TECHNOLOGICAL change and the pattern of disruption is broadening out into other sectors of the economy that have been hitherto immune. Nowhere is this more true than in the automotive sector.
This is underpinned by three structural forces: the shift from internal combustion to electric engines; the shift in the economic model from ownership to on-demand; and, finally, the shift from humans behind the wheel to autonomous driving.
The first shift is inevitable. As the price of batteries continues to fall, we are at the point where electric vehicles (EVs) make economic sense.
There is growing consumer acceptance: this time last year, EVs outsold hybrid vehicles in the US for the first time in history.
There is also evidence of growing political will for change, with many governments committing to the phasing out of diesel vehicles.
Elon Musk’s Tesla is at the forefront of this change, with its vehicles accounting for all of the EV volume growth in the US in the past two years.
The company’s Model 3 car is now the best-selling passenger vehicle in the US in revenue terms and the best-selling premium vehicle in the US in unit terms.
With EVs accounting for in the region of just two per cent of the total US market, there remains substantial opportunity for growth.
The second structural shift, which is being driven by ride-hailing companies such as Uber and Lyft, is a textbook example of disruption.
Uber and Lyft are not new technologies. Their apps simply integrate three existing applications – bookings, maps and payments. Yet by using technology to innovate on the business model and consumer experience, these companies have dramatically expanded the market.
It is notable that in San Francisco ride-hailing is now 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 on auto-makers, but on insurers, dealers and repair shops too.
Today, the cost of an Uber or Lyft is approximately $2 per mile, compared to the cost of car ownership at about $1 per mile. Much will depend on their ability to reduce costs from here. A small drop can result in large increases to demand.
The third shift towards autonomous driving is the least developed, but will have the most profound impact on society.
The average American driver spends the equivalent of nearly 40 eight-hour working days a year commuting, and 1.4 million people globally lose their lives on the road annually.
Millions of elderly and disabled people have difficulty accessing the transportation they require, while the vitality of urban landscapes are affected by congestion and parking spaces.
Autonomy could solve all these issues.
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 have added another contender – Aurora Innovation – to our portfolio.
Aurora is working on delivering the benefits of self-driving technology safely, quickly and broadly. Unlike Alphabet or Tesla, the company has no desire to actually build a car, but instead is focusing on building the artificial driver and pursuing a partnership strategy.
These three structural forces are working together to accelerate the changes we see in society. 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 and saddle makers; it led to the building of infrastructure, the thirst for oil, the development of suburbs, the invention of fast-food chains, 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. It is clear that the future is coming into focus, but it is inevitable that the road there will not be smooth. There will be several winners and many more losers. Despite this, we remain optimistic that we can capture some of the winners.
Helen Xiong is co-manager of the Baillie Gifford US Growth Trust.