Last week, Delphi (NYSE:DLPH) and Mobileye (NYSE:MBLY) announced a partnership to produce self-driving car technology that could be available as soon as 2019. In this episode of Industry Focus: Energy, Sean O'Reilly talks with The Motley Fool's auto industry expert, John Rosevear, about what this could mean for self-driving cars.
Listen in to find out how this will affect automakers across the board, what Delphi and Mobileye's play is, how the popularity of self-driving cars could solve one of their biggest issues, what it will take for the mass market to embrace self-driving cars, some advice for investors who want some exposure to this space, and more.
A full transcript follows the video.
This podcast was recorded on Aug. 25, 2016.
Sean O'Reilly: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, August 25, 2016, so we're talking about energy, materials, and industrials. Today, I'm joined via Skype by The Motley Fool's auto industry expert, John Rosevear. Good morning, John. How's your week going?
John Rosevear: It's going very well. How are things at headquarters?
O'Reilly: It's pretty nice out here. I don't know if you caught wind of the D.C. humidity and temperature a week or two ago, but it was going up and feeling like 111 degrees.
O'Reilly: It's cooled down a bit since then. Speaking of things being on fire, we're talking about the prospects of driverless car technology emerging, and I wanted to get you in here because this is a big deal. We got news this week out of Delphi and Mobileye. They're teaming up and basically creating the nuts and bolts of what an automaker would need to make a driverless car. My immediate reaction was that this is a big deal, and right before we went on air, you confirmed that for me, so thank you. But I'm super-anxious to get your thoughts on this. So, go ahead, go over the deal first so we can talk about the broader ramifications.
Rosevear: We know that a bunch of automakers are working on developing fully automated, self-driving cars -- don't have to touch the steering wheel, those kinds of things. Not all automakers are doing it. Delphi Automotive is a big auto industry supplier. They were spun out of GM (NYSE:GM) years ago. They work with lots of automakers all over the world.
O'Reilly: Weren't they bankrupt at some point?
Rosevear: They're quite healthy now. And they've been working at self-driving for years. Mobileye is a very interesting Israeli company that basically makes the computer brains for assisted driving systems of all kinds. They have a couple of specialties. One is taking the input from cameras and turning it into information that your car can recognize. But they're also very good at what we call deep learning, machine learning, where the computer learns over time as it accumulates more information.
These two companies have worked together for years, and they came out on Tuesday and said, "We're going to have a full-blown SAE level four or five self-driving system that will be available to just about any automaker that wants it starting in 2019." [In the Society of Autmotive Engineers' classification, four = "high automation" and five = "full automation."]
O'Reilly: My jaw hit the floor when I saw that. I actually got a push notification from, I think it was Bloomberg or Wall Street Journal. And I was like, "Oh my gosh, is Elon Musk going to lose his mind now?"
Rosevear: Well, I mean, Tesla (NASDAQ:TSLA) is going to go their own way. There are other companies doing this. General Motors is deep into their research. Ford (NYSE:F) is already well along on their research. Mercedes is along.
First off, Mobileye says they work with 27 different automakers all over the world, including little companies...
O'Reilly: How many are there?
Rosevear: ...Chinese automakers that we don't know very well and so forth. These companies will all have access to this technology starting in 2019. Everybody will be able to incorporate it into their vehicles and offer it. So, yeah, in that sense, it's a huge deal. We talk about the race to self-driving cars. It's not over, but it might have become irrelevant, was my first reaction to this.
O'Reilly: My question is, what do you think the prospects are? What's their play here? Do they want to be the go-to guys if you want to drop a driverless brain into your Ford Fusion? What's their play here?
Rosevear: Mobileye already sells components to just about everybody. GM does business with Mobileye, Tesla has done business with Mobileye -- although they're discontinuing that shortly because Mobileye isn't happy with what Tesla has done, but that's another story. But most automakers do business with Mobileye in things that are moving toward self-driving -- adaptive cruise control, lane-changing systems, things like that. So, they're already customers.
What these guys are saying now is, "We'll have a whole turnkey solution for you if you have chosen not to develop your own internal self-driving thing. We will have something for you that you can add for a few thousand dollars a car starting in 2019." For GM, it's like, "OK, we might benefit from the expertise that comes out of this as they develop it." But think about a company like Fiat Chrysler, which has more debt than cash, which is scrambling to remake its product line all over the world, and which frankly has not had the bandwidth to work on self-driving cars. They can just buy this. And then they're in the game.
O'Reilly: It seems to me like that in itself has two ways you can look at it. Did GM waste all that time and money over the years developing their own driverless stuff? And the same would apply to Ford. Because, this is going to be just as good as they did, and therefore they can just buy it for a few thousand dollars per car and just drop it in Fiat Chrysler's. Or, is GM's in-house stuff still going to be a little bit better?
Rosevear: It will be better from GM's perspective, because they'll make more money on it. If they can offer it as an option for the same price, they'd have to resell the Delphi Mobileye solution, there's a bigger margin on that. But, more to the point, they can also integrate it more deeply into their systems. GM has the Chevy Bolt coming. They all talk about that as a platform for things like self-driving, because they've set it up so they can build this stuff right into the car's computers...
O'Reilly: Yeah, what frame did they use for the Bolt?
Rosevear: It's mostly new from scratch. They used some stuff from the Chevy Sonic, the suspension parts and stuff. But it's mostly new from scratch.
O'Reilly: So, what does this mean for the industry at large?
Rosevear: It means everybody's going to have this stuff, simply put. At least, have access to it. It doesn't mean that every car in the world is going to be self-driving in 2020. It's going to be a long time before every car is self-driving. But it does mean that everybody can offer this stuff as it starts to make sense, as consumers start to demand it, as there starts to be business cases for it over the next decade, basically.
O'Reilly: I was wondering, when we were going to meet up in Pittsburgh for a day trip and ride around in those Volvos. One of the tricks that I've heard -- one of the problems, and the solution -- it's really tricky to know where everything is for a car, even with the best cameras, the best systems. It's all unpredictable. Where do you think these systems are with mapping cities? Because my understanding is one of the solutions that's been offered is just 3D-mapping major cities, and that would make it a little bit easier.
Rosevear: Well, that's what everybody's doing right now. Some people are buying this, some people are doing it themselves. Obviously, [Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL)] Google is out there, has been mapping everything for ages. You need a highly detailed 3D map. But the thing is, over time, once you have a fleet of cars out on the road all sharing data...
O'Reilly: They're all mapping.
Rosevear: They build it. So we should talk a little bit about the definitions of self-driving. What they've said in this deal is that it would be a level four/five. This is from the Society of Auto Engineers sorting out driver assistance systems. Level four is full-blown self-driving in some circumstances. For instance, if you're in a city where it has a map. Level five is full-blown self-driving everywhere all the time, don't even need to think about it, don't even need a steering wheel in the car.
O'Reilly: And that's going to be a while.
Rosevear: Right. But here's the thing. If you have a level four car, maybe you have a map of Pittsburgh, and you drive around Pittsburgh, but then you drive to Chicago to visit grandma -- the car is recording all that. Enough people take that trip, and the system's official map that's shared among all the cars that use these systems, it scales.
O'Reilly: So usage is going to lead to scale.
O'Reilly: So, Uber is in Pittsburgh. What model was it that they were using? Do you know?
Rosevear: I don't remember offhand.
O'Reilly: It was an SUV crossover thing. It was not a car.
Rosevear: Right. They also have Ford Fusions out doing this, by the way. Their first one was a Ford Fusion.
O'Reilly: Do you know what GM and Lyft are going to use car-wise for their stuff?
Rosevear: Chevy Bolt.
O'Reilly: Oh, boy!
Rosevear: That's the whole deal, it'll all be the electric Bolts. We've actually seen self-driving Bolts on the streets in San Francisco. They're already testing them. They're not officially rolling the Bolt into full-blown production, I think, until October or November, but they've made enough of them that they have them out there testing with these self-driving --
O'Reilly: This is awesome. And of course, Ford is going to be mass-producing self-driving cars in 2021. Although, you noted in an article, or maybe it was the show notes, the 2021 line that Ford's going to come out with is only going to be for ride-sharing and ride-hailing at first.
Rosevear: Yeah. I think that's their way, in part, of finessing the level four/five thing. Mark Fields, Ford's CEO, came out and said, we don't need a steering wheel, we don't need gas pedals, we don't need anything like that. But by saying we're making it available to only ride-sharing services, like Zipcar, and ride-hailing services, like Uber and Lyft, they can probably fence it in geographically while they build out the maps. I think that's what that's about.
It's also, to some extent, hedging their bets a little bit around whether there's going to be mass-market consumer demand for this at the price they'll have to charge for it quite yet.
O'Reilly: That way, if they do pull it off, they look like heroes or something.
Rosevear: But not just that. They get several thousand of these cars out. Ford is building cars for robot Uber or whatever, some new competitor, possibly, maybe Didi in China. If they're building these cars, and they're building several thousand of them, the costs start to come down, they gain more expertise, the maps get bigger, etc., over time. Then, maybe in 2025, they can bring a real low-cost solution out after a few years of running these things with companies like Uber and Lyft. They can bring it out to everybody. Maybe by then, enough people will have tried it that there's real consumer demand for this thing.
O'Reilly: Right. So, I'm sure the question on all the listeners' minds is -- and I'm fully aware that the argument could be made that, in the baseball game of driverless cars, we just had the first pitches. But Tesla's kind of been the leader with this. They've had autopilot on the road for about a year now. Does this take away Tesla's advantage or thunder? Because they came out and said, "Oh, we have the fastest car ever in production now." Does this steal any of Tesla's thunder?
Rosevear: If you talk to people at other automakers that are deep into self-driving development, they will tell you, it's not so much that Tesla's so far ahead. It's that they released their system early.
O'Reilly: And we talked about that on another show. They were like, "I can't believe Musk is doing this."
Rosevear: Right. Mercedes-Benz dropped a system -- in 2014 they launched a system that had very limited highway autonomy. That was really the first thing that's like a self-driving car. Tesla's was a step past that. It came out several months later. Of course, they've had the mixed results in the market, and now regulators coming in and saying, "Maybe it's not good to have a system that expects the human to take over under certain circumstances. Maybe we need to more clearly define it, the thing of handing control back from the system to the human." That's where Tesla's system is a little ragged, and where some of the other automakers are saying, "We're not even going to mess around with that. We're going to these level four systems that are fully self-driving or they're not, or they're off, period."
O'Reilly: Again, this is probably a bit speculative, but I just returned from visiting my parents in the Midwest. They're actually relatively young, my dad is in his mid-50s. And we're all sitting there at the dinner table, and I said, "Guys, I think this driverless car thing is going to happen in five or ten years. This is going to happen." And my dad just kind of chuckled. He was born in the early '60s, and I don't know if he's just kind of jaded on technological advances or what. But it doesn't seem like the average person still quite knows what's going on with all this.
This begs the question: How popular will this be? Because his next thing was, "I would not ride in these things with my family or children. I would be too nervous." And I was like, "Well..."
Rosevear: It's hard for most people to relate to this because they haven't seen it yet. We see these big consulting groups, academics, doing these studies, and they find 68% of people -- I'm making this number up, but it's in the vein of recent stuff that's come up -- said they won't try a self-driving car, or whatever. But this is what happens when really ground-breaking new technology is about to come out.
O'Reilly: Ten years ago, people said they'd never...
Rosevear: Yeah. And if you had asked in 2002, "Will you carry a computer in your pocket?" And now we all have iPhones or Android phones that are, effectively, computers in your pocket. Especially where safety is involved, it's going to take some time. People are going to have to see it, they're going to have to experience it, they're going to have to hear from their friends. "I went to San Francisco and rode in an electric Chevrolet that was self-driving, a Lyft car, and it was totally cool, it stopped at all the lights, it was careful in traffic, all by itself! it was really amazing!" And more of these stories come out, and more stories come out, and then 10 years from now there's a button you can push in your Ford F-150 that will drive you home.
O'Reilly: Or come pick me up from work.
Rosevear: Yeah! But I think the way this starts in the consumer world is where it's something you can switch on in your car sometimes. And people start to tinker with it and play with it. And they go to a dinner party and maybe have three glasses of wine and probably shouldn't drive home, and say, "Let's let the car drive." And the car gets them home safe and sound, and it's fine. And they think, "Maybe it can drive me to work tomorrow."
This is how it'll work. People will play with it. There'll be much talk about it. And eventually, and maybe not all that long from now, it'll be a regular thing. Not every car will have it. But it'll be like an iPhone. It'll be technology that we all see and understand, and it's no big deal.
O'Reilly: Before we head out, I did want to get your thoughts on a bottom line for investors here. We've mentioned a couple great companies. As you mentioned, Delphi is crazy profitable. It trades on the NYSE, DLPH, market cap of $18 billion, forward P/E of 16. Mobileye, of course, they're an Israeli company, but they trade here, MBLY, market cap at $10 billion. Of course, Tesla. Of course, all the other automakers. Where do you think -- from talking to all the people in the industry that you do -- the money is to be made in driverless cars? Is it software? Is it entertainment in my car? Is it just buying Ford? What do you see shaking out here?
Rosevear: It's a tough question. From a systems, software, hardware perspective, Mobileye is the purest play. Unfortunately, everybody has figured that out, and the stock is really expensive.
O'Reilly: Yeah, what is its earnings per share? Like $0.30? For a $48 stock?
Rosevear: Something like that, yeah. It's a really crazy valuation. And we have to look at that and go, "This is a well-positioned company, it's well-run, it's solidly profitable, it really does have the expertise." But, you have to pay big.
O'Reilly: So, it's the pure play on the brains that go in these cars? Is that bottom line?
Rosevear: Yeah. It's the pure play on the thing that makes the sensors talk to the computer. And on some of the software, actually, the deep learning software, the machine learning stuff.
O'Reilly: Is there any legacy type of repeat business cash flow type thing, like how Microsoft had Windows? Do you know what I mean? Is there any of that with Mobileye?
Rosevear: If so, it's not visible yet. Again, part of the problem here is, how is this going to shake out over the next four years? We don't know. But just in the last month, we've had a ton of news. We had this deal, we had Ford coming out and doing this big thing at their Silicon Valley tech center. Did you know Ford has a Silicon Valley tech center?
O'Reilly: I did not!
Rosevear: When Mark Fields came out and gave that whole news about, "We're going to be mass-producing level-four cars in 2021, and the whole world went, "Really?!" And we have Uber saying they're starting this pilot program any minute now in Pittsburgh, and this was after Lyft and GM said in May, "We're going to start a pilot program within a year." By a pilot program, I mean self-driving cars where there are people in the car ready to grab the controls, but they're operating as Uber or Lyft rides.
O'Reilly: On a previous show, we talked about the valuations of Ford and GM. What's Ford's multiple, like, 6 or something? It's crazy low. Is this really bad for the automakers? Because, we've also talked about how auto sales are historically at kind of a peak. It's like 17-18 million cars. Is this bad for them?
Rosevear: No. Not at all. There are people who argue, "Everybody will use robot Uber in the future and nobody will buy cars." I think that's decades away, if it ever happens. You might use robot Uber if you live in Pittsburgh, but if you live in Texas, you'll be buying F-150s. It's possible that in 20 years from now, F-150 will be electric and have self-driving capabilities, but it'll still be an F-150. That market may go away, but probably not in my lifetime.
O'Reilly: I had a bit of an insight when I was talking to someone earlier, like, "Oh man, auto sales are going to fall through the floor if nobody owns a car," but then I realized, if you have all these driverless cars circling cities and giving people rides, that's a lot of miles. And the life of a car might just be a lot shorter when they're driverless.
Rosevear: Yeah. How long do police cars last? How long do taxis last? On the one hand, there's thinking that electric cars will be simpler to maintain and more durable over time. On the other hand, there aren't that many of them out there with half a million miles yet, so we don't really know. There's still a certain amount of speculation to this. Yeah, there will be a market. Somebody's going to be selling cars to Uber and Lyft. We know where GM has put its play. And somebody is going to have to build the cars. And it's increasingly clear that, Tesla aside, Silicon Valley is not going to be building the cars. We've seen Google take a look at this and step away from the idea of building a car. They want to build controls, brains, operating systems, something like that. There are hints that Apple might get away from their idea.
O'Reilly: Yeah, that kind of got quashed -- them actually making the cars. All right, well, John, thank you for your thoughts. I can't thank you enough for calling in today.
Rosevear: All right, it's been a pleasure. Thank you! Take care.
O'Reilly: You bet. See you soon.
Rosevear: Take care!
O'Reilly: That's it for us, folks. If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at firstname.lastname@example.org. Again, that's email@example.com. As always, people on this program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For John Rosevear, I am Sean O'Reilly. Thanks for listening and Fool on!