In the past 30 days, self-driving cars have officially hit the mainstream, going from a niche topic among auto analysts and enthusiasts to one discussed on The Late Show and featured on 60 Minutes in recent weeks. The mobility movement is now part of the public consciousness, and the long-term implications are significant for the auto industry and investors. As the coming auto revolution becomes dinner-table conversation, these past few weeks have served as a nice snapshot of an industry at an inflection point.
Silicon Valley auto
After opening up its test center recently to journalists, and garnering a wave of headlines in the process, Alphabet (GOOGL -0.24%) (GOOG -0.15%) -- until recently, known as Google -- is now the poster child of the automotive revolution. Its fleet of 48 autonomous vehicles, including 25 adorable prototypes, have driven 1.2 million miles by themselves and another 900,000 with a human driver. Those miles are collective; thanks to machine learning, each vehicle contains the lessons of those 2.1 million total miles driven.
They have been involved in a few accidents along the way, but it has (allegedly) never been the computer's fault. Besides, an autonomous car doesn't have to be perfect; it just has to be better than a human, and it is easily leaping over that low hurdle. It is estimated that driverless cars will ultimately reduce auto fatalities by 90%, which would be about 300,000 American lives saved a year.
Image source: Alphabet.
Investors shouldn't confuse Alphabet's tests with some fun science project: The company is serious about changing how we travel. And it should be, as the addressable market easily dwarfs the opportunity in smartphones and Android devices by orders of magnitude. Capturing only a small percentage of the multitrillion-dollar mobility market could mean tens of billions in revenue to the company. To that end, Alphabet hired well-regarded auto veteran John Krafcik on Sept. 13 to lead the operation. He worked at Ford before running Hyundai's U.S. operations, and also served as CEO of TrueCar. His experience will become invaluable when commercializing this venture. It's unlikely that Alphabet will build this fleet itself -- it's actively looking to partner with an existing OEM to quickly scale production, which could be a contract manufacturer such as Magna or perhaps even a traditional automaker. Investors should watch developments closely.
Alphabet's fiercest rival, Apple (AAPL -0.38%), is not about to cede this enormous market opportunity without a fight. In fact, the world's most valuable company is further along than many realize, given the shroud of secrecy that hangs over Apple product development. The Wall Street Journal reports that Apple is targeting a 2019 release date -- yes, one year before Alphabet's. The Journal also reports that Apple has a team of 600 already working on Project Titan, and a mandate to triple that staffing. Details around the Apple Car are not known -- what will power it, whether it will drive itself, or even if a customer can own one. I suspect it will be electric and an autonomous ride-sharing service and app directly competing with Uber and Google.
A target date four years away may seem impossibly close, but Apple has smart people and the Mount Everest of cash piles -- all that's needed to make miracles happen. Apple already discussed testing such a vehicle with the California DMV earlier this summer, so it may not be long before we start seeing disguised prototypes on the road.
Apple likes to control the entire user experience, and in some ways a car is the not only the "ultimate mobile device," as Apple SVP Jeff Williams said; it's also the ultimate closed system. Apple can design the hardware, write the software, and painstakingly craft an ideal user experience. Apple gets to dictate who enters its closed system. Drivers collectively waste hundreds of billions of hours a year behind a wheel, time that can be redirected either working or consuming media within the Apple ecosystem. The value of that captured consumer, the data collected, and of course charging for the transport itself makes this opportunity too great for Apple to ignore.
The rest of the traditional manufacturers should be more concerned about these deep-pocketed tech stalwarts entering their market. Investors tend to underestimate the impact of true disruption. Ask yourself: Is it more likely that Apple and Alphabet fail to find traction with driverless cars and stagnate as ancillary competitors, or is it more likely that Detroit's Big Three are closer to becoming the next Nokia, Motorola, and BlackBerry, unable to move fast enough to counter a new paradigm?
VW's unclean diesels
In terms of embarrassing self-inflicted wounds, Volkswagen (VWAGY -1.50%), in rigging its diesel emissions, ranks right next to the QVC presenter who stabbed himself with a katana. It turns out the secret to VW's success in creating efficient, fun-to-drive "clean diesels," representing roughly 70%of the U.S. diesel market, was not a matter of magic known exclusively to Wolfsburg's engineering wizards, but instead a cheat to hide emissions up to 40 times greater than the allowable amount.
The cost of the scandal to Volkswagen will be immense. The company has already set aside over $7.3 billion, and that still might be underestimating the financial impact of its 11 million-vehicle recall. A potential fine could be as high as $18 billion, although that's unlikely. What is certain is that there will be litigation expenses, costs for fixing the cheating software, incentives for retaining angry customers, and a massive PR campaign and apology tour.
That said, VW is one of the best positioned global automakers for the future, now trading at a massive discount. The sprawling conglomerate has several valuable core assets, was one of the first to invest in modular platforms, and is pursuing autonomous driving and electrification through higher-end brands Audi and Porsche. It will, however, have tough times ahead, and investors looking for a deal could catch a falling knife instead, especially if we're nearing the high point of this auto-sales cycle. Concerns existed that VW's estimates were already on the rosy side, so I would urge caution to the value hunters.
The fallout of this crisis won't be contained to VW: It will affect the rest of the industry as well. Increased government scrutiny will increase costs for all manufacturers, as actual fuel economy often lags the EPA numbers. Given the ever-rising global standards for fuel economy and emissions, this could accelerate the switch toward hybrid and all-electric vehicles.
Model X-citement
On the last day of the month, meeting a September launch date by the skin of its teeth, Tesla Motors (TSLA -4.32%) unveiled its new Model X to great fanfare.The all-electric SUV appears to surpass expectations with good looks, impressive safety, hospital-quality air filters, a panoramic windshield, innovative seats, and yes, those stunning falcon-wing doors. It also features autopilot, Tesla's advanced driver safety tech, which will include a fully autonomous -- as in hands-free -- driving mode under certain heavy traffic conditions.
Image source: Tesla Motors.
Unlike some bulls, I don't think Tesla is ready to rocket to $400 per share and beyond, but the arrow is clearly pointing up on the stock. The Model X has a chance to capture imaginations, with the potential to be a best-in-class vehicle in the most important market segment.
Thinking more broadly, Tesla is in a lot of ways better positioned than some legacy rivals. It won't have to deal with increased emissions scrutiny or pour resources into new powertrains that meet heightening global standards. Tesla will have access to the cheapest kWh batteries on the market. And in an automotive world where bleeding-edge tech, especially in advanced safety, is emphasized, Tesla is already far ahead of the curve. This isn't a safe stock: Execution risks abound, and the competition is about to get fierce -- the Germans are coming for Elon Musk. But if we're nearing the top of the buying cycle and loose financing is about to tighten, Tesla won't have the overcapacity concerns or see the same deterioration of its customer base as traditional automakers. Over the long term, Tesla has to drive costs down on its vehicles and potentially leverage its lead in electrification and autonomy to emerge as a broader mobility service, or risk remaining a niche player.
The events of the past month highlight that the way forward for the industry is away from the 100-year-old tradition of gas-powered privately owned vehicles with human drivers and toward electrification, shared mobility, and vehicle autonomy. And that transition is happening faster than the broader market realizes yet. Investors would be well served to favor names at the forefront of this revolution.
