NGS Super secular trends: electronic and autonomous vehicles

Each year, our Investments team sets the strategic asset allocation for our portfolio. As part of this exercise, we produce an in-depth research piece on upcoming “secular trends”.

What are secular trends and why do they matter?

Secular trends are evolving trends in the market that take place over a longer time horizon, rather than being seasonal or cyclical. It’s important for us to understand secular trends when we’re reviewing and setting our long-term strategic asset allocation, as they help us identify investment opportunities and risks.

Key trends ahead

Our secular trend analysis this year looked at:

1. carbon neutrality
2. electronic and autonomous vehicles
3. 3D printing
4. the metaverse
5. demographic changes
6. quantum computing
7. geopolitics
8. blockchain, decentralised finance and cryptocurrency
9. the hydrogen economy.

This article focuses on electric and autonomous vehicles.

Electronic and autonomous vehicles

Mobility is at the core of modern life. How we move — ourselves and the goods we use, including everything from food and clothing to industrial materials — is something most of us probably take for granted. But because transport is such a significant part of our modern economy, its electrification is a key pillar of the decarbonisation of that economy. We can expect significant changes in the near future as electric and autonomous vehicles reshape the world of transport and freight.

Let’s start with a couple of definitions:

• An electric vehicle (EV) operates via battery technology instead of the conventional internal combustion engine. EVs are a key component of the shift to carbon neutrality. We can also expect that EVs will eventually also be partially or fully autonomous as the technology allows.
• An autonomous vehicle (AV) is a vehicle capable of sensing its environment and operating without human involvement. An AV doesn’t need a human drive to take control at any time, and it can of course function without a human passenger.

Currently there are almost 20 million passenger EVs on the road, and electrification is spreading to other segments (such as buses, vans, trucks and electric 2- and 3-wheelers).¹ The EV market is set to rapidly expand by 2024, as traditional car manufacturers race to develop EVs, transitioning their business models to keep up with technology companies.²

Despite the tens of billions of dollars already spent on their research and development,³ with total global investment in the sector exceeding US$200 billion,⁴ AVs are not expected to gain serious momentum until around 2028.⁵ Until then, the main uses for AVs will be in autonomous highway driving for personal vehicles and robot taxi fleets in more remote areas.

Although it’s a longer timeline, we do expect the development of AVs to continue, as the potential benefits are significant. In the US alone, it’s estimated that financial benefits will exceed US$800 billion a year by around 2030, thanks to more productive real estate developments,⁶ fewer road accidents and less congestion.⁷

The size of the electric vehicle market is estimated at $9 trillion up to 2030, and up to 2050 $53 trillion.⁸ In China, autonomous vehicles could account for as much as 66% of the passenger-kilometer traveled in 2040, generating market revenue of $1.1 trillion from mobility services and $0.9 trillion from sales of autonomous vehicles by that year. In unit terms that means autonomous vehicles will make up just over 40% of new vehicle sales in 2040.⁹ That represents a significant investment opportunity.

To date, it has been technology companies leading the charge towards an electrified, autonomous world, while traditional vehicle manufacturers scramble to keep up.

Are there risks?

Regulation is likely to be the biggest hurdle for AVs. Safety is clearly a primary consideration in the development and uptake of AVs — people need to be assured that AVs are safe, and therefore the regulation of AVs will be rigorous. This will create challenges for manufacturers, in the development and also the marketing of AVs.

There are also still significant technological challenges to be overcome. Current AVs cannot handle weather patterns, construction (such as traffic cones), animals, crossing guards and unprotected right-hand turns (in right-hand drive countries). Significant investment in technology advancement will be needed to solve these problems. The main issue is that — for the time being, at least — computers are unable to think and react like humans do to adapt to a change in their surroundings.

Even though the market for EVs is more established commercially and technologically, there are still risks to be considered. Accidents/incidents due to battery overheating and flammability are still a concern. Also, the infrastructure around charging stations is not yet sufficiently developed to relieve potential consumers’ concerns around the driving range of EVs. As EVs become more integrated with networks, cyber risk may become more common.

What does this mean for NGS Super’s portfolio?

Our listed (Australian and international equities) investments in technology companies that have targeted research and development programs in this sector will give us good exposure.

Via private equity and venture capital, there will be opportunities to invest in technology startups that are developing and providing equipment and/or technology solutions to auto manufacturers.