The news coming from Detroit lately has been about the future. No, I’m not talking about the next model year line-up, I’m talking about what it will mean to be an automotive company relevant to keep market shares in an industry that is on the verge of changing forever. Tesla provided a blueprint, and now the second wave of EV manufacturers are coming.
It’s certainly no secret in Detroit, Mary Barra’s vision is a General Motors Co. void of all fossil fuel powered vehicles in the next decade and a half. Qualcomm will be providing crucial semiconductor chips for the autos. GM has announced a partnership with Microsoft, Ford with Google. It’s becoming a who’s who of technology partnerships in the auto industry. Barra and GM announced years ago their desire to be seen as a technology company, but now, the words are being backed by big numbers — to the tune of $27 billion over the next five years.
Technology has made it easier than ever to compete with Detroit for a share of the auto market. Expect the future of automotive to be discussed in terms of battery capabilities. I’m thinking in terms of a new “Moore’s Law” — (i.e.: the number of transistors on a microchip doubles every two years, though the cost of computers is halved) being applied to the automotive battery segment. I wouldn’t bet against car batteries of the future being the size of a laptop and charging in a similar manner. Having trouble imagining? Think about the first cell phone batteries compared to what we have today.
The automotive company of the future will be hiring and relying on chemists to develop proprietary battery technology and manufacturing process. Chemistry will drive future competitive advantages. Miles per charge and charging speed will become new marketing points.
Performance, safety, and the user-experience will require software. Software will require updates. Software is going to dominate differentiation soon. In a comparison of recent 10-K’s, the word “software” appeared 28 times in Tesla’s, eight times in GM’s, and six times in Ford’s. On Nov. 9, 2020, GM announced that through Q1 of 2021, they plan to hire 3,000 employees to transform the future of product development and software as a service. Their stock was up more than 3 percent the very next day.
Last, but certainly not least, is self-driving technology. The computer systems will be highly complex and powerful, enabling a suite of sensors to process vast quantities of information in nanoseconds, thereby enabling the vehicle to be in control at what will likely be a measurably safer manner than a human. The future limitations of this technology are seemingly endless. Improved safety, productivity, and user experience are obvious. However, beyond that, this technology has the opportunity to unshackle traditional transportation dynamics, resulting in vehicles that are hailed to your home or office, sweeping you to your next destination, without even needing to own or lease a vehicle.
Why is Detroit seemingly accelerating their efforts to become technology players? Competition is obvious — there is Tesla, the second wave who are piggybacking off Tesla’s pioneering, and China. While the Big 3 are likely starting from behind in the sedan market, their bread and butter are trucks and SUVs, which is where I expect the response to be fierce. Brand loyalty still matters in those markets and Detroit cannot afford to sit idle.
The financial analyst in me also believes that Detroit has responded due in part to how the markets have allocated capital. It may not be perfectly efficient or entirely rational, but the earnings multiples given to Tesla in comparison to the rest of the traditional automotive market cannot be completely discounted. I would expect that this notion is not lost in Detroit and to its investors and had some contribution to the flurry of recent announcements of partnerships and long-range plans.
You could argue the automotive industry has irrevocably changed and you would likely point to the time Elon Musk and Tesla started to deliver on their vision of the future with the Tesla Roadster — not too dissimilar from the way the communication and phone market changed with the first release of the iPhone. Technology is set to evolve at a pace not seen in the auto industry since the dawn of the first automobile more than a century ago (the first car to appear in the city came from Charles Brady King in March 1896). Detroit is feverously trying to catch up, lest they go the way of Nokia, Blackberry, and Motorola. I’m not counting anyone out yet; after all, Detroit has become synonymous with being an underdog.
Matt Mondoux chairs the investment committee and is a senior investment advisor at Blue Chip Partners, an RIA in Farmington Hills. He is CFA charter holder and a board member of the CFA Society of Detroit, a chapter of the CFA Institute. The mission of the CFA Institute is to lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society.