The Future of Cars

The Sustainable Investing Sector Series Begins with a look at the Future of Cars

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The Automobile sector is a great place to start to review sectors and how they will be affected or can affect sustainability challenges such as climate change.  

Suffice it to say, whether its Google (GOOG)'s driverless cars or Tesla (TSLA)'s promise of mass market affordable electric cars, changes appear to be coming as to how and what we drive, including trucks as well, and this will likely affect auto and truck production as well as company valuation and stock prices.

Both of these companies above have outperformed the S&P 500 by wide margins over the last 5 years for starters.  

Apple also is becoming a car company of ​sorts or seems to want to be. Interesting to see some of the leading lights of technology, innovation and sustainability move towards the Auto sector making one wonder if this sector, like Publishing, may get swallowed up by the Tech sector as well at some point.  

Sector evolution is another clear phenomenon of sustainability in this regard, making the anticipating of sectors which will fade and disappear (coal and utilities are two others under severe pressure in this regard) an increasingly critical consideration for all investors interested in maximizing their future value.

Transportation is one of the largest sectors which contributes to ongoing GHG emissions, and 95% of this sector’s energy use continues to come from engines consuming and burning oil.

 

Issues vary between trains, trucks, motorcycles, aviation (which we will cover separately) and shipping, but we will focus first of all on cars.

Transportation is somewhere around 20% or more of the global carbon emissions footprint (with the other components of the global footprint resulting from impacts from buildings, electricity generation, agriculture and land use as well as the rest of industrial processes) and in some ways, it may be the slowest to change of all.

Consider that there is an embedded universe of cars and trucks owned and already in use which will almost certainly not be converted significantly to use of other fuels or renewable energy sources. This pretty much guarantees the ongoing need for oil at least for a few decades, but are car companies adjusting to consumer habits and forthcoming policy changes?

The most effective tool perhaps to change this sector has involved the establishment of minimum miles per gallon or CAFE standards. This leads directly to changes in future automobile design given the years it takes to move from concept to assembly line, and there is a direct correlation to overall future fuel use by this sector accordingly.

In the US, trucks and SUVs continue to drive the profitability of companies such as Ford (​​​​F)and GM (GM), who are in effect in a tug of war with consumers who want large vehicles versus the longer term need for fuel efficiency.

BMW (BMW.DE)’s recent possible consideration of going all in on Electric SUV's may be the most exciting news of all. Long considered a sustainability leader, this move could set BMW apart. As of 2014, BMW had been featured as a Sustainability leader for 16 years by the Dow Jones Sustainability Index which isolates leaders by sector on their environmental, social and corporate governance performance.

Back when many were doubting BMW's future, they made a decision to prioritize the US some twenty plus years ago. BMW is up +247% since the 2008 financial crisis took hold, a much better performance than the S&P 500 or any other European or Global benchmark since that time.

The main point here is that BMW is succeeding by giving consumers exactly what they want and this is a key feature of sustainability strategy. Make the best product, sell it at the lowest possible price and have sustainability baked in. Tesla did this by building award winning quality cars that just happen to be powered by electricity, and Tesla can continue to see strong performance success if they can execute on their affordable electric car and battery strategies by 2017.

Warren Buffett was an investor in another battery company, BYD, a Chinese company competing with Tesla, so let the best innovator win.

 

Other trends to watch include Ford, who has long placed an emphasis on sustainability, as has GM through its development of the Volt, as has Nissan with its Leaf and others are known to be moving forward with new technologies and initiatives as well. But will these efforts be enough to withstand the growth of emerging companies and technological innovations coming from elsewhere? Who will provide cars to China, India and the rest of the rapidly expanding developing world, and will auto parts and service continue to be strong performers as many consumers seek to extend the life of their existing cars - longer than before?  And how will the sharing economy continue to factor into this sector? Uber's hiring of Carnegie Mellon's driverless car experts is one of many new trends continuing to emerge in this exciting space.

As seen years back when GM didn't act fast enough to change with the times while Toyota became dominant through its Prius success and focus on quality, sustainability is in many ways now the most important trend to consider in the Auto sector. GM used to be one of the largest companies in the world, and they faded in value while Toyota became dominant. The performance of this sector has arguably directly been tied to sustainability focus and success over the last 20 years, and this is likely to reoccur in future. At a minimum, sustainability considerations need to be directly in the mix of investor considerations. Watch for future pieces across all sectors where sustainability has become increasingly critical to ongoing investment success.

(This piece was kindly translated into Japanese and posted to LinkedIn by Kazutaka Kuroda.)