Buy brewers. Buy distillers. Buy restaurant companies. This was the conclusion the other day from stock market analysts at Morgan Stanley, who predicted that the arrival of the era of driverless cars would trigger a significant pick-up in alcohol consumption.
Autonomous vehicles and ride-sharing technology will enable us to glug more than ever, the American investment bank’s analysts argued. There would be “more opportunities to drink before getting into the car” and “more opportunities to drink while in the car”.
For drivers, the hours of down time spent staying dry because of the tiresome business of twiddling the steering wheel would soon be over. That would free up another 600 billion hours of potential drinking opportunity a year, they calculated, perhaps a bit too enthusiastically.
Past crackdowns on drink-driving from Scotland to China to Colombia had all led to slowing demand, Morgan Stanley said. Ergo, we should expect a boost to demand once people are liberated from that constraint. Within ten years, consumers would buy $125 billion a year more alcohol than otherwise, they concluded, lurching from not unreasonable guesswork about future behaviour to over-precise forecasting (the second gin and tonic often has that effect). Average global alcohol consumption growth would accelerate from 2.2 per cent a year to 3 per cent.
We can question the many assumptions. Who’s to say we won’t use the freed-up time to read novels or do in-car yoga? We can laugh at the focus on boozing rather than the important prizes of cleaner air, less congestion, a reduction in the 3,500 per day toll of road deaths and a more slowly warming planet. And we can shake our heads at the bogus precision.
Yet financial markets are having to grapple with what automotive innovation will mean, not only for the car industry but also for the way we live our lives and spend our money.
Technology Shifts Facing the Car Industry
Legal & General said last week that the twin technology shifts facing the car industry — electric cars and autonomous vehicles — represented the biggest change since Henry Ford pioneered assembly line working in 1913, slashing production costs and dramatically widening car ownership. Until now, the motor industry has not faced the existential shocks that have forced other sectors such as retailing, the music industry and newspapers, for example, to rethink strategy. It has made phenomenal strides since the Model T, but they have always been incremental. Now it is facing its own Kodak moment.
“Cars have the potential to become the next technology super-cycle,” according to L&G, changing behaviour in the next 20 years in the same, profound way that the smartphone has in the past ten.
For investors this kind of breathless prognostification raises as many concerns as opportunities, alongside considerable scepticism. The last “super-cycle” they were encouraged to buy into — an era of higher commodity and energy prices driven by insatiable Chinese demand — went bust in 2014. Many lost heavily backing oil explorers and miners.
Investment booms based on the promise of new technology are especially difficult to read. Some may rave about Google, Facebook and Apple. Others will recall the wreckage of crashed dotcom and telecom stocks in 2000-03.
To judge by the intensity of chatter in the equity markets, we are now getting close to peak automotive industry investing greed/fear/paranoia. Virtually every recent forecast for electric vehicle sales has been higher than the last. UBS has upped its prediction for 2025 output from nine million to 13 million to 15 million in the space of 18 months. The break-even date for when electric cars are expected to be produced as cheaply as those running on fossil fuels is constantly being brought forward as battery costs fall.
An eye-opening milestone was passed in April, when Tesla, Elon Musk’s lossmaking upstart, overtook General Motors as America’s biggest auto-maker by market value. Another symbolic moment came in July, when the British government proposed a ban on new sales of petrol and diesel cars from 2040.
There’s barely a week when regulators somewhere in the world aren’t announcing new rules to speed the push to electric, though these days this is driven more by worries about air quality than global warming. This weekend China said that it was conducting research into a ban on the internal combustion engine. This was significant because of paranoia among traditional carmakers that China, the biggest car market in the world, will leapfrog the west to auto-making dominance.
There’s barely been a week when the industry isn’t announcing a new electric model or boasting of some new breakthrough on the long, long journey to fully driverless vehicles. BMW last week announced 25 new electric models by 2025, while the Daimler-owned Mercedes Benz has promised ten by 2020. Jaguar Land Rover has said that all of its vehicles will be part-electrified from 2020.
For investors, this is not just about the choice between owning, say, newcomers like Tesla and Alphabet, the Google owner investing heavily in self-driving technology, or traditional carmakers, such as Volkswagen and Ford. The traditional incumbents are starting to look rather good value on conventional metrics. According to L&G, they now typically trade on only seven times’ profits, compared with a long-term average price/earnings ratio closer to 14.
It’s also about identifying second-order and third-order effects. Just as shovelmakers and brothels made more money than the prospectors in the 19th century gold rushes, so this seismic modern-day phenomenon is going to produce many surprise winners and losers. Morgan Stanley’s focus on drink may not be so potty after all.