Profit from the dawn of the connected car

MoneyWeek cover illustrationAs self-driving and network-connected cars take to the roads, firms producing their kit and preventing cyber-attacks stand to profit, says Sam Volkering.

It’s late on a Sunday evening. You’ve been on a road trip with the family for the weekend. You’ve all had a lovely time. The children are asleep in the back of the car. Your partner is in the passenger seat reading a book. You’re a bit tired, but push on. You’re keen to get home and into bed. It’s been raining the whole way back, so you’ve been cautious on the road, as it’s a bit slippery.

As you make your way towards the motorway, you snake through some B-roads, cutting ten to 15 minutes off the journey. There’s no traffic, so you find yourself ever so slightly cutting the corners on the way through. You head around a blind corner, doing about 55mph. Then a stationary car appears out of nowhere with its driver squatting beside the car changing a flat tyre.

The last thing you see is the car and the man in your headlights. You swerve instinctively, jerking the steering wheel to the right. You lose the back end and the car spins, slides and careers sideways, crashing into a tree.

I think any driver will recognise this scenario as realistic, even if they’d rather not think about it. It’s an example of the kinds of hazards we deal with every day on the road. But step into the future of connected cars and this story and its outcome look very different.

About five miles before you reach the blind corner, an alert pops up on your dashboard. It notifies you that a stationary car is parked on the inside of the corner. It also notifies you that the driver is outside the car, again on the inside corner.

The car knows this because it is communicating with the sensors in the other car, although the vehicles are five miles apart.

As you get within 200 feet of the hazard, you slow down. However, your car calculates that you are still going too fast, given the conditions. It automatically slows to 25mph and you calmly drive around the man and his car. You even have time to acknowledge him with a ‘fingers-off-the-steering-wheel’ wave. You arrive home safe and sound.

This vast improvement in road safety is one of the major benefits we can expect from the world of connected cars.

It’s a world we’re much closer to than you might think and canny investors can reap rich rewards if they get on board the companies involved.

The evolution of the connected car

You may never have heard of the Mitsubishi Diamante. In 1990, it won Japan’s Car of the Year award. It was a good car for the money. It had all the bells and whistles you could want: climate control, power everything, cruise control, etc. But it wasn’t until 1995 that Mitsubishi offered an option on the Diamante that would change the very way in which we drive – and set the scene for the future of connected cars.

Mitsubishi named this feature ‘Preview Distance Control’. It was the world’s first adaptive cruise control (ACC). It meant that while the car’s cruise control was on, a laser would detect another car in front and slow your car appropriately. It didn’t apply the brakes – just eased up on the accelerator and down-shifted through the gears. It was a pretty nifty feature for a relatively affordable car.

A few years later, Mercedes-Benz started to put this high-tech wizardry into its much more upmarket S-Class. For a car that cost up to around £78,000, you’d expect nothing less, of course.

Since then, car makers across the world have put ACC in their cars, increasingly alongside similar technologies, such as infrared and night-vision cameras. But new cars are about to get even more high-tech – they are going to start talking to one another.

The very earliest stages of vehicle-to-vehicle communication can be traced back to the late 1980s and the trucking industry. OmniTRACS was a satellite-based communications system pioneered by US technology giant Qualcomm, which back then was a fledgling, privately held wireless technology company.

The OmniTRACS system was for truck fleets. It allowed operators to track and monitor their vehicles in the field. The system deployed one of the first instances of machine-to-machine (M2M) communication.

The concept developed over the years. In 2012 the European Commission-backed ‘Safe Road Trains for the Environment’ project (SARTRE) used M2M communication to launch an audacious initiative. The idea was to make motorways safer by using self-driving cars and trucks. The sole car maker involved was Volvo.

Here’s how the experiment worked: a human drove the lead truck. Behind it was another truck. Behind that, Volvo S60, V60 and XC60 cars. The vehicles following the leader were all self-driving, with no input from the driver at all. This is achieved by making the vehicles communicate with one another – using lasers, sensors, cameras and lots of data swapping.

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Creating a new internet

Almost every new car these days has at least an element of connectivity. But Audi is one of the companies pushing the limits of this technology. The new Audi is not just a car – it’s a portable wireless hotspot. You can hook up to the internet anywhere, any time.

Live traffic updates and access to Google maps and Street View aid navigation, by helping you choose the most efficient route from A to B. And earlier this year, I saw their vision of the future – an auto-pilot option.

Using their Audi Connect platform, and a huge amount of data, Audi plans to make self-driving cars. This probably isn’t the first time you’ve heard about self-driving cars. And you may have dismissed the idea as impractical, or too ‘sci-fi’.

Well don’t – it’s coming soon. In fact, it’s pretty much already here. The 2014 Mercedes S-Class has so many sensors, radars and cameras that it could drive itself. And with future updates, it will. Mercedes chief executive Dieter Zetsche has already said that the S-Class “marks the beginning of autonomous driving”.

But exciting as that is, there’s a lot more to the connected cars theme than self-driving vehicles. Putting all this together will create a global network of data, cars and information. It’s almost like an alternative internet.

Here’s a real-world example of what I mean. Right now, Audi has 25 cars that connect to 1,000 traffic lights in Berlin. The idea is to help improve traffic flow through the city. Audi links the car with the central traffic computer in the city. This enables the car to analyse the sequence in which local traffic lights change.

It can then use this information to tell you what speed to go at, so that you never get stopped at a red light. But with today’s advanced ACC systems, the car could simply regulate its own speed and do it for you.

This isn’t just about avoiding the odd burst of road rage from impatient drivers, or making a journey easier in terms of traffic-light manoeuvres.

Driving continuously is more efficient than stop-start juddering your way through a string of red lights. In fact, Audi reckons that rolling this feature out across Germany could cut carbon-dioxide emissions by 15% and save 900 million litres of fuel.

Meanwhile, Continental AG and IBM are partnering up to develop the ‘Connected eHorizon’. This goes beyond the reach of typical car sensors. Its aim is to help cars ‘look around the corner’. Part of the project involves building a cloud-based system.

That means data from car sensors and other sources being stored on huge servers, which would act as central hubs across cities. It also means vast levels of data flow – from cars to the central hub and from road conditions to the hub and back to cars. It’s essentially a giant digital net thrown over the whole road system. And within that net, everything talks to each other.

As Continental AG says, map data will be improved “through crowdsourcing” – getting data from the cars themselves through their sensors. “The ‘Electronic Horizon’ can become a key feature in vehicles with the ability to receive and transmit information in real-time, ultimately enabling the vehicle to ‘look around the corner’, predicting road conditions ahead.”

This is great news. It’ll save you money in fuel costs. It’s good for the environment. It’s likely to be safer. We may even become more productive and efficient at home and at work. However, there’s one big problem with it all.

The dawn of the ‘hackable’ car

If cars are all connected to the cloud and to central hubs, they become a network. And as many of us already know from bitter experience, any computer network with a wireless remote connection is vulnerable to a cyber-attack. That means that the cars of tomorrow will need to be as safe as our computers – if not safer.

Next time you’re in the market for a new car, you won’t just be asking about airbags, crash safety and iPod docks. You’ll want to know: ‘How easy is the car to hack? How vulnerable is it to viruses?’.

This spells a whole new business opportunity for the cyber-security industry. Chris Valasek, director of vehicle security research with IOActive, and Charlie Miller, a security engineer with Twitter, put their heads together to study 20 different cars to give them a ‘cyber-rating’. Their aim was to see which were easy to hack and which were not.

The 2014 Jeep Cherokee was the easiest to hack of the 20 they looked at. One of the hardest was the 2010 Range Rover Sport. But one key problem they identified is that, because each manufacturer designs their fleets differently, each type of car requires a different sort of security tests. And that means even more work for cyber-security specialists.

NCC Group (LSE: NCC) is one company that’s already developed tools and techniques to assess car security. The technical term is ‘penetration testing’ – which just means they try to hack the cars to see if they’re secure or not.

I recently saw a presentation from two NCC security consultants, demonstrating the methods that can be used to launch a cyber-attack on a car. A simple option is to plant a bug via a UBS connection (in other words, you plug a device containing a virus into a suitable port inside the car). There was also a more complex example, where the experts took control of the entire system remotely.

What does this mean in practice? A car that’s easily hacked is a threat to its owners. A hacker could send a false alert to a driver, warning that they have a flat tyre. The driver pulls over and gets out to check, leaving them vulnerable to theft or carjacking.

That’s why as new cars are produced, testing their digital security is as vital as testing the brakes. It’s one of many opportunities the connected car will create in the future. We look at the best ways to profit in the box below.

The three stocks to buy now

Three companies in particular stand to benefit from the dawn of the connected car. First there’s Frankfurt-listed Continental AG (Frankfurt: CON). Continental has been a manufacturer of tyres for many years – it’s part of its heritage.

But it’s also a highly innovative company – it spends more than €1.8bn a year on research and development projects, such as the ambitious eHorizon venture with IBM (mentioned above) and its technology forms the cornerstone of just about every advanced car-safety system we have today. Anti-lock braking systems (ABS), blind-spot monitoring, lane-guidance systems – it’s all Continental AG.

In short, this is one of the world’s most important firms in the connected-cars field, and eHorizon takes it into another key area of technology, making it a vital part of the connected-car supply chain. Continental AG reckons that “in 2016, we will already generate sales of roughly €1bn with advanced driver-assistance systems”.

The current market cap is around €31bn, and over the last four financial years net income has grown from €576m to more than €1.9bn.

It trades on a price/earnings (p/e) ratio of 15 and yields 1.5%. With the world of connected cars now on our doorstep, you must consider Continental AG when it comes to investing in this huge opportunity.

NCC Group share price chartA much smaller firm with just as much potential is NCC Group (LSE: NCC). Although it has offices all over the world, the head office is in Manchester. It was formed in 1999, and has only been trading on the London Stock Exchange main market since mid-2007.

Of all its business functions, one is especially relevant to connected cars – its security-testing service. As I mentioned above, every car maker designs its range differently, which means there’s no universal standard to test for vulnerabilities.

That means a lot more work for firms such as NCC, which offer ‘penetration testing’ for car systems, in order to help manufacturers make their vehicles ‘hack-proof’. NCC currently has a market cap of just £431m.

That gives it plenty of room to grow as connected cars expand across the world. It trades on a p/e of 24, and pays a 1.8% dividend yield.

A third opportunity is a company I haven’t mentioned yet. You see, with all this technology and data flying around, you needreally fast computer processors to make it all work properly. That’s where US-listed NVIDIA (Nasdaq: NVDA) comes in.

Millions of new cars hit the road each year and many contain NVIDIA’s technology, which I believe makes it one of the best plays on the coming world of connected cars.

For example, if you take a look at the interior of Audi’s car of the future, you’ll see a lot of nice-looking displays and visual aids – all of them powered by NVIDIA’s processors.

Its Tegra processors are already used in Audi’s existing driver displays, while the Lamborghini Aventador and Tesla’s Model S also use NVIDIA’s technology. And when the new generation of connected cars – ones that can detect pedestrians, read speed signs, and use night vision – come into widespread use, they’re likely to employ NVIDIA’s processors.

The company has a market cap of about $10.4bn, and it’s highly innovative – its processors are also key to the future of mobile technologies. NVIDIA trades on a p/e of 15, and pays a 1.8% dividend yield.

• Sam Volkering is the editor of Revolutionary Tech Investor, an Australian technology newsletter.

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