Pieter Schop, Senior Portfolio Manager Equity Specialties and Manager Information Technology funds at NN Investment Partners
The outperformance of global technology stocks is to a large extent driven by a new cycle of technology penetration in multiple industries. Automotive is an important sector that is sowing the seeds of a new cycle of growth in technology.
In automotive three megatrends are taking place: electric vehicles, advanced driver assistance systems and car connectivity. Technology companies will profit from all three. The big car manufacturers are adopting technologies in order to remain competitive in a new, highly innovative, technology-driven automotive industry. The number and value of electronic devices and IT components per vehicle is increasing and expected to rise tenfold from current levels. These technologies demand heavy investments. Traditional car companies that want to keep up with the pace of innovation will have to mimic the investment patterns of tech companies. They will have to educate their investor base that their focus is shifting from profitability to growth opportunities.
Recent M&A activity shows us where the industry powerhouses think the world is going. For example, Intel recently spent $15bln to buy MobilEye, a developer of autonomous driving software. German chipmaker Infineon bid for Wolfspeed, but its takeover attempt was blocked by the US regulator. US mobile chip designer Qualcomm acquired NXP, the biggest supplier of chips to the automotive industry, for $47bln last year. New research initiatives also point in the same direction, with Google and Apple working on autonomous driving software and Ford’s appointment of its smart mobility head as new CEO. Among tech companies, we see power semiconductor, connector, sensor, and circuit protection manufacturers as the key beneficiaries of the electric vehicle adoption trend. Power semiconductor manufacturers, such as Infineon, Texas Instruments and NXP, could play a key role in providing the inverters that are essential for the electric motors. High-voltage electricity, advanced infotainment systems, as well as the increasing number of special sensors require a reliable connection. TE Connectivity and Amphenol are connector companies active in this field.
Almost all car accidents are caused by human error. This gives widespread support for advanced driver assistance systems, which represent the bedrock of future autonomous cars. First, a full set of sensors is necessary for every unit produced in order to be able to navigate in any driving situation that may occur in a regular traffic environment. In order for cars to be fully autonomous, all the sensors have to work in tandem in real time, and that requires integration of various sensors. Cars will have to communicate with distant servers, cellular networks, devices and with other cars. Finally, cars must navigate through any environment and in any weather condition. For that reason, all our roads, streets and highways must be digitally mapped. Furthermore, these maps have to be constantly updated so that the sensors and the software driving the car can recognize location, react to obstacles and ad hoc traffic situations.
Car connectivity is another major area where industry development is concentrated. There are more than 20bln connected devices today¹. A number which we think could potentially double in the next years. These communications will use 4G, Wi-Fi, Bluetooth and other broadband channels. Vehicles on the road will communicate traffic data, weather conditions, positions, speed and other information, leading to more efficient energy consumption, less congested roads and safer transport. For example, Maxim and Texas Instruments currently offer modules that facilitate the fastest uncompressed video transmission that real-time applications need.
These connections leave room for cyberattacks. Protection of data, sensors and controls is probably the most important issue at hand when it comes to the infrastructure of connected cars. Unwanted remote access to telemetries, powertrains, locations and other on-board systems poses threats. Security companies such as Symantec are working on new, deep-penetrating software security systems that protect the vehicles down to the sensor-level from unwanted access.
These developments in the automotive sector are characteristic for the bright prospects for the technology sector in our view. We are optimistic about the ability of the sector to outperform the broader market going forward and convinced that the sector will continue to play an important role in productivity gains within the broader economy.
¹ Cisco Visual Networking Index, 2017