Astoundingly, around 95% of the world’s cars are parked at any given moment. And, as a result, as much as 31% of urban land is currently devoted to parking lots.[1] These two statistics fly in the face of the supposed allure of the freedom that cars offer, a selling point perpetuated by companies since automotive advertising began.

They are also numbers that point to a seemingly staggering level of inefficiency within the current global transport system.

Yet when many people talk about the future of transport, their first thought might often be about driverless cars or the ongoing shift from internal combustion engines to electric ones, rather than on ideas of shared mobility. The reality however, could potentially be a combination of all three,  given the growing intolerance for inefficiency and the need for cleaner, cheaper ways of getting from A to B.

If current buying trends continue, it has been forecast that the number of cars on the road worldwide could double, to some two billion by 2040.[2] But, at the same time, by 2050 it is estimated that around 70% of the global population will live and work in cities.[3] These two predictions are at odds with each other and trying to align them raises a number of difficult questions, not the least of which is where will these billions of vehicles be stored, when space is increasingly at a premium?

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A shared mobility future

It isn’t just the space required for everyone to have a personal vehicle that will force change through the system – although space constraints are likely to push up both the cost and administrative burden of owning a car – it is also likely to be the increase in the range of alternatives. For city dwellers it is already much harder to justify owning a vehicle they hardly ever use when they can arguably get a relatively similar experience by downloading a ride-hailing app onto their smart phone.

This is where the second major factor i.e. technology, is forcing change across the automotive industry. We believe that rapid strides in computing power, connectivity, vision systems and artificial intelligence will potentially create a world, where self-driving cars ride alongside human driven ones – and we anticipate that such an environment may not be very far away.

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The other driver of change is the environment. Greater awareness of climate change is forcing a shift from fossil-fuelled vehicles to electric ones. According to the International Energy Agency, the stock of EVs by 2030 could number north of 200m [4] and this number could ratchet sharply higher, especially in countries with a strong regulatory framework around these issues and in areas where consumer interest morphs into mass adoption. But such a rate of change may not be sufficient to meet global climate goals.

According to a recent report commissioned by the World Economic Forum, focusing only on the replacement of so-called personal use vehicles will not help to achieve current climate goals. For example, it says: “In the US, cutting vehicle emissions by half would require 40% of light-duty vehicle stock to be electrified, or 95m vehicles. Current forecasts predict this percentage will not be reached until 2042.”  However, it added, shifting the focus to a push for fleet (and by this they mean public transport and commercial vehicle fleets) and mobility-as-a-service electrification could have significant environmental impacts and more than quadruple the value generated by the transport system.[5]

And, it is a strategy already being championed in certain parts of the world. Norway, for example, is currently aiming to have a 100% EV fleet mix by 2025, according to its long-term transport plan.[6] If other countries follow suit, this could lead to much quicker mass adoption.

As a result of these two forces, and the improvements in battery technology that have significantly lowered the cost and increased the efficiency of energy storage – long the albatross around the neck of electric vehicles – we believe it is likely that mobility as a service will continue to grow in stature.

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 Automotive disruption

That is not to say that cars will no longer be bought and sold but rather the emphasis is changing.

As cars become more eco-friendly, more connected to each other and more intelligent, the supply chains supporting them are likely to grow. Additionally, with this shift to convenience, manufacturers – and their profit margins – are likely to alter too. With such growth and change, a whole new opportunity set may well present itself to investors.

In such a world, the choice for an auto investor isn’t just between Ford and Toyota for example. It isn’t even between Tesla and the Nissan LEAF, it is between app developers and battery makers, car builders and chip manufacturers. That is not to mention the other industries that will be fundamentally affected by such a shift.

The travails of the oil sector are well known, and EVs are likely to continue eating their petrol-drenched lunch but when mobility is a service, rather than a status symbol, insurance rates too will change. Currently, around 1.3m people die on the world’s roads.[7] And, it is generally accepted that the majority of these are the result of human error rather than mechanical failure. Most reports into such statistics put the figure at around 90%[8] but  when roads are ruled by law-abiding, artificially intelligent algorithms plugged directly into the traffic grid, human error and accidents rates will likely decline as well – challenges the insurance sector and its investors may need to grapple with.

When a sector is as dramatically disrupted as the automotive sector has been, a trend we expect to endure for some time, the full effect of the changes can take some time to become apparent. This means that the potential investment universe is likely to continue to expand. It also means the incumbent players are increasingly being forced to think differently about what they do. Both of which, we believe, are potentially exciting for long-term investors.

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Sources:

[1] BAML February 2017
[2] https://www.weforum.org/agenda/2016/04/the-number-of-cars-worldwide-is-set-to-double-by-2040
[3] BAML February 2017
[4] https://www.iea.org/media/topics/transport/Global_EV_Outlook_2017_Leaflet.pdf
[5] Electric Vehicles for Smarter Cities: The Future of Energy and Mobility
[6] BAML February 2017
[7] UN April 2018 https://news.un.org/en/story/2018/04/1007151
[8] https://crashstats.nhtsa.dot.gov/Api/Public/ViewPublication/811059