Profit from the new age of the car

The future of motoring is electric, driverless and ‘telematic’. Smart investors will buy in to the new technology early, says Matthew Partridge. Here, he explains how.

A popular story claims that Bill Gates once said that if the car industry were as innovative as Microsoft, by now it would have developed a car that got 1,000 miles to the gallon and cost only $50. The anecdote is sadly false, but it contains a large element of truth.

Modern cars are safer and far more comfortable than Henry Ford's Model T. But the basic idea of the car has changed little since the development of the internal combustion engine in the 19th century.

This could be about to change. From small start-ups to global conglomerates, firms are researching ideas that will drag car design into the 21st century.

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Three key ideas electric cars, smart' insurance, and driverless vehicles look particularly interesting to both drivers and investors. While advanced versions of these technologies may take a decade or more to appear on the roads, some are being trialled, or have already hit the market.

The rise of the electric car

The idea of powering cars with electricity, rather than petrol or diesel, is not new. Indeed, until the 1920s there were many electric car models. However, mass production, changes in engine technology, and cheap oil saw them pushed out of the market.

Even after the energy crisis of the 1970s, there was little commercial interest. An attempt by California in the 1990s to force car companies to offer electric models sparked some interest, but this collapsed when lobbyists were able to get the ruling reversed.

But in the last decade this has begun to change. Concerns about global warming on one hand, and soaring oil prices on the other, have made European and American politicians more keen to push technology that could reduce overall fuel consumption, and therefore dependence on oil.

Indeed, one condition for the US bail-out of the car companies in 2009 was increased investment in electric cars. In 2009, General Motors released the Chevy Volt fuel-electric hybrid, which was subsidised by a large tax credit.

The American government has also raised fuel efficiency standards. In less than 15 years, cars and light trucks will be required to get a minimum of 54.5 miles to the gallon. No petrol car currently on the market meets those targets. So the chances are that firms will respond by working on advancing electric cars further.

Governments aren't the only ones getting behind electric cars. Consumers seem keen too. In 1997 Toyota released the Prius, a range of petrol-electric hybrids. Experts felt the car would only appeal to a niche market. But sales gathered momentum and the Prius is currently the world's third best-selling car (behind the Ford Focus and Toyota Corolla, if you're wondering).

Of course, hybrids are just a staging post on the journey to fully electric cars. Both Nissan and new entrant Tesla Motors have launched cars that are petrol-free. Tesla Motors, run by maverick technology guru Elon Musk, perhaps best known for his bids to create a private space industry, has won plaudits for its sports cars (Roadster) and luxury saloons (Model S).

One of the biggest obstacles to more widespread use of electric cars is that they have to be re-charged relatively often. Today it remains very difficult to find somewhere where you can top up your battery. This isn't a major issue for shorter trips, since owners can recharge at home overnight. Many workplaces also have charging facilities. But for longer trips, the lack of charging stations is much more inconvenient.

Two solutions are emerging. One is to increase the number of stations. Tesla has made existing points more accessible to the wider public, and has promised to build a large network of points in California within the next two years. It is also improving the speed at which recharging takes place, with the aim to get the battery fully charged within half an hour.

Cities on both sides of the Atlantic are acting too, installing more public charging points. This is partly to be seen as environmentally friendly, but also to get ahead of any problems stemming from greater use of the domestic electricity network. London mayor Boris Johnson wants the city to have 1,300 public charging points by the end of next year.

Manufacturers are also looking at the idea of wireless charging. This would remove the need for a station instead, you would simply receive a charge via a wireless network, even while driving. Trials have shown this to be viable and safe, with only a small amount of energy lost in the transfer.

An innovation in insurance

Another major innovation is in the field of insurance. Last year the European Court of Justice banned insurance companies from using gender to determine insurance rates. This presents a huge problem for drivers and insurers: there is strong statistical evidence that female drivers are generally safer than male ones.

According to one study, men account for 98% of convictions for dangerous driving, while another found that on average young men claim 60% more on their insurance than women of the same age.

Banned from discriminating on gender, companies are keen to find other ways of identifying careful drivers. Several schemes have sprung up offering lower premiums to those who obey certain conditions, such as limiting their speed, or not driving at night.

To monitor compliance, participants have to install a black box' device, which tracks car speed and usage. The data can also be used to analyse other elements of a person's driving performance, such as braking ability.

Consultancy Towers Watson, which has been working with insurers in the field of telematics', as it's called, thinks that monitoring could reduce accidents (by encouraging more careful driving), and make insurance pricing more accurate. While such schemes are in their infancy, demand for them is growing rapidly.

Indeed, there has been a 15-fold increase in the number of participants during the past three years: unsurprising, given that they can cut premiums by more than half, particularly for young drivers.

Soon there may be no choice in any case. Growing numbers of manufacturers are including monitoring equipment in their new models. What began in the 1980s as a way for manufacturers to assess the performance of safety equipment has broadened into a variety of different systems, many of which continuously send back data on all aspects of a car's components.

It is estimated that 85% of new cars sold in the US now contain event data recorders'. For example, General Motors has developed a system called OnStar. This allows engineers to change a car's settings remotely in order to optimise performance and fix problems, reducing the need for labour-intensive formal servicing. But it also sends a message to emergency services in the event of a crash, and even allows stolen vehicles to be tracked and shut down.

Driverless vehicles

These developments could substantially alter both our driving habits and the economics of driving. However, the most exciting shift has to be the prospect of removing humans from the driving seat altogether. And it's much closer than you might think.

Seven years ago Google developed the first driverless car successfully to complete a test set by the US Defense Advanced Research Projects Agency (DARPA). The technology firm currently has around 12 vehicles, which have clocked up nearly half a million miles between them under a wide range of conditions.

Last year Google persuaded the Nevada State Legislature to pass a bill allowing driverless cars on the roads, and California will follow by 2015.

Several major companies are following Google's lead. BMW's robot car has successfully driven from Munich to Nuremberg. Volkswagen's driverless car was able to navigate the tightly-curved roads and tracks of Pikes Peak, a 14,000ft mountain in the American state of Colorado.

Market research firm Gartner thinks driverless cars could hit showrooms in as little as eight years. When they arrive, many believe they will quickly become standard. Indeed, if they are safer than human drivers, they may even become mandatory.

This isn't far fetched. Robot vehicles' are already operating in a commercial environment. At Rio Tinto's West Angelas ore mine, five GPS-guided trucks move material around and refuel. The mining giant plans to have 150 such vehicles by 2015. BHP Billiton is using similar technology at a coal mine in New Mexico.

Meanwhile, car makers are already quietly automating many of a driver's most annoying tasks. Toyota has an automatic parking system on many of its high-end models. GM, Ford and BMW are developing an automatic steering system that can help keep cars within lanes in slow traffic. BMW's will be commercially available next year the i3, an electric car.

That's good news for ageing Western populations the number of people losing their driving licences on medical grounds is rising. If more and more work is done by the car itself, these rules could be relaxed. For more on the best ways to play these trends, see below.

What comes after peak car'?

Until recently, it was assumed that both car ownership and the number of journeys taken would continue to rise for the foreseeable future. However, a growing number of experts believe demand (in the developed world at least) for car transport may already have peaked, and may even be falling.

For example, Britain's Departmentfor Transport (DfT) National Travel Survey suggests that the number of miles driven per driver in 2010 was 13% lower than in the mid-1990s.

Some of this decline is due to the rise in oil prices and the fragile economy. Indeed, the DfT expects overall car traffic to return to 35% by 2035. However, other experts believe this is all part of a longer-term shift away from cars.

The think-tank Transport for Quality of Life suggests that the internet may have played a part: online shopping, social networking and teleconferencing all reduce the need for transport. Indeed, the number of young people with driving licences has fallen sharply in several countries.

If the DfT's figures prove to be overly optimistic, and car usage really has peaked, it could have serious economic implications. On the bright side, cutting car usage could be good news for both the environment and in terms of driving oil prices lower.

But the government could also end up facing a huge bill from its plans to offer investors in roads a guaranteed income, for example. A decline in car use also suggests that unless the car industry can find a compelling reason for consumers to replace existing models more rapidly, it will have trouble preventing a decline in sales all the more reason to invest in revolutionary technologies like the ones described in this story.

What to invest in now

While an increasing numbers of firms are making electric cars, the best pure play is Tesla Motors (Nasdaq: TSLA). Its main model is the Tesla Roadster, a sports car loosely based on the Lotus Elise. It has received good reviews, with Auto Express praising its "Ferrari-rivalling" power and calling it "a real achievement".

The Model S, a luxury saloon, has also been praised. Both models are aimed at the luxury market, which should help to protect them from future competition.

Tesla also produces electric car components, chiefly lithium ion battery packs. It has also teamed up with other car companies to apply its technology to their vehicles. Both of these activities allow it to benefit from the growing overall demand for electric cars, as well as sales of its own models specifically. Its major partnerships include Mercedes, Daimler and Toyota.

While it has not yet made a profit, strong sales have enabled Tesla to repay government loans ahead of schedule. This year, Tesla's share price has been extremely volatile, falling by nearly 10% at the end of last month after it cut this year's revenue estimates by $40bn as it produced fewer cars.

However, Goldman Sachs argues that production levels are less important than maintaining quality, adding that output at Tesla's plant has still increased substantially since the summer. It has a price target of $42, an upside of over 40% on the current share price.

Several firms are hoping to profit from greater demand for charging infrastructure. One of the more interesting is ECOtality (Nasdaq: ECTY), which runs Blink, a network of over 5,000 physical charging points, which have already been used over one million times and have provided enough energy to drive a total of 41 million miles.

ECOtality has also benefited from the help of several cities and the American government, which has provided grants and loans to help speed up further expansion. It has a tiny market cap of $11.7m, which means it is definitely a high-risk play but if it takes off, it could deliver very high returns.

Qualcomm Incorporated (Nasdaq: QCOM), which sells products and services based around wireless technology, takes a slightly different approach. It is at the forefront of schemes designed to allow electric cars to be recharged wirelessly, which would remove the need for physical charging stations. Its Qualcomm Halo system is currently being trialled in London. It has also already persuaded electric car maker Delta and minicab hire firm Addison Lee to take part in the trial, and hopes to get Renault involved too.

While it trades on a relatively high price-to-earnings (p/e) ratio of 18.5, earnings are expected to grow strongly. Clearly, if Qualcomm's wireless recharging takes off, it's a threat to the likes of ECOtality. That's why it's always a good idea to build a diversified portfolio if you are investing in these sorts of areas your winners can offset your losers.

When it comes to black boxes' for drivers, risk consultancy Towers Watson (NYSE: TW) is at the forefront of the telematics revolution. It is working with Verizon subsidiary Hughes Telematics to offer a DriveAbility service. This will allow insurance companies to understand how the data generated by black boxes can be used to measure risk.

The overall aim is to provide a one-stop shop for insurers, so that they can buy a system off the peg, rather than designing one from scratch. This will save time and money, allowing them to meet rapid demand for telematic-informed insurance. The shares trade on a forward p/e of 9.7.

As we noted above, several car companies are working on self-driving cars. Of these, BMW (DE: BMW) seems to be the closest to bringing a viable model to market. Its i3 electric car, due to be released in just over a year, will come with radar-controlled cruise control and a Traffic Jam Assistant' system. The latter will steer the car automatically in slow traffic, maintaining an appropriate distance from other cars and keeping within lane markings. On 7.8 times earnings, the shares look decent value.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri