1. Disruption in
    the Automotive
    Industry

    Gary Robinson and Helen Xiong, Investment Managers. Third Quarter 2019
  2. The value of shares, and any income from them, can fall as well as rise and investors may not get back the amount invested.
  3. We have often spoken of technological change and how the pattern of disruption is broadening out into other sectors of the economy that have been hitherto immune. Nowhere is this more true today than the automotive sector. Our exposure to the sector has grown through the IPO of Lyft and the addition of Aurora Innovation. Combined with Tesla and Waymo (Alphabet’s autonomous unit), this now makes up an important theme in the portfolio. This quarter, we wish to share some emerging thoughts and developing frameworks.

     

     

  4. 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.

     

     

     

  5. Conclusion

    Finally, it’s worth noting that while these three structural forces are independent of each other, they are working together to accelerate the changes we see in society. EVs and autonomous driving have the potential to reduce the cost of ride sharing to below one dollar per mile. The magnitude of these innovations could be as significant as the shift from horses to automobiles in the late 19th century. Automobiles didn’t just spell the demise for horse farmers, saddle makers, and carriage makers; it lead to the building of infrastructure, the thirst for oil, the development of suburbs, the invention of fast-food chain restaurants, and much more. It affected every aspect of society from family life to the economy to the environment. Changes of this magnitude are incredibly rare, and that’s what makes it so exciting. The future is coming into focus, but the road there will not be smooth. There will be several winners and many more losers. We remain optimistic that we can capture some of the winners.

     

     

  6. Risk Factors

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    Annual Past Performance to 30 June each year (%)

      2019
    Baillie Gifford US Growth Trust plc 13.2

     

    Source: Morningstar, FTSE. Share price, total return. Sterling.

    Past performance is not a guide to future returns.

    The Baillie Gifford US Growth Trust plc was launched on 23 March 2018. Past performance is only available from this date.

     

    Ref: 41997 IND WE 1426

  7. Helen Xiong

    Investment Manager

    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.

  8. Gary Robinson

    Investment Manager

    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.