Investment summary

The automotive market is currently in a tech revolution that has barely started. Most notably, the cars of the future will be electrified, autonomous, connected, smart and shared.

Key industry drivers

Autonomous cars

All car OEMs are investing in autonomous car technologies, although the 100% autonomous cars will arrive later than OEMs previously expected. The investments are related to many different areas. Various sensors are needed for the car to detect what is going in its surroundings. Artificial Intelligence (AI) then helps the cars to understand this information and make adequate maneuvers.

Some of the OEMs are moving directly to level 4 (high automation) where the car drives by itself almost the whole time. Others believe it is important to first develop semi-autonomous level 2+ or level 3 (conditional automation) cars where the driver is expected to intervene from time to time. Regardless of which one of these approaches the car OEMs prefer, the whole car industry has agreed on the long-term importance of moving towards autonomous cars due to e.g. higher safety and lower transportation costs.

Safety-standard organizations mandating more technology to enable higher grades of autonomy

As for the safety implications, safety-standard organizations worldwide are continuously mandating more technology to decrease the 1.2 million road fatalities and 50 million traffic injuries that occur every year. About 94 percent of these car crashes are related to human error, which drives the need for Advanced Driver-Assistance Systems (ADAS), i.e. technology that helps the driver in the driving process. Like self-driving cars, ADAS also require an increasing number of sensors and AI.

2021 has seen first-ever deployments of L3 and L4 – but above 20% share expected only after 2030

In 2021, Honda became the first carmaker to sell a vehicle equipped with certified level 3 self-driving technology. Though we already have the first L3 cars on the roads, it will take time before penetration becomes relevant. In 2030, Europe is estimated to reach 29% of L3 or higher of new vehicles sold. The same figure for the USA is 16%, 34% for China, and 29% for Japan. Fully automated cars, i.e., level 5, are expected to arrive in 2035, but only at a modest 1% share of all new cars sold. All this according to PwC Autofacts and Strategy&.

The global semi-autonomous vehicle market demand was valued at 14.2 million units in 2020. NVIDIA estimates that in 2025, there will be 40 million semi-autonomous vehicles, of which 6/7 with Level 2, and the remaining 1/7 of Level 3 or 4. Grandviewresearch.com estimates the market to expand to 60 million units in 2028. Nvidia also estimates that there will be only 1 million Robotaxis in 2025.

Trust towards autonomous cars is declining – driven by worries of cybersecurity threats and recent accidents

According to the Digital Auto Report 2021 by Strategy&, trust towards autonomous cars is declining in several important markets. In a consumer survey, people in Germany, the USA, and China answered on whether they personally would use a fully autonomous car. The share of consumers saying they would not use an autonomous car increased to 62% in Germany (36% previous year), 64% in the USA (36% previous year), and 14% in China (9% previous year). Trust is however increasing in Japan, with 28% saying no vs 37% last year.

“In general, willingness to use fully automated cars has declined, especially in Germany and the US. Trust in automated driving is seen as susceptible to change, and consumer attitudes might fluctuate rapidly as critical headlines emerge, e.g. following accidents and cybersecurity threats.” – Strategy&

Environmentally-friendly electric cars

All major car OEMs have an electric vehicle strategy and most of them are looking to go fully electric. The installed base of electric vehicles is expected to exceed 100 million vehicles around 2029. The estimated total installed base of electric vehicles (EVs) in 2030 is 140 million vehicles. This is a 10% increase in estimates from 2019.

Europe leading the way for new EV registrations – USA lagging

In Europe, EV sales exploded in 2020. In 2019, only 3% of cars sold in Europe were electric – in 2020 this figure increased to 10%. Overall Europe’s car market contracted 22% in 2020. Yet, new electric car registrations more than doubled to 1.4 million.

China was previously the leader in the share of electric vehicles sold, amounting to 5% already in 2018. Since then, China’s growth of EVs has stagnated and the share of EVs amounted to 6% in 2020. The US market is clearly lagging in both China and Europe. The share of new vehicles being electric has been steady at 2% since 2018.

According to PWC, over 55% of all new car sales could be fully electrified by 2030.

Smart connected cars

Cars are becoming connected “computers on wheels” as they get equipped with internet access/W-LAN, allowing cars to communicate and share information with each other. This also open up all of the endless opportunities in the IoT space, one example being controlling household electronics from the car like e.g. the fridge telling the car that it is out of milk.

Sharing economy & ride-sharing

According to several market pundits, owning a car will be less common in the future. Instead, cars will be shared and rented as a service.

Preference towards shared mobility still varies across the major markets; EU/Japan expected to lead by 2035

Today, China and Europe are far ahead of the USA and Japan in shared mobility. While China and Europe have a market penetration of shared mobility of 11% and 8% respectively, Japan and the USA are both only at 3%.

Looking into expectations for 2035, Europe and Japan are expected to travel one out of four kilometers through shared mobility, while China will only grow to 14% while the USA expected to remain at 3%.

Why now?

Even though the trends above are structural trends that will play out over many years to come one should note that the lead times in the automotive industry are long and the entry barriers high, which is related to the platform strategies of the car OEM. Car OEMs manufacture are consistently trying to optimize costs by manufacturing more car models on fewer platforms. The different car models on a platform, therefore, share most of the technology. Thus, the companies that win the ongoing procurements have a good chance of delivering their technology to, not only one car model during its 5-7 year lifetime, but also to its sibling cars on the platform.