We believe that the automotive sector is undergoing significant disruption. This is underpinned by three structural forces:
1 The shift from internal combustion engines to electric ones
2 The shift in the economic model of ownership to on-demand
3 The shift from humans behind the wheel to autonomous driving
The first is inevitable. As the price of batteries continue to fall, we are at, or close to, the point where electric vehicles (EVs) make economic sense. There is growing consumer acceptance, and in the fourth quarter of 2018, EVs outsold hybrid vehicles in the US for the first time in history. There is also growing political will, as many governments have committed to phasing out diesel vehicles. Tesla is at the forefront of this change. In the past two years, Tesla vehicles have accounted for all of the EV volume growth in the US. Model 3 is now the best-selling passenger vehicle in the US in terms of revenue, and the best-selling premium vehicle in the US in terms of units – the first time in decades an American carmaker has taken the spot. With EVs accounting for approximately just 2 per cent of total US market, there remains substantial opportunity for growth.
The second structural shift, driven by the ride-hailing companies such as Uber and Lyft, is interesting because it’s a classic example of textbook disruption. Uber and Lyft are not new technologies. The app itself is just the integration of three existing applications – bookings, map, and payment. Yet, by using technology to innovate on the business model and consumer experience, these companies have dramatically expanded the market. In San Francisco, the home market of Uber and Lyft, ride-hailing is four times the size of the taxi market.
The long-term promise of these companies is a world where few people own cars and few cars sit idle. This will impact not just auto-makers, but insurers, dealers, repair shops, and more. With ride-hailing accounting for just 1 per cent of miles travelled in the US in 2016, we are still a long way off this long-term vision. Today, the cost of an Uber or Lyft is approximately two dollars per mile, compared to the cost of car ownership at about one dollar per mile. Much will depend on their abilities to reduce the cost from here. These are price elastic markets and a small drop in price can result in large increases to demand.
The third – autonomous driving – is the least developed, but one that will have the most profound impact on society. 1.4 million people globally lose their lives on the road every year; the average American driver spends 51 minutes each day commuting (the equivalent to nearly 40 eight-hour working days in a year); millions of elderly and or disabled people have difficulty accessing the transportation they require; and the vitality of urban landscapes are affected by congestion and parking spaces. Autonomy has the potential to solve all these issues, and more. This is made possible by advancements in computing and machine learning.
While we’re still in the very early stages of this shift, the area is abound with innovation and capital. Tesla and Alphabet both have serious claims in this space, and we’re delighted to add another contender – Aurora Innovation – to our portfolio this quarter. Aurora is working on delivering the benefits of self-driving technology safely, quickly, and broadly. It was founded by three of the world’s foremost experts on autonomous driving: Chris Urmson, who led Alphabet’s self-driving car programme from 2013 to 2016; Drew Bagnell, who was a founding member of Uber’s Advanced Technology Centre; and Sterling Anderson, who led Tesla’s Autopilot programme. Unlike Alphabet or Tesla, Aurora has no desire to build a car. Instead, it is focusing on building the artificial driver, and is pursuing a partnership strategy to deliver the promise of autonomous driving. While Aurora is at an earlier stage of development than our usual investments, we believe the changes are profound enough, and the opportunity large enough, to merit the higher risks.
The views expressed in this article are those of the authors and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions.
This communication was produced and approved on the stated date and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
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Helen joined Baillie Gifford in 2008 and is an Investment Manager in the US Equities Team. She has also spent time working on our Developed Asia, UK, North America, Emerging Markets and Global Equity teams. Before coming to live and work in the UK, Helen lived in China, South Africa and Norway. She graduated BSc (Hons) in Economics from the University of Warwick in 2007 and MPhil in Economics from the University of Cambridge the following year.
Gary is an Investment Manager in the US Equities Team. He graduated MBiochem in Biochemistry from the University of Oxford in 2003 and joined Baillie Gifford the same year. He spent time working on our Japanese, UK and European Equity teams before moving to the US Equities Team in 2008. Gary is a generalist investor but retains a special interest in the healthcare sector dating back to his undergraduate degree. Gary is also a member of the Global Stewardship Portfolio Construction Group.