The business models of global automotive industry players will significantly change in the coming years as car use is transformed, say Robeco’s sustainability specialists.
The sector faces major environmental, social and governance (ESG) challenges, prompting Robeco’s Governance & Active Ownership team to make engaging with the auto industry one of its priorities for 2017.
“We believe the business models of car makers will need to adapt to the potentially wide-ranging use of electric vehicle batteries, along with the rise of shared mobility solutions,” says Sylvia van Waveren, senior engagement specialist at Robeco. “And all this is going on while the sector is becoming more digital, attracting new entrants such as Google and Uber proposing their own solutions.”
“As investors, we need to know how car makers will deal with these challenges in their industry, how they will address the huge risks, and how they plan to profit from the opportunities that arise. This will allow us to pick the winners of this transformation.”
Currently, very few players in the auto industry meet Robeco’s sustainable investing criteria, says Global Equities analyst Jurriaan Hofman. “We focus on companies that can generate strong or increasing returns on invested capital and cash flow in a sustainable manner. If a company meets these criteria, it should provide a sound base for long-term viability. Additionally, it should deliver outsized investment performance if we can buy such companies at an attractive valuation.”
“However, within the automotive industry we currently find only a small number of companies that meet these criteria. Most of them are suppliers of auto components that have a competitive advantage, either through technological know-how or cost leadership. Typically, we prefer to invest in suppliers over the auto manufacturers.”
Hofman says the auto industry is facing four themes that will affect its future sustainability scores, and therefore its investibility by Robeco. First and foremost is the move towards greener cars, particularly New Energy Vehicles led by electric and hybrids. This is partly being led by regulations over emissions, with some governments planning to phase out combustion-engine powered vehicles in the coming decades.
Secondly, there is the move towards making cars safer, with more in-car features such as automatic braking and parking assistance, using new digital camera technology. Thirdly, we see growing consumer demand for self-driving vehicles, though this awaits government approvals for public use. Finally, new business models such as Uber are leading the growth in consumer services such as car sharing.
’Electrification mostly provides challenges for auto manufacturers’
“We certainly see a long-term trend towards increasing ‘electrification’, and in particular, a shift in auto sales towards hybrid cars,” Hofman says. “This trend is particularly favorable for the companies that provide the technology for electrification.”
“However, we believe the electrification trend mostly provides challenges for the auto manufacturers. At the moment, the production costs of hybrid and electric cars are higher than the costs to produce a traditional car. Moreover, most consumer are not willing or able to pay for these extra costs. This situation makes it difficult for auto manufacturers to earn sufficient profits on the sale of hybrid and electric vehicles.”
Making cars safer and more ‘intelligent’ is largely an opportunity for auto industry suppliers such as Delphi, Sensata Technologies and Mobileye, Hofman says. “Cars are becoming equipped with an increasing number of ‘active safety’ features: you can for instance think about self-parking cars, and automatic brake assistance,” he says. “This means the market for active safety products is already growing very fast. Despite that, it is likely going to take many more years before we will see a significant share of ‘fully autonomous driving’ cars on the roads because of legal and technological challenges.”
Self-driving cars and the rise in car sharing services are largely a profit opportunity for technology enablers such as companies that supply sensors, software and electrical architecture rather than the auto manufacturers, Hofman says.
“Car-sharing could indeed pose a threat to future car sales, but its impact is likely to be mitigated by other factors. Many consumers who use a car-sharing service may not have used a car if they would have had to buy one. Additionally, the more intense use of shared cars leads to more wear and tear on the vehicle, and thus the quicker the vehicle needs to be replaced by a new one.”
For the G&AO team, the issue is fundamentally trying to improve ESG metrics as the industry develops. “Short-term operational challenges such as ever-rising fuel efficiency requirements and many recalls, sometimes at very high costs, cast question marks about the industry’s efforts in ensuring the highest product quality,” Van Waveren says.
“At the same time, the auto industry has to answer fundamental questions related to their future product offerings, and how quickly they want to shift from internal combustion engines to plug-in hybrids, and ultimately to electric vehicles.”
The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.
The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.
Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is Robeco Switzerland AG, Josefstrasse 218, 8005 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.
Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/Robeco Switzerland product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/Robeco Switzerland offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.
This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.