Asia Essentials

Autonomous driving: Roadmap through 2025

A revolution is gripping the automotive industry, as auto companies competewith tech giants to design cars where input from drivers will become less andless necessary. Recent newsflow has highlighted the challenges to getting tocompletely autonomous cars and we think they are unlikely to hit the road before2025. But the race to self-driving cars is already opening numerous investmentopportunities. Macquarie brought together our global auto, TMT, and insuranceteams in this report to outline the roadmap and impacts to various industries.

ADAS – advanced driver assistance systems – is the bucket that encompassesthe emerging technologies and products that enable autos to take over from thedriver. Current ADAS features are considered level 1 or 2. From a technologicalfeasibility perspective, level 3, where the driver cedes control of safety criticalfunctions under certain traffic conditions, should be commercialized by 2020.

Level 4/5 achievement is targeted by 2025 but this involves technologicalhurdles – AI and real-time high precision 3D mapping – that remain to beimproved but that are the target of R&D efforts by leading global auto OEMs.

Five main areas of component content that should benefit

We believe component makers will be the main beneficiaries of the emergenceof ADAS. The component content will increase with the rising levels ofautomation. There are five fields where technology and functionalityimprovement are required – sensors (various sensor types including cameras),connectivity (telematics, v-to-x), HMI (to cope with explosive information inputand driver- vehicle interface), dynamic map for accurate localization, and AI.

Auto OEMs need to find a balance between new car pricing and risingcomponent costs, however, the need to maintain 5-star safety ratings creates astrong impetus to integrate the new technology on cars.

Paradigm shift brought by autonomous driving

Autonomous driving is a disruptive technology that not only alters the carindustry landscape, but that could create a paradigm shift across both industryand society. Existing car makers face new competitors/collaborators fromtechnology companies, and non-ICE powertrain adoption will likely accelerate,creating threats to the incumbents. Car ownership may also be threatened bynew mobility services. There are likely ramifications for the auto supply chain,insurance, transportation, logistics, infrastructure and new industries.

Stocks – global top pick is Denso

For leading auto OEMs, ADAS is both a threat and an opportunity. Other winnersare tier-2 suppliers that are able to protect their margins. The tier-1 Japanesestocks have been poor performers mainly due to yen appreciation but asvaluations are near historical lows, they offer the best value in a three-yearperspective. Our global top pick is Denso as we expect ADAS to begin tocontribute to OP in 2HCY17. In Japan our other pick is Panasonic. For the US,we see Nvidia as a winner from ‘deep learning’. In Korea we believe Mandostands to benefit the most. In Taiwan our favoured auto component company isCUB. We rate Underperform on auto insurer Admiral. We simultaneouslypublish 3 initiations and 15 company and sector reports.