How You Should Be Thinking About Autonomous Driving

It's no secret that automakers and technology companies are putting a lot of money and effort into developing autonomous vehicles: cars and trucks that can drive safely on public roads with no human driver needed.

While it may be many years before autonomous vehicles dominate the world's roads, autonomous-driving technology is already emerging -- and that means big opportunities for investors are already starting to appear.

Here's how investors should be thinking about those opportunities.

The company formerly known as the Google Self-Driving Car Project has come a long way from the cute-but-impractical "panda" test cars that debuted just three years ago. Waymo's current test fleet is made up of custom-built Chrysler Pacifica Hybrid minivans fitted with its latest sensors. Image source: Alphabet.

What is autonomous driving?

The dictionary tells us that something "autonomous" is self-contained, able to function without outside control. In the case of vehicles, an autonomous vehicle is one that can drive itself without a human driver. Autonomous vehicles are often referred to as "driverless" or "self-driving," or sometimes "robotic"; it's all the same idea.

What are the "levels" of autonomous driving?

Often, in articles about autonomous-vehicle technology, you'll see references to "Level 4" or "Level 5" systems. Those levels refer to standards set by SAE International (a professional association of automotive engineers) that are widely accepted around the world.

The SAE's standards are intended as a quick-reference guide to a given vehicle's level of automation. There are six autonomous-vehicle levels, ranging from Level 0 (no automation at all) to Level 5 (a fully automated vehicle that can operate under any conditions a human driver could).

But here's a quick summary of what you need to know about self-driving systems:

• Level 2 designates an advanced driver-assist system, one that can control both steering and braking under certain circumstances, but isn't officially considered self-driving.
• Level 3 is "conditional automation," meaning that the vehicle can drive itself under strictly limited circumstances (only on a highway, for instance). Level 3 systems require that a human driver be alert and ready to take over quickly. That has made them controversial, and some automakers have said they will skip Level 3 entirely.
• Level 4 is "high automation." In practice, that has come to mean a system that can do most of what a human driver can do, but only in a limited (well-mapped) geographic area. Most of the autonomous-vehicle systems likely to come to market in the near future are considered Level 4 systems.
• Level 5 is full-blown autonomous driving: The car can go anywhere and do anything that an experienced human driver can.

It's important to remember that the levels are designated by the maker of a system; they're not assigned by an outside agency. Officially, both Tesla's (TSLA 0.01%) Autopilot and General Motors' (GM +0.00%) Super Cruise systems are Level 2. Volkswagen AG's Audi subsidiary is in the process of rolling out the first system to come to market with the Level 3 designation.

Will this be the first mass-produced autonomous vehicle? GM said its self-driving Chevrolet Bolt EV could go into production soon. Image source: General Motors.

How and when will autonomous vehicles come to market?

Most companies working on autonomous-vehicle systems are focused on one (or more) of three potential markets:

• Vehicles intended for ride-hailing use in urban environments, with services like Uber Technologies or Lyft
• Commercial vehicles that can drive automated delivery routes
• Vehicles for consumers, particularly luxury vehicles

As I write this in the fourth quarter of 2017, it looks likely that the first Level 4 autonomous vehicles to be mass-produced will enter service with ride-hailing businesses, probably within a year or two.

But the other markets will be significant within a few years: Nearly all luxury-car makers are chasing the early lead staked out by Tesla with its Autopilot system, and several makers of light and heavy trucks (and technology companies that hope to do business with them) are working on autonomous systems for commercial-truck use. Ford Motor Company is even testing an autonomous pizza-delivery vehicle.

What companies are likely to profit most from autonomous technology?

That's a hard question to answer, because the market hasn't really taken shape yet. It's also complicated by the sheer number of development efforts underway: It's likely that Level 4 technology, at least, will become a commodity within a few years of its introduction.

But there are several companies with the potential to see major bottom-line growth as autonomous vehicles become common:

• NVIDIA (NVDA 0.01%) makes graphics processors that are being used to power the computer "brains" of many autonomous vehicles in development now. The company has said its total addressable market for autonomous driving will be $8 billion a year by 2025. Its current clients include several automakers with advanced autonomous-vehicle development efforts, including Audi and Tesla.
• Intel (INTC +0.00%) is making a big play to counter NVIDIA. It recently purchased Mobileye, a leader in the machine-vision systems that are key components of advanced driver-assist and self-driving systems. Intel is competing to supply processors both to makers of vehicles and to the data centers that will be needed to support autonomous-vehicle networks; it sees the total addressable market for both growing to $70 billion a year by 2030.
• Among big automakers, General Motors stands out as having staked out early leads in both battery-electric and autonomous-vehicle technologies. GM recently announced that it has a "mass-producible" Level 4 electric vehicle ready to go; it may be waiting for regulatory approval. CEO Mary Barra has said that these technologies could drive significant profit growth for GM over the next several years, though she hasn't yet given a detailed forecast.
• Daimler AG (DDAIF +0.01%), which owns several medium- and heavy-truck brands as well as the Mercedes-Benz luxury-vehicle brand, is believed to have an advanced autonomous-vehicle development effort. That's true of most of its rivals, but Daimler's truck business gives it several profitable ways to bring such a system to market.
• Tesla was an early leader in this space. If it can get the hang of mass production and manage to perfect its Autopilot system, it could be a big winner. But its chances look slimmer as bigger automakers like GM race to close the tech gap.
• Last but certainly not least, tech giant Alphabet (GOOG +0.02%) (GOOGL +0.02%) has established a subsidiary called Waymo LLC that is charged with bringing its pioneering autonomous-vehicle system to market. Waymo isn't an automaker and doesn't intend to become one, but don't count it out: Its high-profile tech savvy could make it an appealing partner for an automaker that finds itself falling behind rivals.

The upshot: How to think about autonomous driving

Here's the takeaway for investors: Level 4 autonomous vehicles are likely to begin appearing soon, within a year or two. The initial markets for them may be limited, but they're likely to grow huge over time. And while it's too early to declare winners, and it's likely that Level 4 technology will be a commodity within five to seven years, we can already see that several companies are particularly well-positioned to profit as autonomous-vehicle technology enters the mainstream.