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The automobile industry is experiencing massive change as a result of increased demand for electric and hybrid cars that require batteries and the evolution of autonomous driving features that rely on connectivity. We believe these structural shifts are enduring and offer potential opportunities for long-term oriented investors, such as ourselves. However, investors will need to be discerning as both winners and losers will emerge.
Consider the first shift: The transition from internal combustion engines to electric vehicles (EVs) is being driven by climate change-related regulations to reduce carbon dioxide emissions and decrease air pollution. It’s estimated that 23% of total CO2 emissions from fuel combustion are transportation related. Consumer preferences should also contribute to the shift to EVs, given they are cheaper to fuel and maintain. The pace of EV adoption will be influenced as well by the rate at which battery prices continue to decline—lithium-ion battery prices have fallen roughly 80% since 2010 and are projected to fall a further 73% by 2030—in addition to the reduction in battery recharging times and the nascent build-out of charging infrastructure in much of the world. We’re still very much in the early innings of this transition, in our estimation. EVs accounted for only 1% of the global auto market in 2017, but EV sales are expected to grow at an annual rate of 33% through 2022.
Another shift is the degree to which cars are becoming increasingly connected. Approximately one in three vehicles sold in 2015 already had some degree of connectivity. Bluetooth technology that enables hands-free phone calls was one of the earliest examples of connectivity in the automobile. In the same way, infotainment services for streaming navigation information, traffic information and music have become standard features. Advanced driver assistance systems (ADAS), such as blind-spot monitoring and surround-view cameras, are more recent innovations. We see the growth in ADAS content in the car as part of the evolution toward increasing levels of vehicle automation. Eventually, we expect mass adoption of fully autonomous or self-driving vehicles, but we see this occurring over a longer timeframe than the shift toward EVs.
The next-generation automobile is one of the more prominent themes in which we are invested. As with other themes, we try to identify businesses that will serve as high value-added bottlenecks in their industries. We choose to avoid parts of the industry value chain that we believe will be commoditized or highly capital intensive, such as battery suppliers. Instead, we are more focused on the increased semiconductor content of the car and, in particular, the role of next-generation power semiconductors technologies. Handling tasks such as fast charging or controlling electric current to the main motor, these devices are critical in enabling appropriate standards of safety, durability, power and range for the car.
Not only is the number of power semiconductors within a car structurally increasing, but the underlying material science is also shifting. Traditional silicon-based semiconductors are reaching their physical limitations in terms of ability to efficiently handle high voltages. Instead, compound semiconductor materials such as silicon carbide (SiC) are becoming crucial. SiC, one of the hardest materials on the planet, enables semiconductors to operate efficiently across a much wider range of voltages and temperatures, meaningfully extending battery efficiency while reducing the system’s weight.
In summary, the automobile is undergoing a fundamental re-architecture wherein it is becoming electrified, connected and, in the long run, autonomous. As these structural shifts play out, we anticipate significant change in the relationships between auto manufacturers and suppliers as well as in the economics of distribution chains. We therefore believe it’s critical to understand how value will accrue to select parts of the industry. Those suppliers providing the most critical parts and differentiated solutions should be the biggest beneficiaries, in our view. Like smartphones, we believe the future automobile will be a software- and semiconductor-defined product.
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