/05/from-audi-to-volvo-most-self-driving-cars-use-the-same-hardware/
• http://www.marketwatch.com/story/want-to-invest-in-self-driving-cars-check-out-the-chips-2016-08-26
• https://www.theinformation.com/gm-expressed-interest-in-lyft-at-6-billion
• http://fortune.com/2016/08/12/gm-lyft-acquisition-interest/
• https://www.forbes.com/sites/davidkiley5/2016/08/16/why-gm-wants-to-takeover-lyft-and-lyft-is-saying-no/#3525e2c72310
• https://www.nytimes.com/2016/11/29/business/intel-to-team-with-delphi-and-mobileye-for-self-driving-cars.html?_r=0
• http://www.inc.com/business-insider/uber-says-87-percent-us-ride-sharing-market-theirs.html
• http://money.cnn.com/2017/02/10/technology/ford-argo-self-driving-cars/
• https://arstechnica.com/cars/2016/05/from-audi-to-volvo-most-self-driving-cars-use-the-same-hardware/
• http://fortune.com/2016/08/23/mobileye-delphi-self-driving-cars-2019/
• https://www.forbes.com/sites/samabuelsamid/2016/08/16/ford-and-baidu-lead-new-150-million-investment-in-lidar-maker-velodyne/#2a03ab121de7
• https://static.nhtsa.gov/odi/inv/2016/INCLA-PE16007-7876.PDF
• https://www.tesla.com/autopilot
• https://www.2025ad.com/in-the-news/blog/hacking-at-highspeed/
• http://money.cnn.com/2017/03/10/technology/california-dmv-self-driving-car/
• https://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_transportation_statistics/html/table_01_26.html_mfd
• https://www.cdc.gov/nchs/fastats/accidental-injury.htm
• http://www.mobileye.com/our-technology/

Views expressed are not necessarily those of Raymond James & Associates and are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur.  Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence.  There are additional risks associated with investing in an individual sector, including limited diversification.  Raymond James & Associates, Inc., Member New York Stock Exchange/SIPC