Disruption is emerging across all economies, markets and industries, but is often seen as just the arrival of technology, the mobile phone and the use of the Internet. However, it is clear that the greatest impact of disruption will be felt where we find the convergence of both changing and enabling technology, generational change and behaviours and accommodative regulation. Nowhere will this convergence be more evident than in the auto industry.
Disruption via fuel competition
First, there is the disruption caused by the competition of fuels, with gasoline giving way to diesel in many markets, all reliant on the price and availability of oil. This fuel competition has recently been exacerbated by the Volkswagen "dieselgate" scandal which will undermine diesel investment outside Europe. However, gasoline of whatever variety is now being attacked by electric battery power and hydrogen-fueled cars – both of which are considerably more environmentally friendly, at least initially (as I do not want to argue that storing coal-fired electricity in a battery is green)! This new fuel competition seems to represent a battle for market share, in which the established automakers should be able to successfully defend against Tesla, a company that has little capital and little manufacturing and engineering prowess, although it does have a new business model and an innovative brand.
Disruption via technology
Second, the industry has already been experiencing greater automation of the car with regards to safety, navigation and control of some 2,000 moving parts, akin to a mobile orchestra with the driver often just setting the direction and speed of the vehicle. An electric car like a Tesla has only 20 moving parts, so that it is less of an art to assemble and design, changing one of the key auto barriers to entry. As technology expands into this sector, we find that a car now has more semiconductor processors than the Apollo space rocket, and that drive-by-wire is now accepted by consumers. What many may not realize is that a modern smartphone has sufficient processing power to drive the car "on an app" so that driverless driving is indeed nearly a reality. Global miner Rio Tinto already has driverless ore trucks operating by GPS satellite navigation in its mines in Australia.
Disruption via public policy
Third, it is clear that many governments are keen to make their roads safer, as it is a sad fact that over 1 million people die in car accidents around the world annually. Thus many are openly attracting driverless trials and reviewing with the innovators, like Google and others, as to how these vehicles would work on a road system dominated by human drivers, pedestrians and other day-to-day hazards. Nevertheless, the direction of travel is clear and as all parties recognize the safety, efficiency and feasibility of these automaton cars, then a new market will rapidly emerge. Insurers are well aware of the threats from this trend as auto insurance accounts for approximately 25 per cent of all property and casualty premiums, and one can envisage a world where driverless cars are "insured by their operator rather than an insurer" in the future.
Disruption via the millennials
Fourth, the millennial generation, which is made up of people born after 1985, is increasingly less interested in driving or owning a car, unlike their parents’ generation. They will be very comfortable "Ubering" or "Zipcaring" a vehicle when they need one, such that consumers will drive substantial change in not only the numbers of cars needed, but also how they are used. Studies estimate that if an entire economy used Uber-style cars, then the economy would need only 5 per cent to 10 per cent of the current car population, since 90 per cent of the time a car is parked and unused!
Restructuring an entire industry
In the next 10 to 20 years, we will see not only the disruption of the existing auto industry in terms of fuels and number of cars being manufactured, but also in terms of usage and consumption. As a result, the auto will eventually no longer be an essential tool for each household; instead, an auto will be a motorized utility that you pay for when you need it. These changes will disrupt industries and services, from repair to insurance. Winners and losers may well change many times over the next decade and enormous amounts of capital may be written off or restructured.
If you want to drive your car, you will need to go to a racetrack where you can turn off the computer!
About the Author
Neil Dwane is the Global Strategist for Allianz Global Investors and part of the Equity Investment Management Group. He coordinates and chairs AllianzGI’s Global Policy Committee, which formulates the Allianz Global Investors house view, as well as leads and directs the agenda setting for the biannual Investment Forums. Mr. Dwane still manages some European equity portfolios, and thought leadership articles written by him are published regularly.
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Important Information
The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.
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