In my Real Money column yesterday, I noted Tata Motors (TTM) as a play on the move to produce battery-electric vehicles (BEVs) that consumers actually want to buy. That model, the I-Pace from Tata's eminently British brand Jaguar, is being produced on a contract basis in Graz, Austria, by Steyr, a subsidiary of Canadian auto supplier Magna International (MGA) , using battery packs manufactured by South Korean supplier LG Chem, with profits ultimately flowing to Tata's headquarters in Mumbai, India. Have you reached for Google Maps yet? Yes, autos are a global industry.
Besides accounting for most of the stamps in my passport after following car stocks for most of my adult life, the global nature of the auto sector hints at the immense resources that it can apply toward a problem. As we move towards a future of autonomous vehicles (AVs) powered by electrified powertrains the sector faces two key challenges- Getting buyers for all the BEVs the global industry will produce over the next few years.
- Surmounting the massive challenges that face autonomous driving to get to a future where the car is a tool of mobility, not your own personal people mover.
How should a stock investor play this? Well problem solving is a lucrative factor for investors. If there is a killer app to be developed, the world's car makers, which as of my last count had $267 billion in cash on their collective balance sheets, certainly have the money to throw at it.
Problem 1 for BEVs is that the early entrants from the mass marketers look at the unloved gas-powered sedans that Western consumers are avoiding like the plague. Only Tesla (TSLA) avoided that fate, but in its first eight years as a public company TSLA burned through $9 billion in negative cash flow, so one has to wonder whether the Model S and X were really "worth it." The jury is still out on the Model 3, but the real styling winners in EV land will likely come from a very familiar place: Germany. I like Volkswagen (VLKAY) and BMW (BMWYY) as early winners in phase 2 (2019-2020) of the BEV war, and I wouldn't count out Daimler (DDAIF) , either.
Problem 1A is that the batteries aren't very good. It is very difficult to get an auto industry executive to admit to that. Sorry to blaspheme, though, but a 240-mile range and 8-hour charging time are really not what I am looking for in a new car. The battery industry is dominated by giants LG Chem, Samsung (SSNLF) and Panasonic (PCRFY) (which is Tesla's partner in its Gigafactories,) and those are far from pure plays. If someone, anyone, can innovate to increase range, and shorten charging times, that company will be in demand. As I have mentioned in prior Real Money columns, my battery play is tiny Applied Minerals (AMNL) , whose halloysite clay has chemical properties that could aid the development of solid-state batteries. It might just take a long shot like AMNL to disrupt the market for lithium-ion batteries for vehicles.
On the autonomous side, the problems are the amount of sensing technology required and the massive amount of computing power required to process that information at the incredible speed required to ensure pedestrian (and driver) safety. This excellent article in Wired details the amount and pace of computations required for Action Alerts PLUS holding Nvidia's (NVDA) Xavier SOC (system-on-a-chip), which has been developed for self-driving applications. Reading this quote from the article made my head explode:
Nvidia believes that a fully self-sufficient, no-steering-wheel-or-pedals kind of driverless car will need to run on a platform it's calling Pegasus. With two Xavier chips and two more GPUs, this platform can crunch 320 trillion operations per second.
After recovering from my head explosion, I noted that a) Nvidia is a good play on AVs and b) NVDA's stock chart (which would make one's head explode if one were foolish enough to short it) already reflects that. It's a phrase that I have used so many times in my Real Money column in the past 18 months, but if I owned NVDA I wouldn't sell it. I also like Intel (INTC) , with the sensing technology it acquired when it purchased Israeli company Mobileye, as another play on AV architecture.
So we've gone from Mumbai to Austria to Israel to Silicon Valley, but the final play on AVs and BEVs is found here at home. No, it is not the Big 3, and it certainly is not Tesla -- as next Wednesday's earnings report will prove. I mentioned Magna earlier, and companies that can successfully integrate AV systems onto BEV platforms for the OEMs -- Delphi (DLPH) is another systems integrator -- and will benefit from the auto industry's embrace of innovative mobility solutions.