It could take years for fully self-driving cars to become reality. But aspects of the technology are being adopted now, and they will make driving a safer and better experience for everyone, says David Giroux, portfolio manager and chief investment officer for T. Rowe Price Investment Management.
Adoption of the technology will have important ramifications for investors, he says. “Over the next 10 years, as more consumers buy cars that incorporate these technologies that reduce accidents, that’s bad for auto insurers. Maybe lawyers, too—anyone who benefits from auto accidents,” Giroux says. “But from a societal perspective, it’s a great thing. And the technology exists today.”
Automated driving is one of four big trends Giroux sees transforming entire sectors of the economy and the way we live and invest. He discussed their impact with Barron’s. An edited version of the conversation follows.
Barron’s: Why is automated driving among the most important and surprising trends that investors should focus on?
David Giroux: The market has been too focused on totally hands-free driving. That has been pushed back 10 years. The technology works, but it’s taking longer [to implement]. I think what’s really going to play out over the next five years is two things.
We have what is called Level 2 technology, where you can take your hands off while driving on the highway. It’s not fully automated driving, but I think it will revolutionize the customer experience in the automobile. There are some broad implications of this. Once cars convert to this technology, some of the safety enhancements can reduce accidents by up to 80%—think automated braking or lane-centering technology.
If you take a long view, that’s bad for auto insurance companies, because premiums will go down as accidents decrease. Also, if you think about automated driving and the amount of radar, sensors, and chips that have to go into cars, that’s a positive development for companies like
NXP Semiconductors
(ticker: NXPI). They’re the ones that really allow the technology to work. They’ll be the big beneficiaries. That’s a 15- to 20-year transition.
For consumers, what that means is being able to drive hands-free. They will be able to take their hands off the wheel and feel very safe.
It sounds like hands-free driving could have the kind of impact that airbags have had in reducing fatalities.
Exactly. I used to cover an airbag company as an analyst. Airbags greatly reduced the odds of dying in a car accident. What’s really interesting is that new technologies may have an even bigger impact because they will automatically prevent accidents. You’ll be driving on the highway and you won’t have to pay attention. You can watch a movie, or do some work. That will give every American some time back. That’s powerful. It’s like your car going from a flip phone to an iPhone.
What’s your second big-picture trend?
Another big one: electric vehicles. We are going to see a proliferation of EVs. Most people think that by 2030, half of global auto sales will be EVs. People tend to think
Tesla
(TSLA) will be a big beneficiary of that. But the problem is that when you are the only one offering a product, you can have great margins.
What we are seeing in Europe and Asia is that more competitors are entering the EV market. So you will see an avalanche of great EVs coming into the market from European, Asian, and American manufacturers.
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We expect Tesla’s market share to drop dramatically over time in North America. Its margins will get back to what an auto maker earns, which is a good margin, but it will not be what Tesla has in the past.
People always ask me, how do you play that theme? The answer is semiconductor companies. The amount of semiconductor content we need in a typical EV is maybe twice the amount in a traditional car.
Is a shortage of charging stations a challenge to adoption?
Yes. It’s a chicken-and-egg thing. Utilities have to put in this infrastructure to enable fast-charging stations. Not every state is doing it or being as aggressive, but there are states that are building the infrastructure. And there are private dollars that are pouring into it. This is where the market is going. The tax credits and other incentives in place, plus the savings on gas, make it really compelling for consumers to buy an EV.
The vast majority of cars sold in Norway today are EVs. It’s a country that doesn’t have a lot of people, but it’s a sizable area and they’ve made it work. So I don’t think it is an impediment.
There are a lot of families that have two or three cars. Maybe in the short term, you’ll see families that have an EV for local driving and a gas-powered car for longer trips. But I think the infrastructure challenge is being overcome and the battery technology keeps getting better. In five years, you might be able to go 500 or 600 miles before having to recharge.
OK, on to the third big trend.
Climate change will be the defining challenge for mankind in my lifetime. A lot of people are scared about that. I am, as well. But there is a lot going on from a technological and renewable perspective that will overcome that challenge—at least in the U.S. and Europe.
So, how do you play climate change as an investor? There are multiple ways. The easiest is industrial-gas companies, such as
Linde
(LIN). These are companies that are at the forefront of being able to be in the value chain of hydrogen production. Hydrogen will become a mainstream fuel both for transportation, industrial uses, and potentially power generation.
Another low-risk way to play climate change is utilities. They are making huge investments in transmission as well as in solar and wind. They are taking what may be 100-year-old pipes that leak methane into the atmosphere and upgrading them. Over the next 20 years, probably every coal plant in the country will be shut down. You’ll be left with nuclear, wind, solar, hydrogen, and battery storage. That will really be how we generate power.
As utilities rebuild our infrastructure, that will allow them to grow their rate base at a healthy clip. People think about utilities as being low growth with nice dividend yields. But you are going to see a lot of utilities grow earnings, and the best can deliver 9% to 10% total returns between earnings-per-share growth and dividends.
Ameren
(AEE),
Xcel Energy
(XEL),
Exelon
(EXC),
CenterPoint Energy
(CNP),
WEC Energy Group
(WEC),
NextEra Energy
(NEE), and
DTE Energy
(DTE) are best positioned to consistently deliver that impressive level of total return.
There’s a 20-year positive story for utilities as they transform how they produce power and reduce emissions. It is a really underappreciated multiyear, multidecade story. It also feeds into the EV story. As you go from filling up your car at a gas station to filling up your car at a renewable station, it actually improves utilization of utilities and lowers bills on a per-unit basis. It’s a really good 20-year story whether you look at it from an EV or climate-change perspective.
Is the fourth big trend artificial intelligence?
AI will be revolutionary. It will also be deflationary. AI has the potential in technology and a variety of other white-collar jobs to make them more productive.
I saw that there will be a Wendy’s in Columbus, Ohio, where there won’t be a human taking your order in the drive-through, but AI. A lot of jobs like that can be replaced with AI. We used to tell all our kids to learn coding. Now, with AI, coders will be even more productive. If a coder is more productive, then you won’t need as many coders as you used to.
I think it’ll help alleviate the challenge we have in this country: The number of workers isn’t growing. All these companies want to grow but can’t find enough workers.
If you listened to Google on its past two earnings calls, management talked about how they would grow its margins. The first thing they mentioned was AI. If it used to take 10 people to complete a task, well, maybe it’ll just take two.
I think high-value jobs—like being a writer for a top publication or a portfolio manager who adds alpha—those kinds of jobs will be fine. But more mundane tasks, like taking an order at Wendy’s, those jobs may go away.
I’m going to flip this conversation and ask what trends you think are overhyped.
Inflation. I hear a lot of people say that we’re never going to fix it, that 7% is the new normal. That’s overhyped. There were multiple things that drove inflation up, but almost all of them are being corrected. The massive Covid-related stimulus was, in hindsight, possibly too much. But that money has been spent. So we’re mostly past it. The supply-chain issues have been largely corrected. Freight costs have come back down. And the Fed kept rates at zero for way, way too long. That has obviously been corrected. We will be back in the 2% to 3% range for the fed-funds rate. That’s probably the right range for the near term.
The other overplayed trend is reshoring. You’ll see it in some things, such as semiconductors. We can’t be dependent wholly on China. But I think a lot of other things that are produced in China aren’t going to come back here. For example, we’re not going to make toys in the U.S. That will go to Vietnam or Mexico. I think the idea that we’ll manufacture all our components for everything we need in the U.S. isn’t in line with reality.
Apple
isn’t moving all of its production to the U.S.
And it would be inflationary if we did bring back all that manufacturing, right?
Yes, but the other thing is that we don’t have the workforce for it. Reshoring is happening for semiconductors, but I think people are making too big of an extrapolation. When we talk to companies, it’s not in their five- or 10-year plans.
How do you keep up on these and other trends?
Every quarter, I listen in on maybe 100 conference calls. Last night, I went through Google’s AI presentation. You just consume a lot of information by listening. We also have conversations with companies and people who do independent research.
It helps to have a long time horizon. I’m not trying to outperform the next week or month. I’m focused on the long term, and that focus enables me to look at these big trends. I put my orders in the morning, and I spend the rest of my day trying to identify long-term themes, companies, and opportunities that we believe we can make money on.
Thanks, David.
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