Technology Breakthroughs Paving Way for Automobile Industry Transformation

While the $2 trillion auto industry recorded strong sales in 2016, its future fleet is expected to look and perform a whole lot different.

All of the big automakers are focusing their research and development efforts on electronic, self-driving futures. Tech firms have joined the race too – with names like Apple, Google, Samsung, Amazon, Intel and Uber spending significant time and money on driverless technology. In fact, South Korea’s Ministry of Land, Infrastructure and Transport gave Samsung approval in early May to start testing its self-driving technology in Hyundais on its roads.

Insight on innovation and an auto industry outlook are provided by a credit research analyst at Loomis, Sayles & Company. And Mirova’s CIO, sustainable investing, looks at global megatrends reshaping transportation needs, the auto industry, and investment opportunities.

Our Panel Responses

Steven Bocamazo
Steven Bocamazo

Associate Director of Credit Research Loomis, Sayles & Company

The global auto industry is on the precipice of its largest technological transformation since its birth more than 100 years ago. Global automakers are making massive investments in the development of electric vehicles (EVs) and autonomous vehicles (AVs), also known as driverless or self-driving cars. All of the major automakers, as well as the supplier base, are preparing for these innovations.

Toward that end, we have seen automakers make acquisitions of companies that possess key technological competencies for these initiatives. Meanwhile, large multi-national firms such as Intel and Samsung, which previously had no major presence in the auto supplier base, have recently acquired or will soon close on acquisitions of previously independent suppliers that are focused on technologies which are critical for autonomous driving.

While an increasing number of EV models are currently available, their penetration rate among total vehicle sales is quite small, especially in the U.S., given their higher cost as well as the presence of low gas prices. We expect the EV sales rate to accelerate next decade, especially in China and Europe, given increasingly stringent vehicle tailpipe emission standards. Additionally, the introduction of AVs, most of which are also likely to be EVs, will contribute to a global fleet less reliant on the internal combustion engine.

Innovation & disruption
The rise of vehicle sharing services, such as Uber, may also pose both future challenges and opportunities for the auto industry. At present, it is readily apparent that the rise of ride sharing has negatively impacted demand for traditional taxi and limousine services, but not so much for the automotive industry given the continued rise in vehicle sales. Should ride sharing become a ubiquitous service, as expected, it could significantly reduce demand for private vehicles, particularly in compact urban areas where the cost of personal vehicle ownership is high. In an effort to be participants in this phenomenon, automakers are entering partnerships with Uber and Lyft on matters such as AV development. General Motors has gone as far as taking an ownership stake in Lyft.

AVs are being tested in controlled areas as well as the open road. In addition to testing and refining the technology, some of which is currently available on vehicles (e.g., Advanced Driver Assistance Systems), many hurdles remain involving insurance issues, infrastructure requirements and government regulations. These must be addressed before AVs become commonplace on our local roads and highways. However, there is little doubt that AVs will be on the road over the next three to four years, though we should expect the roll-out to be slow and deliberate.

Industry outlook
The global auto industry completed a successful year in 2016, driven by solid sales performance in the U.S., China and Western Europe. However, South America and Russia continued to post weak sales figures due to underlying economic difficulties. While we expect continued growth in global sales in 2017, the underlying fundamentals are weakening in two of the most important markets – the U.S. and China.

A mature market, an affluent customer base and a growing driving population make the U.S. a very desirable market for the auto industry. This was readily apparent during the 2010 to 2016 timeframe when auto manufacturers operating in the steadily growing U.S. market generally outperformed peers. U.S. customers have always had a greater affinity for more expensive trucks and sports utility vehicles than their compatriots in other parts of the world. Lower gas prices and easier financing terms in recent years have only accelerated this trend. That said, we are now of the opinion that the U.S. auto market has reached a plateau stage and that sales are likely to vary by several hundred thousand units (either positive or negative) each year.

Aggressive levels of vehicle incentive spending as well as the continued availability of cheap, relatively easy financing may help keep sales elevated over the near and medium term. However, despite current supportive economic conditions and low gas prices, rising interest rates, declining used car values and a growing number of off-lease vehicles present impediments to future volume growth.

Growing competition in China
The world’s largest auto market, China, continues on a growth path, though at a more measured rate than several years ago. Early entrants to China, such as Volkswagen and General Motors, remain market share leaders, but all of the largest global original equipment manufacturers (OEMs) now have a presence in this important market. An improvement in the competitive position of the country’s indigenous brands is posing a threat to the more established automakers and contributing to continued pressure on vehicle pricing.
Steven Bocamazo, is a Associate Director of Credit Research at Loomis, Sayles & Company.

Steven Bocamazo is an associate director of credit research at Loomis, Sayles & Company. Among the areas he is responsible for covering globally are investment-grade and high-yield automotives & auto parts, railroads, and tobacco. Steven began his investment industry career in 1989 and joined Loomis Sayles in 1997. Prior to Loomis Sayles, he was a vice president and senior credit officer at Moody’s Investors Service. Steven earned a BA and a JD from St. John’s University.

Jens Peers
Jens Peers, CFA®

CIO Sustainable Equities and Fixed Income Mirova1

Urbanization, breakthrough technologies, and lowering carbon emissions to combat climate change are among the global megatrends under way today that we believe have large implications for the automotive industry.

One of the major trends we’ve seen in the 21st century is urbanization. Already, we have more than half of the world’s population living in cities, and that is going to continue. By 2030, the United Nations estimates that almost two-thirds of the world’s population will live in cities. This means thinking about transportation, along with many other aspects of daily life, in different ways.

More specifically, younger people, who tend to gravitate to urban areas, are not buying as many cars as they once did and are using Uber accounts more and more. Ride sharing is certainly changing market dynamics. As a result, the auto industry will have to rethink their business model. One scenario would be that the automakers may become the owner of the car, and Uber or other ride-sharing companies could very well be the operators of the whole system. Individuals wouldn’t own a car, but they could use their mobile device to request whatever model of car they prefer to use. You will still have choice, but you pay per mile instead of owning or leasing.

Electric and driverless innovation
We are also in the midst of technological breakthroughs which are driving a shift to electric and self-driving vehicles. Many individuals today just can’t grasp the concept of self-driving cars. However, we believe they are just a few years away. By speaking to car manufacturers and looking at how much they’re investing in driverless technology, our research analysts believe it’s very likely that in 10 years or less, a lot of the new cars will be self-driving models.

Another low emissions technology being worked on today by big automakers, including Ford, Honda, and Daimler (Mercedes Benz), is hydrogen-powered, fuel-cell electric cars. This version of the electric vehicle (EV) offers the same performance and environmental benefits of battery-powered EVs, as well as the range of traditional cars. Because it can be refueled on the go, it solves the time and range issues involved with recharging EVs. Also, hydrogen refueling stations could be incorporated into our present gas stations. But gas stations would need to invest in the ability to refuel hydrogen tanks before fuel cell EVs become practical. Overall, there are still a few issues that need to be worked out, including the exorbitant cost of fuel cells.

Sustainable opportunities
Developers of clean, efficient technologies designed to optimize vehicles – from energy storage to sensors that recognize road conditions and obstacles – or suppliers of lighter materials helping to build more energy-efficient cars, are examples, we believe, of sustainable opportunities that stand to deliver attractive long-term growth potential.

Also, as we look further at the urbanization trend, and the need to adapt and create sustainable cities and buildings, we can identify many other opportunities. The list includes companies involved with infrastructure and public transportation engineering, energy-efficient solutions for buildings, new technologies for traffic lights, and so on.
Jens Peers, CFA®, is a CIO Sustainable Equities and Fixed Income at Mirova1.

Jens Peers is CIO Sustainable Equities and Fixed Income of Mirova, a subsidiary of Natixis Asset Management (Natixis AM), engaged in responsible investing. He joined Mirova in 2013. Prior to Natixis AM, Mr. Peers was head of portfolio management – environmental strategies for water, agribusiness and cleantech (renewable energy, energy efficiency and waste management) at Kleinwort Benson Investors, Dublin. He also was a financial analyst at KBC Asset Management and a financial advisor at KBC Bank, Brussels. Mr. Peers began his career in 1998.

Mr. Peers holds a master’s degree in applied economics from the University of Antwerp, Belgium. He also is a CFA® Charterholder and is a certified CEFA (Certified European Financial analyst of the BVFA-ABAF – Belgian Association of Financial Analysts).

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