Article
Automating the automobile
In this Thematic Insight, we explore automation in today’s passenger cars, what the future is likely to bring and whether we should consider the car itself as an automation solution.
January 27, 2022
Once upon a time, not so long ago, we might have sent a few postcards from holiday to friends and relatives. More recently perhaps we might send a text message, or a few photos by email or WhatsApp.
Today it is becoming more common to make a quick video call, tomorrow perhaps there will be no need to travel, since we will be able to meet in a virtual world, or “metaverse”. Technology has a habit of creeping up on us, and while the pace of technological change in so many aspects of daily life is startling, the greater surprise is how fast we adapt to these new technologies, and how quickly we forget what things were like only a few years ago.
I felt this phenomenon recently, when my car was sent to be repaired, and I was lent a new fully electric vehicle by the garage as a temporary replacement. It proved to be a glimpse into the future. The immediate shock was of course the electric motor, its total absence of engine noise and its huge torque available even from a stand still, but the greater surprise still was the amount of automation built into the car.
Themes
Our thematic strategy aims to outperform by identifying the powerful trends and themes likely to shape the future investment landscape.
Advanced driver assistance
First seen on the Tesla Model S, the Porsche Taycan offers “Comfort Access” (or in Tesla terminology, “Auto-present”). Approaching the car with the keys still in my pocket and placing a hand near the door handle, the door handle (normally flush to the car door) “pops out” to allow you to place fingers under the handle and open the door.
Sitting in the car and engaging the seatbelt, the car is already "on" and ready to drive. In fact, the first time I drove it, I pushed the "ignition" button (something that resembles the "on" button from a PC) and was confused to be greeted by a "Goodbye" message on the dashboard.
Only afterwards, I understood that there is no need to push the "on" button. The car recognizes the key and turns on automatically. In fact, the Driver’s Manual1 also recommends that there is no need to turn it off when you have arrived at your destination: "When you leave the vehicle and take the driver's key with you, the vehicle is locked automatically and switches off completely."
As you set off, the seat-belts tighten up automatically to ensure the occupants are snugly secured, and a warning alarm sounds if the driver or passengers have not engaged their seatbelt or have not properly shut all the doors. Steer too close to the edge of the lane or to the centre line in the middle of the road and the steering wheel gently tugs you back into your lane. Drive too close to the car in front and the brake pedal will depress until a safe distance in between has been restored.
These automations were just the tip of the iceberg. The vehicle of course had all of the well known and widely adopted automated safety features, such as ABS braking, smart headlights, automatic windscreen wipers, blind-spot monitoring, lane assistance, adaptive cruise control, seat-belt tensioning, airbags, and convenience-focused automation such as automatic transmission, folding side-mirrors, power steering, and personal ergonomic settings relating to your preferred seat, mirror and steering wheel position, which adjust automatically when your key is recognised.
It also carried some rather more esoteric and arcane automation features, such as "soft-closing doors" (something more often seen in a modern kitchen), the "emergency stop function", which is activated automatically if the vehicle recognizes erratic steering, braking or acceleration patterns at different speeds, and "surround view" which provides a surprisingly accurate bird’s eye view of your vehicle and automatically engages when an object is detected nearby or when the vehicle is put into reverse.
In fact, there are so many automation features available in the car that there are 268 instances of words starting with "automat-" (automatic, automatically, etc.) in the Driver’s Manual, perhaps more than any other adjective or adverb. Today’s modern automobile is a mobile treasure trove of automation.
"The cost share of electronic components in relation to the total value of the car will grow from approximately 16% currently to around 35% by 2025"
according to the Roland Berger study, “Computer on Wheels / Disruption in Automotive Electronics and Semiconductors”2
Is the automobile an automation system?
Our thematic equity strategies focus on "pure-play" companies, which we define as those with at least 50% of current revenues from products and solutions directly related to the specific theme. Our Robotics strategy invests into "automation" and therefore the question for us is always whether a company, industry, technology or product, qualifies as a pure-play maker of automation systems. Since the modern passenger car is so full of automation, can we plausibly include car makers in our "pure-play" universe for the Robotics strategy?
Etymology
The word "automobile" is a classical compound derived from the Ancient Greek, autós, meaning "self", and from the Latin, mobilis, meaning "movable".3 Therefore "self-movable". It entered English dialect from French, and was adopted by the Automobile Club of Great Britain (now the Royal Automobile Club) when it was established in 1897.4
The "auto-" suffix in automobile is the same as the auto- in automation, but in the case of automobile, it refers to the means of propulsion rather, i.e. moving by itself (rather than being pulled by a horse, or something else). In contrast, the "-mation" in automation is from the Greek, "matos", meaning thinking or animated, and thus automation is focused on sentient or "self-thinking", self-aware systems.5
Although the modern automobile contains a vast and varied arrangement of automation, its primary purpose is as a vehicle to transport us from one place to another, and in this function it is not automated. Not yet at least. A human is still required to operate and "drive" it.
Autonomy - almost
As advanced driver assistance systems, or ADAS, become more sophisticated, they take on more responsibility for the "-matos", or the thinking part of driving, and the requirement for a human driver starts to wane.
The Society of Automotive Engineers (SAE) has defined 6 levels of driving automation ranging from no automation (Level 0: the human driver performs all driving-related tasks at any time) to full automation (Level 5: the automated driving system is able to perform all driving-related tasks at any time).6
Figure 1. The 6 levels of vehicle autonomy (SAE)
Currently available ADAS systems can perform lower levels of driving automation (SAE-Level 2-3) under specific circumstances. In these cases, the human driver is still required to monitor the environment and the system constantly and to take over the driving task if necessary.
Although we have seen significant technical progress toward higher levels of driving automation (SAE-Levels 4–5), there remain a number of major hurdles, technical, regulatory as well as "social", and many kilometers of test driving to be completed before passenger vehicles become fully autonomous and then many years before they become ubiquitous on our roads. Only when these challenges have been overcome, for the purpose of our "pure-play" approach we might be able to consider cars as automation solutions.
In the meantime however, we continue to focus on companies which develop the automation systems that go into the vehicle. In other words, while our "pure-play" approach does not allow us to buy Tesla, Baidu, Hyundai or GM, despite all the work they are doing on autonomous vehicles, we are able to invest into pure-play suppliers of automation systems to these companies.
Auto makers do not make the automation
In the race to differentiate their models from the competition and boost profit margins, auto makers are keen to build more and more automation and other options into their cars. However, it is generally not the auto maker who builds these systems.
Car makers are often known as auto "OEMs", or Original Equipment Manufacturers. However, this is something of a misnomer, since car makers today are mainly only involved in design, assembly, marketing and sales, and are generally not involved in the manufacturing of parts, components and subsystems.7
Counting every part down to the smallest screw, a typical passenger car today has approximately 30,000 individual parts.8 Most of these parts, including the automation solutions, are supplied to the auto OEMs as systems and sub-systems, by the major "tier 1" parts suppliers, such as Bosch, Continental, Denso, Magna, ZF, Aisin, Hyundai Mobis, or by "tier 2" suppliers such as Panasonic, Intel, Nvidia, NXP and Qualcomm.
Traditionally the combustion engine and drive train were the heart of the vehicle and these core technologies were developed and manufacturer inhouse by the auto OEMs. However, as the cost and complexity of developing new engines has increased, many small to mid sized auto OEMs have elected to buy-in engines and drive trains from larger makers.
As the number of electric vehicles sold continues to grow (PwC expects that EVs may represent approximately 14% global new vehicle sales in Europe and China by 2025, up from 1% in 2017),9 a larger part of the value of the vehicle will again shift away from the auto maker into the supply chain. And since the lithium-ion batteries in an EV can account for 50% of the cost of an EV, the breadth of the supply chain will also expand beyond the traditional makers, much further into the digital world.
This shift in value will be amplified further as more cars become "connected" to the internet and connected to one another through other wireless networking technologies. As more cars are connected, the number of possibilities for digital applications and automation expands greatly.
Security
As we have seen in previous Thematic Insights, Security and Automation often share a symbiotic relationship: the increasing prevalence of automation in the world often increases the need for greater security, and the more layers of security built into a system, the greater the need to automate the security processes to ensure that the security does not become an obstacle to performance.
While automation can make life more convenient for the intended user, it can also aid unwelcome users. The "Home Link" feature in many cars is an automation solution now loved by burglars and other malevolents the world over. A car stolen from a public place, will politely guide the thief back to it’s home via the "take me home" function in the navigation system, and once home and the "home link" feature will helpfully unlock the garage door, which in a modern home often enables easy access to the entire house. Caveat usor!
Conclusion
Our conviction in the robotics and automation theme as a long-term investment opportunity is based on the fact that we see a rising tide of innovation, an increasingly varied range of use-cases and applications, and a large number of new ventures entering the market.
In this Insight we have looked at the growing number automation features available in the modern passenger car, and considered whether car makers themselves should be considered makers of automation solutions. Our conclusion is currently no, because passenger cars are not yet fully autonomous in their primary function, and because most of the automation built into a vehicle is actually supplied by tier 1 parts and sub-system suppliers, and therefore we cannot include them in our investable "pure-play" universe for robotics and automation.
We do not claim that our “pure-play” focus is superior, however we do believe it is a different approach from most of our peers in the thematic market. We choose to take this approach because it gives our strategies a higher degree of direct exposure to our investment themes, and since we believe in the powerful long-term growth potential of our themes, we prefer to have as more exposure to them, rather than less.
It also moves the focus of our investments onto smaller companies, which are often at an earlier stage of development, more innovative and disruptive, and many times not part of any major stock market index.
Even if we cannot include auto makers in our investable universe, we do see significant growth potential for automation systems in passenger vehicles over the coming years. This will be driven by the rise of electric vehicles, the growing capabilities of autonomous vehicles, and by broad number of automation possibilities, which occur when vehicles are connected to a network and can "communicate" with one another.
Credit Suisse Asset Management has designed a number of highly focused strategies to provide clients with "pure-play" 10 exposure to a number of compelling long-term secular growth themes, such as Robotics & Automation, Security & Safety, Digital Health, Edutainment and Environmental Impact.
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The securities mentioned in this section are meant for illustration purposes only and are not intended as a solicitation or an offer to buy or sell these securities.
1 Berger, R. (2020). Computer on Wheels. Focus. 2021, January. p.9f
2 Porsche Taycan “Good to know – Driver’s Manual”. 2021
3 Oxford Dictionary of English Etymology
4 The Royal Automobile Club (n.d.). History. Derived from www.royalautomobileclub.co.uk on Nov 25, 2021
5 Oxford Dictionary of English Etymology
6 SAE International (2021). Taxonomy and Definitions for Terms Related to Driving Automation Systems for On-Road Motor Vehicles. April 2021. p25f
7 Berylls (2020). Study on the Global Automotive Supplier Industry”. 2020. Derived from 20200721_Study_Top_100_2020_EN.indd (berylls.com) (PDF) on December 5, 2021
8 Toyota (n.d.). Frequently asked questions. Derived from Toyota.co.jp on December 7, 2021
9 PWC (2019). Merge ahead: Electric vehicles and the impact on the automotive supply chain. Derived from Electric vehicles and supply chain: PwC on November 30, 2021
10 With the “pure-play” concept we mean companies which have at least 50% in revenues directly attributable to the corresponding theme.
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