The auto industry is expected to go through a massive transformation – more than anything we have seen over the last century. David Mau, Portfolio Manager, TD Asset Management, talks to Sara D’Elia about how self-driving vehicles, the end of car ownership and tech changes could transform how we get from A to B.
As you drove to work today, did you think about how your ride might change in the future? Over the next few years, the auto industry is expected to go through a massive transformation, more than anything we've seen over the last century. Self-driving vehicles, the end of car ownership, and new technology could completely redefine how we get from Point A to Point B. Joining me to explain is Dave Mau from TD Asset Management.
Dave, I want to start with self-driving cars. We've heard a lot about when this could happen, companies like Tesla as early as 2019. Is that the time frame? And, you know, what are some of the considerations there?
Yeah, Sara. So I think Tesla's always a bit aggressive when it comes to their forecasts. I think most of the other players in this space right now kind of think that they'll have something ready for the road in the early part of the next decade, so maybe 2021 or 2022.
In terms of the considerations, there's a couple of big things that are on the horizon. The first one is auto insurance. Who's going to be responsible if there is ever an accident? Is it going to be the auto manufacturer? Is it going to be the owner of the car? Or is it going to be the person that's in the car? We don't know yet. And that's something that's going to need to be resolved. So I think we'll see some major changes in the way auto insurance works in the future.
The other really big thing that needs to change before we see self-driving cars on the road is the current traffic and safety regulations. So changes will need to be made at the federal level and at the local level, as well, to allow for a car to operate without a human being at the wheel.
Now, I think one of the really interesting things about these companies is the technology. And what's even more fascinating is you say that changes how we value cars in the future. How so?
Yeah. So, in the past and even right now, when people make a car-buying decision the things that influence their decision are the visual appeal of the car. Is it a good-looking car? What kind of luxury features does it have? What kind of safety and performance features does it have? I think, going forward, there will be less emphasis placed on those things and more on the technology that's inside the car. And really it's about what that technology can do for you and what it can do to improve your daily life.
So think about it this way. Imagine a car that can take you to work in the morning and then take itself to the car wash to get cleaned up, go to the school in the afternoon to pick up the kids after school and take them home, and then, at the end of the day, come back to your workplace and then pick you up and take you home. That's a huge difference from how we use cars today.
So it's not just about the technology. There's also, potentially, some demographic trends. And maybe, even, people won't own as many cars, if that's the case.
That's right. So most people right now agree that, in the future as autonomous vehicles evolve, car ownership rates will decline. And the use of car-sharing services or ride-sharing services will increase. So, basically, rather than owning a depreciating asset, people will prefer to pay for transportation as a service.
Now, assuming all of these things happen-- because there's a lot of unknowns at this time-- what do you think that could do to traditional auto stocks?
Well, I think the auto stocks, companies that focus on technological innovation will garner higher valuation multiples over time whereas your traditional auto manufacturers who do nothing more than simple assembly will begin to trade more like commodities. And that's because they're not doing anything to differentiate themselves from the pack.
So what would your overall view right now be? Do you think investors should wait on the sidelines until some of these unknowns sort of shake out? Or do you think there's an opportunity to strategically play the auto space?
Well, I think it's a bit early yet to know exactly who the winners will be. New companies that have entered the space like Google or Apple or Uber certainly have an advantage when it comes to the technological front. But you have to remember that these are not car companies. They have no experience in making cars. And even Tesla has a very short history of auto manufacturing when you compare them to companies like Ford or BMW or Toyota.
So I think, over time, the winners will be companies that join together, so a strong tech company that will bring technological breakthroughs as well as an experienced auto manufacturer that work together. And they'll be able to commercialize this technology and bring the price down to a point where it's affordable and available for the mass market.
So, potentially, some M&A transactions could make this, you know, more affordable.
Yes. And we've already seen partnerships developing in the market already. So Google has partnered with Fiat-Chrysler. Uber has partnered with Volvo. And even Toyota has partnered with the computer chip company Nvidia.
Putting some of the unknowns aside, if you had to put money to work in this space, what are some of the names that you like?
Well, I think, for companies like Google or Apple who do so many other things well, you're probably not going to buy those stocks just for the self-driving car potential. But I think some of the auto suppliers in this space could be interesting-- a name like Continental, which is a European auto parts supplier. And they're actually best known for their tires. They have a division that supplies parts for driver assistance systems. And I think that part of their business is going to grow faster than the market.
And the second name that's interesting is Delphi, which is a US auto parts supplier. But they're also a leader in making active safety technology. And so I think their business will grow faster than the market over time, as well, as the amount of content that put into each vehicle increases over time.
Well, you've given us a ton of considerations and lots to think about in the auto space. Thank you very much, David.