This week we continue (and conclude) our series on the mobility thematic with the final two pillars in our framework, that is connectivity and shared mobility. Both of these pillars are intrinsically interrelated and are perhaps where we have seen the greatest focus from a consumer perspective. I will try to tie it up by looking at two companies that are personal favourites from an investment perspective.
When we speak of connectivity, we are primarily referring to the data-driven and enhanced experience that consumers are given. At a simplistic level, this can involve the basic requirements of tracking vehicle usage and monitoring technical status right through to the virtual chauffeur that is able to predict driver or occupant fatigue. Think for a moment of the applications not only from a transport perspective but the ability to advertise, say a coffee stop, to a passenger. Or the implications of having this enriched data for the likes of insurance companies or transport operators. In the case of insurance companies, for example, drivers could be offered incentives based upon where drivers were driving and how they do so, with secondary data around things like fatigue giving them specific and actionable risk metrics. Similarly, an insurer’s in-car risk platform might get additional revenues from advertising coffee stops to fatigued drivers or meal stops to those on long trips.
What we are seeing evolve is an ecosystem that is predicated upon not only consumers having a better travel “experience” but also increased opportunities and threats for the broader business environment. The data and access thereof creates immense opportunities even for incumbents in industries such as consumer discretionary alongside contextualised advertising, especially with personalised infotainment content. For example, massive chains like McDonald’s or Starbucks could use driver/vehicle data to optimise locations and easily geotarget advertising accordingly. We also see the development of SaaS providers that target the extraction/mining of data within this segment. As previously mentioned, Connexion Telematics (CXZ.ASX) is one company that comes to mind if one were to be encumbered by solely investing in the small pond that is the ASX.
The second aspect of shared mobility is probably the most obvious in terms of economic impact given the rise of Uber and Lyft. However, what isn’t immediately obvious within this is that it has broader implications for transport in general. Think, for example, of the rise of e-hailing and what this means for public transport and congestion. For one thing, there is great evidence to suggest that e-hailing has in fact lead to the increase of congestion since, as one McKinsey study showcased, fully a half of all ride-sharing trips would not have taken place in the absence of e-hailing (i.e. effectively meaning that there were a greater number of vehicles on the road than would otherwise have been the case). Another question that is immediately bought to mind within this context is automobile sales. One could easily argue that there might be a marked incentive upon policymakers and the population alike to put downward pressure upon private ownership of the automobile in preference for shared mobility especially in densely populated regions like Asia. Take Beijing for example (fun fact: China has already surpassed the US as the largest automotive market in the world), where locals spend approximately 1.3 hours in commute per day on average. As a case in point, across major metropolitan areas in China, including Shanghai, Guangzhou and Beijing, a number plate effectively costs more than the car itself.
Similarly, take note of nations like Singapore which actively discourages private car ownership with a 20% excise duty that effectively makes the nation one of the most expensive in the world to even buy a low-end Toyota. As such, it is logical to assume that we will see the greatest emphasis placed upon shared mobility and connectivity (especially in terms of data requirements) come from developed Asia before anywhere else.
Now, two companies worth a look.
It might seem a tad bizarre that after speaking about mobility and connectivity, the industries of the 21st century, I would recommend looking at Corning. This company is decidedly seen as a dinosaur, rightly so if one were to look at its age of 169 years. Their shot at fame within the automotive space came in helping the automotive manufacturers reduce their emissions as part of the requirements under the Clean Air Act of the 1970s. Most people are aware of the company as primarily a glass manufacturer and to a certain extent they would be right.
The more interesting story however is that Corning worked with Steve Jobs around the creation of the ultra-thin iPhone glass, now known as the Gorilla Glass. If you have a smart-phone you would probably be looking at or through a Corning manufactured product. It has proven not only to be adaptable but resilient in a dynamic space. As of last year, core sales for the company annualised $11.7bn USD or $1.76 USD per share. For me and within the broader connectivity and mobility thematic, think for a moment and ask yourself the question what are the components that go into connected automobiles. Yes, glass and windshields are required but more importantly, glass that is compatible with digital displays, that has the ability to respond to touch, connect with the web etc. My take is, look at it this way, if you’d asked me twenty years ago who would’ve won the mobile phone market, I wouldn’t be able to tell you but I could’ve jumped on the thematic by placing my bets on and investing in the controllables (i.e. the things that go into the manufacture of that mobile or smartphone). With Corning, it is not the Tesla of this thematic but it is a company that has a proven history and market share in a niche that it will likely continue to dominate.
It currently works as the original equipment manufacturer (OEM) for most of the major auto manufacturers across the planet, add in a diversified business that works across optical solutions as well with collaborations with Intel, Verizon and CenturyLink for the manufacture of its extreme density cable. This is one company that will benefit from the broader mobility theme. If you didn’t catch it earlier, optical solutions that go into enabling the 5G infrastructure is something I also consider part of this thematic since it is required for the connected car.
NXP Semiconductors N.V. (NXPI.NASDAQ)
Many of you are probably aware of NXP Semiconductors, but let us embark on a brief walk down history lane. The company itself is a spinoff from Phillips (PHIA.AMS) from which it was de-merged in 2006. Since then it has been a rather busy bee, announcing a merger with Freescale (which itself was a spinoff from Motorola eventually bought by Lenovo). It initially fell across my radar properly when Qualcomm (QCOM.NASDAQ) tried to make a bid in 2016 and, although it was given approval by US regulators, China refused to come up with a ruling.
That series of events in itself is interesting given it showed 1) increased consolidation within the broader semi-conductor space and 2) the political incentives that are also at play. We would posit that Chinese regulators were unwilling to give the green light for one simple reason and this is the same reason the discerning investor should look further into the company. The company now makes up close to 12% of the global automotive semiconductor market, a segment that is not only expected to grow at 7.5% CAGR for the next decade but one that is crucial for the building out of the connected car and shared mobility in general.
Importantly, the company acts as an OEM and key supplier of close to 95% of all automakers globally with considerable headway made in the Chinese market where it is in JV with Datang Telecom (600198.SHA). For the reasons mentioned throughout this series, including the upward pressure on data collection, we see semi-conductor usage and the market more broadly not only growing in volume but margins. Just think about the very simple maths of it all. If the new generation of connected and autonomous vehicles all have in the ballpark of 5x the requirement for semiconductors and there will be major incentives to transition to these vehicles, then it doesn’t take a genius to see the upside. NXP offers a unique opportunity to gain exposure to not only a market leader but also a potential takeover target if not from Qualcomm then a Chinese alternative. Or even a sale of NXP’s Chinese operations to a Chinese firm, since we’re quite sure the US and EU regulators would put up a decent fight, with the western operations being allowed to be taken out by Qualcomm.
Definitely a space to watch!
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