SPECIAL REPORT

A Brownstone Research Publication

Investing in the Self-Driving Car Revolution: The Future Is Now

By Jeff Brown

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Investing in the Self-Driving Car Revolution: The Future Is NowBy Jeff Brown

Silicon Valley is unlike anywhere else on the planet. If you are part of the network, you get to see, hear, and experience things months or even years before the rest of the world.

My name is Jeff Brown, and I’ve built a 25-plus-year career working with cutting-edge technology. I feel fortunate that I have been able to work in this field at a time of such radical technological transformation. Better yet, I spent the majority of those years living and working outside of the U.S.

I was able to see how technology was impacting more than 50 countries around the world, not just one single country. I have found that having this perspective has proven to be invaluable as an investor.

It has given me a global network of contacts and an incredible knowledge base, and it developed my ability set to see problems and opportunities from many different angles.

And as excited as I was during the first part of my career, I can tell you I am five times more excited about the next decades. Actually, I can barely wait for what will happen in just the next few years.

Right now, a transformational technology is being developed. It will dramatically affect the way that we live our daily lives. It will change

how we commute to work and go on vacation, and it will save millions of lives in the process.

The technology that I’m referring to is autonomous vehicles, often referred to as self-driving cars. For reasons that I’ll explain, this trend is happening much faster than the market understands. And this presents an incredible opportunity for us as investors. Like Silicon Valley insiders, we have a chance to “stake our claim” in this new technology before it becomes a reality for the rest of the world.

Let me explain how.

Bigger Than Smartphones, Laptops, and Television

Autonomous driving technology is about to completely upend the global automotive industry, which sold 75 million vehicles in 2019. This number fell slightly in 2020 to 64 million vehicles, but this was simply due to the COVID-19 pandemic. All this represents a more than $4 trillion market. And that is just the beginning. By 2030, the global automotive industry is predicted to be worth $8.9 trillion.

The $4 trillion market for vehicles is multiples larger than the consumer market for televisions, personal computers, or smartphones. While annual production may be higher for

Special Report 2021

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smartphones, PCs, and televisions, the average price point for vehicles is the reason the market is so massive.

Now, you might think that self-driving cars won’t be here until far off in the future. I wouldn’t blame you, either. In a 2016 Wall Street Journal article, a professor from Duke University stated, “We’re a good 15 to 20 years out from [self-driving cars]…” Even more recently, a 2019 New York Times article reported again that fully driverless cars were still “way in the future.”

I’ve also heard similar comments at industry conferences that I’ve attended from executives who work for the “old school” automotive companies.

But in fact, this technology is actually available today, in production. Tens of thousands of people use this technology.

In Silicon Valley, people can see one or two of these vehicles driving around every single day. Yes, cars without a driver in the front seat. For years, Waymo, a company spun off from Google, has shuttled around employees from location to location. There is no driver at all. Just room for two or three people to sit in the back of the car.

Source: Dllu / Wikimedia Commons

Waymo Self-Driving Taxi

And you don’t even have to live in California to see these vehicles. In October 2019, Waymo announced it was expanding its early riders program (which began in 2017) to allow users of

its ride-hailing app to experience a ride in a self-driving car in the Phoenix, AZ, area.

And these vehicles are just like any other car on the road… except they are safer, less aggressive, and strictly follow the rules of the road… unlike human drivers.

You might get a laugh at that, but unfortunately, it is very true… with dire consequences.

An Undiagnosed Epidemic

Sadly, road traffic injuries killed 1.35 million people in 2016. In fact, according to the World Health Organization (WHO), death from a road traffic accident is one of the top 10 causes of death in the world.

Worse, in the U.S., driver error causes more than 90% of those deaths. And globally, road traffic deaths are the leading cause of death among young people aged 5–29.

In essence, traffic collisions are an epidemic of epic proportions.

Aside from the obvious emotional toll of losing a loved one, the economic toll that these deaths cause is massive. It is estimated that the cost of these deaths to governments is on the order of 3% of gross domestic product (GDP).

In 2010, the National Highway Traffic and Safety Administration estimated that the total economic cost to the United States of these accidents was $242 billion.

And incredibly, it has gotten worse since then. From 2010 to 2018, fatalities in the U.S. increased by 10.8%. You would think with safety technology improving every year that the number would be decreasing, but something different is happening.

Have a look at the total number of vehicle crashes in the U.S. on the chart on the next page.

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As you can see, the number of annual crashes bottomed out in 2011. And you probably won’t be surprised by what is believed to be the cause.

To the bottom right is a chart of smartphone ownership among adults.

As of 2019, a whopping 96% of adult Americans owned a cell phone of some kind. And 81% of them owned a smartphone. That number is up from 35% back in 2011. It is already becoming difficult to find a phone that doesn’t have a touch screen on it.

The correlation is very clear. As smartphone penetration increases, the number of automobile accidents per year has been increasing in step.

And there is a direct financial impact to drivers: higher car insurance rates. In the chart on the next page, you can see another obvious correlation in the increase in car insurance rates.

Car insurance premiums bottomed in 2009. But just like car accident rates, they increased in lockstep with the growing penetration of smartphones among drivers.

It is all very logical. All the features available on a smartphone distract drivers. It is foolish, of course. Drivers shouldn’t touch their phones while driving a vehicle, but it is certainly human nature.

Self-Driving Cars Are the Cure

These trends will most certainly continue. That

means more car accidents, more deaths, and higher insurance premiums.

That is precisely why the world needs autonomous driving technology as soon as possible. It will essentially “cure” the epidemic of car crashes while lowering insurance rates for consumers.

Autonomous technology has already revolutionized one type of travel and made the process of getting from one place to another infinitely safer.

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Most passengers on commercial aircraft do not understand one simple truth. For the most part, they are flying on a fully autonomous aircraft. That’s right. Commercial aircraft pretty much fly themselves.

A pilot of a Boeing 777 spends just about seven minutes actually flying the plane on a typical flight. The pilots of an Airbus airplane spend only about three and a half minutes due to even further automation. On a three-hour flight, that equates to less than 2% of the flight time with a human piloting and 98% fully autonomous.

There is a good reason for that, too.

Human performance problems cause about 85% of commercial aircraft accidents. The current generation of autonomous aircraft has 0.17 fatal accidents per every one million flight cycles. This compares to the first generation of aircraft, which has an accident rate of 4.03 fatal accidents per million flight cycles.

The application of autonomous flight technology reduced the aircraft accident rate by more than 95%.

Yet we continue to allow humans to drive, causing more than a million deaths a year, nearly 3,700 deaths per day, when we know that human error causes 94% of those deaths.

Self-driving will do for automobiles what it has already done for aircraft: Save lives on a massive scale.

Your Car Insurance Rates Are Going to Drop

Another exciting and very welcome benefit of autonomous vehicle technology will be the reduction of car insurance rates.

Up until 2009, car insurance premiums had been declining due to safety improvements to cars. But then driver distraction from smartphones increased the number of accidents, and car insurance rates began to climb again…

In a world of autonomous vehicles, however, it is estimated that the auto insurance sector will be reduced 70% by 2050. The reason is simple. A 90% reduction in accidents will reduce the insurance industry’s costs. This will directly impact and reduce car insurance premiums.

I also believe that there will be one other major development with regard to insuring autonomous vehicles. The burden will shift toward the autonomous vehicle manufacturer or a self-driving car service. Think about it… If the consumer isn’t actually driving the car, who is actually responsible in the event of an accident?

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During the transition from mostly autonomous to fully autonomous technology, I believe we’ll have a hybrid model. Drivers will be responsible for lower insurance premiums due to dramatically fewer accidents. Carmakers will have greater insurance liability in the case of any self-driving car malfunctions.

As we migrate to a fully autonomous model, there just won’t be much need for personal car insurance.

When Will We Have Self-Driving Cars?

There is always one lingering question regarding self-driving cars…

When?

The first time I sat in a self-driving car was in October 2011 on the NASA Ames campus. It happened to be one of the earlier prototypes of Google’s self-driving technology. It wasn’t pretty to look at. The vehicle was loaded with computing equipment, screens, wires, and various testing equipment like sensors, cameras, radar, and lidar (i.e., light detection and ranging, but originally a portmanteau for light and radar).

The technology has come a long way since then.Waymo released its fifth-generation vehicle in 2020. Have a look below…

Source: Waymo

Waymo’s Fifth-Generation Self-Driving Car

We can see it still has a lidar system on top. Lidar is the technology that can produce a 3D image of the space around a car. Self-driving cars use it to “see” the objects around them.

And Waymo has lidar systems all around the perimeter of the vehicle as well for a total of four additional lidar units. We might ask if all of this is still necessary. This much equipment seems to echo that original car I sat in. In fact, I think this car is overengineered. Those lidar systems are expensive. It’s hard to imagine this model being put into mass production… Each car would cost at least $5,000 more to produce.

But that gives us a clue as to Waymo’s plan for moving forward and putting these vehicles on the roadway. Waymo is not targeting the consumer auto market. Instead, it is going to partner with a manufacturer to create an autonomous ride-hailing fleet. And it is making the lidar technology very visible for the sake of regulators.

Think about it. What’s the best way to demonstrate to regulators that your self-driving taxis are safe? Make the “safety” equipment as visible as possible. And most riders won’t mind what the taxis look like. As long as we can get from point A to point B safely, we’ll happily ride in a self-driving taxi.

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COVID-19 and Self-Driving Vehicles

Self-driving taxis will become an even bigger phenomenon than traditional Uber and Lyft rides. This service will be improved by having no driver in the front seat, especially now that viruses like COVID-19 have entered the picture.

For the sake of argument… Would we rather hail a car with a driver who could potentially carry the virus? Or would we rather hail a self-driving car and avoid contact with other people?

I think the answer is clear. Even after COVID-19 has passed, the psychological aftermath of the pandemic will remain. We will no doubt see accelerated adoption of self-driving taxis in this environment.

So Waymo is making good progress on its autonomous vehicles in an environment primed to use its fleet.

And that’s not the only way we’ll see autonomous vehicles gain popularity due to the worldwide pandemic. As one example, grocery deliveries have increased by a staggering amount due to virus fears and lockdowns. In 2020, the president of Instacart said demand was up 300% year-over-year.

And that’s creating new opportunities for autonomy as well…

Two ex-Google engineers founded a self-driving delivery company called Nuro. Its vehicles transport packages and groceries to users, who place orders using an app.

A Nuro Delivery Vehicle

Source: Nuro

Nuro’s self-driving delivery has dimensions similar to a large refrigerator turned on its side. And it is 100% autonomous. There isn’t even a place for a driver. There are no pedals, sideview mirrors, or steering wheels. It’s optimized for delivering packages or food. And its max speed is capped at 25 miles per hour.

This is a clever use of autonomous technology that is sure to see adoption due to its “contactless” nature. The customer unlocks the delivery vehicle through a smartphone app and takes the food or packages out. No interactions with other people need to take place.

So even outside of passenger cars, it’s easy to see how autonomy is entering the mainstream. We are going to see all kinds of small vehicles buzzing around our streets in the very near future.

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And as of early 2020, Waymo boasts 20 million self-driven miles on public roads. That’s up from just four million miles in 2017. Waymo also claims 10 billion simulation miles to its credit.

But equally if not more impressive is the work that Tesla has been doing in this space.

In terms of deploying autonomous driving technology in production vehicles, no company is further along than Tesla. In fact, Tesla is sitting on an absolute gold mine of information.

Tesla implemented its autonomous driving functionality in its Model S cars as early as October 2015. The name that Tesla uses is “Autopilot.” At that time, Autopilot was capable of auto-steering, auto-parking, automatic lane change, and side collision avoidance. This was revolutionary in 2015.

Where Tesla has been so clever is that it has been methodically rolling out both the hardware and software to upgrade its production vehicles for higher and higher levels of autonomy.

In January 2016, Tesla released its version 7.1 software, which had additional enhancements to its Autopilot functionality.

Then, in October 2016, Tesla announced that all its production cars would have the hardware necessary for full Level 5 autonomous driving. That includes the Model S sedan, the Model X SUV, and the lower-end Model 3.

And any car that has been produced since October 2016 is capable of receiving a software update enabling full Level 5 autonomy when the

software is ready. Now, you might be thinking “How is that possible?”

While Tesla may seem like a hardware company, it essentially builds its vehicles around a computing platform. The striking advantage of doing so is that new technology and user improvements to the car can simply be downloaded at any time they are ready.

This has provided Tesla an extraordinary advantage in the automotive business.

Tesla “upgrades” its cars through software updates automatically throughout the year… just like downloading a new operating system to our smartphones.

For just about every other car manufacturer, we suffer the inconvenience of scheduling an appointment to bring the car to the dealer to receive a software upgrade to fix a problem.

Tesla has also taken control of the key components that go into its cars. It is designing its own semiconductors and controlling its own supply chain.

Estimated Tesla Autopilot MilesAutopilot Miles

0

1 billion

2 billion

3 billion

4 billion

5 billion

6 billionMore than five billion miles have been driven using Autopilot

Source: @lexfridman

Projected Autopilot Miles: 5,134,585,459Date: 2021-01-01Projected Autopilot Miles on Hardware 1: 994,077,265Projected Autopilot Miles on Hardware 2/3: 4,140,508,193

Current Estimated Autopilot Miles: 3,324,020,246Date: 2020-04-22Current Autopilot Miles on Hardware 1: 852,461,468Current Autopilot Miles on Hardware 2/3: 2,471,558,778

2015 2016 2017 2018 2019 2020 2021

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And in early 2020, Japanese publishing house Nikkei did a “teardown” of a Tesla Model 3, the lowest-end vehicle. Nikkei gutted the car to conduct a thorough analysis of how it was made. And it concluded that Tesla is at least six years ahead of its closest competitors in the industry.

Artificial Intelligence Will Lead the Way

There’s another reason why Tesla is years ahead of the competition.

Remember when I mentioned that Tesla was sitting on a gold mine of information? Well, another thing that makes Tesla different is it’s constantly monitoring the performance of all of its vehicles… every day.

As the earlier chart showed, Tesla now has an estimated five billion miles logged. Why is this so significant? The Tesla self-driving technology uses “machine learning” to consistently improve its efficiency. Machine learning is a type of artificial intelligence technology. It can use pattern recognition techniques and analyze large sets of data and learn from that data without being programmed to do so.

And this is precisely why Tesla is sitting on a gold mine. It has the largest data set for autonomous driving anywhere. Its data set is multiples larger than its nearest competitor, Waymo.

In order for machine learning to learn and improve, the more data the better. The larger the data set, the faster the machine learning algorithms can learn. This is exactly why Tesla’s data set is so valuable and also why Tesla is so valuable today.

How Self-Driving Cars Will Transform the World

Because the availability of self-driving technology will come far faster and sooner than anyone has realized, it is important to consider the impacts

that will be felt on the economy as a result, as well as the industries that will be disrupted.

Aside from the obvious benefits of saving more than a million lives every year, lowering accident-related injuries, and thus reducing costs associated with accidents, there will be many more benefits to society from the widespread adoption of this technology.

The Uber of the Future

One clear trend that will develop rapidly is shared autonomous vehicles (SAVs). Companies are beginning to spring up to manage fleets of autonomous vehicles that can essentially run 24 hours a day.

These SAVs will be on demand and available through a simple smartphone application, just like how on-demand transportation services like Uber and Lyft are available today.

Uber and Lyft were so simple yet revolutionary to the traditional taxi industry. Passengers could receive much better service, newer and cleaner vehicles to ride in, and lower prices as compared to traditional taxis.

And when the driver is removed, on-demand transportation services will become dramatically cheaper.

Based on an analysis performed on taxis versus SAVs in a market like Manhattan, the average cost for a yellow taxi is $5 per mile driven versus a projected $0.50 per mile driven for an SAV. That is an incredible 90% cheaper from where they currently are today.

I envision a future where these kinds of services will be provided for free in exchange for opting in to advertising or commerce opportunities.

After all, Google generates billions of dollars of revenue from internet advertising every year. I believe it can do the same thing with SAVs. There

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are even signs that Google (Waymo) plans to license its self-driving tech so other companies can create their own fleets.

If other automakers adopt Waymo for their self-driving fleets, Google will collect even

more behavioral data on consumers. Driving patterns… temperature preferences… music preferences… how often we talk on the phone… if we are generally pleasant or angry… how much we weigh… Google will know it all.

How Safe Is Self-Driving Technology?

When evaluating the safety of autonomous driving technology, a common metric that is being used is disengagements per 1,000 miles. While it is not a perfect metric, as it is not measured consistently between each automotive manufacturer that is working with autonomous driving technology, it is still a useful reference.

A disengagement is when a driver feels the need to grab the wheel of a self-driving vehicle and take control. The reasons can be various, but typically, it is when the driver needs to take some kind of corrective action on the self-driving vehicle.

The number of disengagements in Waymo’s vehicles dropped an incredible 75% from 0.80 disengagements per 1,000 miles down to 0.20 disengagements every 1,000 miles.

This means that a Waymo self-driving car could essentially drive itself, and its passengers, from Los Angeles to New York City without a driver ever touching the wheel.

Autonomous Vehicle Driving Levels

Level Level Description

Level 0 Automated system has no vehicle control but may issue warnings.

Level 1Driver must be ready to take control at any time. Automated system

may include features such as Adaptive Cruise Control (ACC), Parking Assistance with automated steering, and Lane Keeping Assistance (LKA) Type II in any combination.

Level 2The driver is obliged to detect objects and events and respond if the automated system fails

to respond properly. The automated system executes accelerating, braking, and steering. The automated system can deactivate immediately upon takeover by the driver.

Level 3Within known, limited environments (such as freeways), the driver can safely turn their

attention away from driving tasks but must still be prepared to take control when needed.

Level 4The automated system can control the vehicle in all but a few environments, such as severe weather. The driver must enable the automated system only when it is safe to do so. When

enabled, driver attention is not required.

Level 5Other than setting the destination and starting the system, no human intervention is

required. The automatic system can drive to any location where it is legal to drive and make its own decisions.

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Plus, there will be a big screen in the car where Google can serve us ads on our daily commute. That hasn’t been possible before. We should remember that we won’t have to watch the road anymore once cars are fully autonomous. So the advertising model for SAVs has potential.

On the other side of the spectrum, Tesla’s latest software update tells us that it is also planning for SAVs, with its own special twist.

Hidden in Tesla’s latest software update is a “pay as you go” subscription plan for its Autopilot package. This gem reveals Tesla’s master plan… Tesla plans to launch a monthly subscription service for the full self-driving mode of Autopilot. This is huge news.

Right now, most Autopilot miles are on the highway from on-ramp to off-ramp. Tesla hasn’t yet released full autonomy in its software. The upcoming premium version of Autopilot will be fully autonomous. We will be able to have our Tesla drive us from Point A to Point B without us ever needing to touch the steering wheel.

And the fact that this option is coming soon shows us how far along Tesla is. Tesla’s release of the software enabling a subscription payment model tells us full autonomy is in the very near future.

Tesla was very clever with its business model. It sells or leases the car, and then it offers software upgrades like Autopilot for additional fees. Autopilot can be purchased for $7,000 outright, but that steep price tag is out of range for most consumers. That is why a subscription model is so attractive.

Early estimations for the premium Autopilot package are just over $100 per month. Tesla is imitating Silicon Valley software companies by choosing a software as a service (SAAS) strategy. These models have been remarkably successful

over the last decade.

This makes a ton of sense, and I think it will do very well for Tesla. How many Tesla owners wouldn’t pay $100 per month to have the car drive itself? It’s a great value proposition.

And then we should think about what happens when Tesla turns on its autonomous taxi network…

After all, on average, cars are only used about 5% of the day; the other 95% of the time, they are parked. Tesla’s taxi network will allow anyone who owns a Tesla with a self-driving package to put their car to work when they aren’t using it. The car will go out and provide taxi rides to consumers until it’s summoned back to the owner, like an autonomous Uber or Lyft. I can even envision an option for the car to go to a service location to be cleaned and disinfected before returning to its owner.

The owner will receive a large portion of the revenue generated from these rides… which means the Tesla will ultimately pay for itself. At that point, the car is free for all practical purposes.

Who wouldn’t want to own a Tesla then? This is just one more reason why self-driving cars will be the future of the auto industry…

And SAVs’ impact on the world will be profound. A study showed that one SAV could replace nine conventional vehicles. Think about that. Even with a growing population, the number of cars on the road will dramatically decrease.

What will this mean? In short, less traffic, less congestion, and fewer emissions.

Self-Driving Cars Could Save the Environment

With self-driving technology, one SAV could replace nine traditional cars.

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This will have an extraordinarily positive impact on air quality and our environment, particularly in major metropolitan areas where congestion tends to be the highest. The impact in developing countries will be even more profound where current air quality is so bad that it is detrimental to human health.

But an even more significant amount of emissions savings will come from the fact that, most likely, all SAVs will be battery electric vehicles (BEVs). While there is no direct correlation between self-driving vehicle technology and electric vehicle technology, there are some strong incentives for using BEVs for SAVs.

Put simply, BEVs are easier to maintain. They have fewer moving parts. Compare the drivetrain of a Tesla Model S with just 17 moving parts. There are several hundred moving parts in a vehicle with an internal combustion engine. Fewer moving parts mean fewer maintenance costs.

And if a business is managing a fleet of autonomous vehicles, the maintenance costs are the single largest costs of operating its business. That is precisely why BEVs will be the logical choice.

Now, this is where it gets exciting. Autonomous vehicles have the potential to reduce emissions by more than 90% compared to conventional internal combustion engine vehicles.

Say Goodbye to Traffic

Whether you believe that one SAV will replace nine conventional cars or fewer, there will be dramatically fewer cars on the road in the near future.

By way of example, a study analyzed what would happen if 50% of drivers shifted to SAVs. It resulted in a reduction in traffic congestion by 37% and a decrease in the number of vehicles on the road by 19%.

Even more critically, a 2019 study reported that a fleet of driverless cars working together to keep traffic moving smoothly can improve overall traffic flow by at least 35%.

And simple things that take time, use up gas, and create congestion, like trying to find a parking place in an urban area, will no longer be an issue.

Goodbye to Parking Lots…

On average, drivers around the world in major metropolitan areas spend 20 minutes driving around looking for parking spaces. Aside from being a very unproductive use of time, cars circling around a city do nothing but increase congestion and waste gasoline.

A study conducted in one small section of Los Angeles called Westwood Village estimated that searching for a parking place created an additional 950,000 excess miles traveled in a year. This wasted 47,000 gallons of gasoline and generated 730 tons of carbon dioxide emissions just in Westwood Village alone.

Just imagine the waste if calculated at a global level. And now imagine that all of that waste will disappear in a world of autonomous vehicles. Instead of parking your car close to your destination, the vehicle can be instructed to return to a convenient storage location or pick up another passenger if it’s used in a shared vehicle pool.

In the U.S. alone, it is estimated that there are almost a billion parking spaces that support about 253 million passenger vehicles. That means we have almost four times more spaces as compared to vehicles on the road.

And the combined area required in just the United States for those parking spaces is larger than the state of Connecticut.

Furthermore, 31% of the commercial cores in cities are dedicated to parking.

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As I am sure many have seen, most of these spaces are empty at night.

Perhaps surprisingly, the same is true of parking places in urban apartment developments. In Seattle, 37% of parking places are also empty at night according to a 2013 study. One would think that the evening would be the peak of demand for apartment complex parking.

Imagine what cities could do if they could reclaim 31% of their commercial cores. Or even if they could reduce the number of parking spaces by half.

Perhaps what Manhattan has done with the High Line project might serve as an example. What was once an old, elevated railway has now become a sprawling park, adding much-needed greenery to a very congested city.

Source: Friends of the High Line

High Line Public Park in New York City

Cheaper Rent for All

Remember the statistic that 37% of parking spots in apartment complexes in Seattle are empty at night?

If renters don’t pay for a parking space in their apartment complex, they might think that’s not a problem. But even if you are not “renting” a parking space along with your apartment, you’re still likely paying for the parking offered by the building.

Apartment building owners in Seattle tend to make up the costs of building parking lots by padding monthly rents by roughly 15%. In Seattle, that amounts to about $246 per month for each occupied apartment. The average increase in rent on a nationwide basis is roughly the same at $225.

So landlords recoup parking lot costs through higher apartment rental rates for all tenants. The reality today is that everyone pays for parking.

Imagine how nice it would be to save an extra 15% per month on your rent…

You May Never Own Another Car

As of 2019, drivers in the U.S. spend an average of 10 hours and 50 minutes a week in their cars. That is a 12% increase from the previous year. And for the most part, this time is a complete loss of productivity.

You may be thinking that if the cost of using a shared autonomous vehicle is 90% cheaper than what it costs to use a taxi today, it’s safer than a human-driven car, and it frees up hours every week that we could use for something else… why even bother owning a car?

It won’t be necessary at all to purchase and own a vehicle. But people will still do so. Some will still want to have their own car, unused by anyone else. And some will place a high value on convenience. In other words, rather than deal with waiting for a car, they want to just hop in and go.

But the amount of time, money, and inconvenience of owning a car will be clear catalysts for moving away from ownership.

It makes sense after all. The utilization rate for automobiles in the United States is about 5%. That means that for about 22–23 hours a day, the average car is just sitting, completely underutilized.

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A recent study out of the University of Michigan Transportation Research Institute identified that there would potentially be a 43% reduction in car ownership in the U.S. as a result of SAVs. That’s almost a reduction of half.

Imagine a day when you no longer have to pay for gas, never have to go to an auto shop, never have to make another car insurance payment. The impact on our personal lives would be enormous.

It All Adds Up

Autonomous driving technology’s total impact on society will be profound. The average consumer’s life will be less stressful, more productive, safer, and more convenient. Even the costs of goods and services will decrease because the overall costs of logistics to deliver those goods will drop by around 90%.

The numbers add up… with an estimated $1.3 trillion in annual savings to the U.S. economy from autonomous vehicles:

• $488 billion in savings from accident avoidance

• $169 billion in fuel savings • $645 billion in productivity gains

Every year!

How We’ll Invest in the Future of Self-Driving Technology

Very few understand how quickly this autonomous driving technology is advancing. Most people will be surprised to see a fully autonomous car on the road this year.

The innovation that has taken place in semiconductors – specifically, graphics processing units (GPUs) – camera vision, radar, sensor technology, and machine learning is responsible

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for enabling what is truly exponential growth in technology development.

This is such an exciting time. Every month that passes brings major improvements in autonomous technology, more data, and more proof that the technology is already several times safer than human drivers.

We are on the cusp of commercial deployments, and this is creating spectacular investment opportunities in companies that build technology to support autonomous vehicles.

Keep reading to see two of the best ways to gain leverage to this technological revolution.

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How to Profit from the Self-Driving FutureBy Jeff Brown

Regular readers know that our mission at The Near Future Report is to identify and profit from industry-altering trends like autonomous driving technology, precision medicine, and the 5G build-out.

I use my decades of experience in the tech industry to spot mid- to large-cap companies at the leading edge of these trends.

And for this report, my first recommendation is Microchip (MCHP). This company has built up a large portfolio of secure MCU solutions for the automotive industry over the last decade.

While CPUs are good for general-purpose use, MCUs are designed to be application-specific. And with much smaller sizes comes lower power consumption.

Microchip’s Microcontrollers

A microcontroller (MCU) is basically a small computer distilled onto a single integrated circuit (IC). An MCU has a central processor, some memory, and the ability to have inputs and outputs.

Comparative Size Difference Between a CPU and an MCU

Source: Getty Images

32-bit MCU (9 mm by 9 mm)32-bit CPU (42 mm by 28 mm)

The major differences between an MCU and the central processing unit (CPU) that runs your computer come down to scale, size, and power consumption. CPUs are designed for general computing purposes, like running an operating system like Windows and other software applications. They’re also quite large, at 42 mm by 28 mm.

By comparison, an advanced 32-bit MCU offered by Microchip is typically a fraction of the size (only 9 mm by 9 mm, less than 7% the size of a CPU). That’s tiny enough to rest on your fingertip.

These products can be used in very small devices like digital watches, fitness trackers like the Fitbit, or augmented reality glasses.

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MCUs are often paired with analog integrated circuits (ICs) that take analog inputs like sound, temperature, or vibration. These are then converted into a digital format that can be analyzed, processed, and used for diagnostics, improvement, or control of a device – or vehicle.

That last part is especially important. Microchip’s technology allows future vehicle models to have more technical capabilities… with higher efficiency… and will keep them safe from remote hacking.

And when you consider how large the worldwide vehicle market is, as well as its growing reliance on semiconductors, it’s clear just how crucial Microchip’s products are…

One of the Largest Technology Markets in the World

The automotive market is one of the largest semiconductor markets in the world. But this wasn’t always the case. Thirty years ago, semiconductors were sparsely used in internal combustion engine (ICE) vehicles.

Today, most cars are loaded with semiconductors. The average midrange ICE car has around $350 worth of semiconductors inside. These semiconductors are used for everything – steering, airbags, collision warning, power doors and windows, entertainment and navigation systems, power systems, and sensors that assist with parking and automatic emergency braking.

And compared to hybrid electric vehicles (HEVs) and electric vehicles (EVs), this number is small. These cars use more than $700 worth of semiconductors on average.

With luxury cars, the number of semiconductors increases further. That’s because they include even more advanced electronics and features, like advanced driver assistance systems (ADAS), autonomous driving functionality, and

various other features typical in high-end cars. These vehicles typically have $1,000 worth of semiconductors or more.

Given this, it’s not surprising that the automotive industry is a large market for semiconductors, valued at $48 billion in 2020. And that number is expected to grow to over $67 billion by 2026.

An Industry Shift

As the industry trends toward EVs and away from ICEs, the automotive industry will play an even larger part of the worldwide semiconductor industry.

And of that automotive semiconductor market, about 70% of that is MCUs and analog ICs. As vehicle production continues to evolve, by including more electronics with higher capabilities, its reliance on these components will soar.

This is where Microchip’s strengths lie.

I mention this because Microchip has been playing the long game. Over the last 15-plus years, Microchip has been climbing the ranks of the worldwide microcontroller market, from No. 8 in 2013 to No. 3 today.

Microchip’s acquisition of competitor Atmel in January 2016 for $3.6 billion is what vaulted the company into its third-place spot, and it’s now within close reach of becoming number two.

This has vaulted Microchip into another key ranking: the top 10 automotive semiconductor vendors. It has also put the company in a great position for future growth.

It’s worth asking… why is this so important and valuable?

As a semiconductor vendor, being successful in the automotive industry is a true test of the quality of the company, and more specifically the

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quality of its products. That’s because you won’t find an industry with more strict quality control standards than the automotive industry.

And there are two reasons why. First, there are lives at stake. When key components fail while a car is in motion, people can die.

Second, the cost of recalling a car is exorbitant for auto manufacturers. In the U.S. alone, the total cost of recalls was $22 billion in 2016. Needless to say, this is something that manufacturers want to avoid.

The incentive for a strong semiconductor company to be a major automotive player is significant. Business is won three, sometimes four years in advance, during the automotive design process. Manufacturing cars is such a complex process, the final designs are done years in advance. By the time the cars are manufactured, the technology inside is usually four years old.

But because of this, the revenue streams are highly predictable. Since the design wins and manufacturing starts are so well known in advance, suppliers to auto companies can accurately forecast future revenues. And with the coming massive shift from combustion engines to EVs, we’ll see the average semiconductor content more than double in the coming years.

And as the industry moves toward autonomous driving, I expect that we’ll see those averages go even higher due to all of the sensors required for fully autonomous vehicles.

Our Timing Couldn’t Be Better

Earlier I mentioned Microchip’s acquisition of Atmel. At the time, it was Microchip’s largest acquisition. And it was the key deal that secured Microchip’s leadership position in the microcontroller industry.

The semiconductor business is brutal. Quality expectations are high, and price expectations are low. When I worked in the industry as a high-level executive at NXP Semiconductors, my team and I would have multiple price negotiations with our major customers each year. It was painful.

This is precisely why there are so many mergers and acquisitions (M&A) in semiconductors. It brings scale (growth) to a business. And scale brings the ability to decrease manufacturing costs and stay competitive.

In 2018, Microchip pulled off its largest acquisition yet. In May, it acquired Microsemi for $10.3 billion, a healthy price for a company generating about $2 billion in annual revenue at 62% gross margins and about $418 million in free cash flow.

Acquiring Microsemi added a large aerospace and defense business to Microchip’s overall revenue. This business was 26% of Microsemi’s annual revenues prior to the acquisition, $473 million in revenue in total.

I believe this will certainly be a positive growth sector for Microchip’s new aerospace and defense business.

On top of that, Microsemi brings a strong data center business, making up 23.3% of its revenue with $421 million.

But believe it or not, neither of these reasons are why I’m most excited about the Microsemi acquisition.

A Critical Asset

From my perspective, the most strategic asset that Microchip acquired via Microsemi was its precision timing solutions. These are made up of products like oscillators, clock generators, and network synchronization ICs.

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And they’re essential to critical infrastructure around the world. Put simply, these products keep networks in sync. And networks that stay in sync operate at their full capacity with the least amount of data loss.

The GPS systems used in cars, boats, and planes use Microsemi’s timing products. Ethernet networks and routing systems all use timing solutions, as do data centers. And these timing products are also critical to the proper functioning of 4G and 5G wireless networks.

In total, Microsemi (now Microchip) has more than 60% of the worldwide market share in these timing products. And it announced plans to acquire Tekron International Limited, another player in timing solutions, at the end of 2020 to further extend its reach.

But it’s not the past or current timing business that has me most excited. It’s what will come in the near future that makes this business so interesting…

5G Needs Microchip

It’s the underlying change in these new networks that present the real growth opportunity.

For example, let’s look at fiber-optic networks and data center technology. The industry is currently building out 100 gigabit per second (Gbps) throughput, and is already designing networks to support 400 Gbps…

These faster networks require more precise timing solutions that provide better accuracy. This is where Microchip comes into play.

And you might have guessed already, more accurate timing solutions are even more critical with 5G wireless network design. Due to the small cell architecture, 5G wireless networks will be far denser than current 4G wireless networks. There will be at least five times

as many cell sites as the current-generation architecture. And based on what I’m seeing with the build-out so far, I predict five times will be an underestimation.

If the new 5G network isn’t in sync, it simply won’t function properly. This could cause dropped calls, lost data, or even something more serious… like a self-driving taxi losing connection with the network – and the partial awareness of its surroundings along with it – and causing an accident.

This is a company that we want to have in our Near Future Report portfolio, so we can take advantage of these two massive industry trends at once.

Action to Take: For our current buy-up-to price for Microchip (MCHP), please see our online model portfolio.

Risk Management: Because we will be holding this stock without a stop loss, I encourage all readers to use rational position sizing. We should remember to never go “all-in” on any one investment. Our mission is to build a portfolio of our companies. That’s how we’ll optimize our success.

Finding More Opportunity in the Automotive Market

Air travel has quickly become a less desirable and high-risk way to travel because of the worldwide pandemic. After all, who wants to sit in a confined space with no fresh air, knowing that there is a certain percentage of passengers traveling who have COVID-19? Even now that many people are being vaccinated, there’s still a lot of fear and panic about the spread of the virus.

And that presents another opportunity for automotive technology…

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We’re going to be spending more time in our cars, and families are going to be opting for family vacations that are within driving distance.

And as a result of a strategic acquisition, my second recommendation has suddenly become the No. 1 semiconductor supplier to the automotive industry. And this industry crisis is presenting us with an opportunity to buy in at a fantastic price.

We’re going to invest in one of the most important semiconductor companies in the world: Infineon Technologies (IFNNY).

A “Powerful” Company

Infineon is one of the world’s leading semiconductor manufacturers. Headquartered in Germany, Infineon started as a division of the conglomerate Siemens. Eventually, it grew big enough that Siemens spun out the company in March 2000.

It has historically been known as one of the top suppliers to the automotive (No. 2 globally), industrial, and secure semiconductor (No. 2 globally) markets. And Infineon actually holds the No. 1 spot globally for power semiconductors used across all sectors including automotive, wireless communications like 4G and 5G, and industrial, among others.

We can see how dominant Infineon is in power semiconductors with one simple chart above.

Infineon has more than twice the market share of its closest competitor in this space.

These power management semiconductors regulate the flow of electricity throughout an electrical device. It doesn’t matter whether it is a smartphone, automobile, industrial compressor, solar energy inverter, or 5G wireless base station. Each of these devices needs Infineon’s technology.

Infineon is a massive company that generated €8.5 billion in revenue for fiscal year 2020 (ending September 30). It provides solutions to just about anything we can imagine. But the company’s primary drivers are actually easy to understand.

FY 2019 Revenue by Target ApplicationInfineon has its chips in a wide range of products

Source: Infineon

Digital Security: 8%Smart Card Solutions: 5%Embedded Security Solutions: 3%

Power Management: 30%Computing: 8%Consumer: 2%Smartphones, Wearables: 5%Communications: 1%Industrial: 11%Other: 3%

Power Control: 18%Drives: 6%Renewables: 3%Home Appliances: 3%Traction: 2%Other: 4%

Automotive: 44%Powertrain excl. xEV: 12%Electric Vehicles: 7%Safety Sensors: 8%Advanced Driver Assistance: 3%Comfort, Premium: 12%Other: 2%

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Infineon’s presence in the automotive industry represents an 11.2% market share, just barely behind NXP Semiconductors, which has maintained the No. 1 spot at 11.3%.

I know Infineon well. I competed in some areas against Infineon when I worked in the semiconductor industry as the president of NXP Semiconductors Japan. At the time, Infineon was the No. 1 semiconductor supplier in the industry.

And if you want to be one of the best serving the automotive industry, you have to be strong in Japan. It is the home of some of the largest automobile manufacturers in the world as well as one of the largest Tier 1 automotive suppliers, Denso.

But as we’ll see, Infineon has a strategy to leapfrog NXP as the top supplier of semiconductors to the automotive industry. And somewhat ironically, it is taking a page from NXP’s playbook to do it.

Strategic Acquisitions Increase Market Share

How did NXP Semiconductors become No. 1 in the automotive market? A strategic acquisition. NXP stepped up in 2015 and acquired Freescale Semiconductor for $16.7 billion (including debt). In other words, it bought market share.

The acquisition of Freescale was all about the company’s strength in the automotive industry and its microcontroller portfolio. While Freescale wasn’t a very healthy company at the time

and was burdened by billions in debt, it was a logical choice for NXP. It empowered the company to become the strongest player in the automotive industry. And for reasons I’ll explain below, having a strong strategy to address the automotive market pays off.

Remember Infineon’s strategic acquisition that I mentioned earlier? In June 2019, Infineon announced that it would acquire U.S.-based Cypress Semiconductor for about $10 billion. And on April 16, 2020, Infineon announced that the deal closed after receiving final regulatory approvals.

What was the strategic motivation for the deal? It was the automotive industry and microcontrollers… Sound familiar? In the two and a half years that followed NXP’s acquisition of Freescale, its stock nearly doubled, and the same thing is going to happen with Infineon.

And guess who gets the top spot in the automotive industry? The new and improved Infineon now has a 13.4% market share. Infineon is now the top semiconductor supplier to the automotive industry.

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Electric Car Market to Grow 30x Over the Next

Decade

The EV market will see exponential growth over the next 10 years. Currently, only 4% of cars sold are EVs. And in 2020, only 3.1 million electric vehicles were sold.

But Credit Suisse predicts over half of all cars sold will have some type of electric power by 2030. That will translate to about 60 million EVs sold annually.

But I don’t believe it will take nearly that long to see the mass adoption of electric vehicles. The shift toward electric vehicles is happening more quickly. The total cost of ownership is already lower than a comparable internal combustion engine (ICE) vehicle. And with battery costs continuing to drop and efficiency improving every year, we have already passed the inflection point. In short, these estimates are too conservative.

And that was before COVID-19. What has happened since then? We are witnessing a sharp and immediate shift toward contactless transactions of all kinds. The pandemic is a catalyst for eliminating unnecessary contact. Payments can and should be made using a smartphone rather than exchanging credit cards. Orders and payments can be made in advance by phone or online for curbside pickup.

And what’s one benefit of owning an EV? We don’t have to go to the gas station anymore. We don’t have to touch a gas pump. We take care of our errands during the day, come home, and plug in our car. And the car will be ready again in the morning. No contact required.

But even if we use Credit Suisse’s predictions and assume that we will see 60 million EVs sold by 2030, the market will grow by 32.2% per year.

As technology investors, we must have exposure to markets growing that fast. Infineon is now the market leader… And it will grow its automotive revenue even faster…

The key dynamic that we need to understand is that electric vehicles and even hybrid electric vehicles require a lot more semiconductors. It’s estimated that electric vehicles require more than twice as many semiconductors as internal combustion engine (ICE) vehicles.

So Infineon will be able to potentially double its revenue per car in this fast-growing market.

And that’s before accounting for self-driving vehicles.

Infineon’s Exposure to Self-Driving Vehicles

Let’s have a look at the chart above. It shows the growth of autonomous vehicles (AVs) through 2023.

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Over the next four years, we can expect at least two million cars to be fully equipped for self-driving capabilities.

Again, COVID-19 will catalyze the adoption of this technology. Consider the fact that the first exposure most of us will have to self-driving cars is through an autonomous taxi service. As previously mentioned, Google’s Waymo has already deployed its pilot program in Phoenix, Arizona. Lyft’s autonomous taxis are already live in Las Vegas, Nevada.

Considering how many people are practicing “social distancing,” or physical distancing, which option do we think consumers will opt for? Do we want to share air with someone we don’t know in a small, confined space? Or will we opt for a clean, self-driving car with nobody in the front seat?

Autonomous vehicles were already inevitable. But like so many other bleeding-edge technologies, the world’s response to COVID-19 has, in one fell swoop, demonstrated why we need to adopt these technologies faster.

And here’s why the rise of autonomous vehicles is important for Infineon. Each AV comes with an additional $970 of semiconductor content. And with Infineon’s acquisition of Cypress, it has gained a suite of microcontroller, sensor, memory, and connectivity semiconductors that will give Infineon a complete technology solution for EVs… and basically all AVs are electric vehicles.

Becoming the Automotive Powerhouse

Providing semiconductors to the automotive industry is different than other industries. The industry structure is unique, and the supply chains are complex. As a result, automotive designs tend to be made three or four years in

advance. Work done today pays off a few years later in terms of revenue.

Except for Tesla, car manufacturers really aren’t technology companies. They are primarily design, marketing, manufacturing, and distribution companies. The real tech takes place through Tier 1 suppliers, who design and build subassemblies and components that go into cars. This simplifies the manufacturing process.

Car manufacturers rely heavily on Tier 1 suppliers like Aptiv, Bosch, Continental, Denso, and others. These major players are middlemen in the industry that help simplify automotive manufacturing. These Tier 1 suppliers are the gateway into automotive design, and both Infineon and Cypress are two of the most well-established companies in this space.

Just like car manufacturers, Tier 1 suppliers do their best to simplify their supply chains. That is why scale is so important. They want strategic relationships with large semiconductor companies that have a wide range of products to support their automotive designs. This allows them to put strategic purchasing agreements in place and buy in volume.

Even companies that don’t use Tier 1 suppliers – like Tesla – use Infineon’s solutions. Infineon’s semiconductors are in Tesla’s Model 3 and Model S sedans. In fact, Infineon supplies the chips to control the batteries and motors in eight out of 10 of the world’s top-selling EVs.

And guess where Cypress’ headquarters is located? In San Jose, California, just a few miles down the road from Tesla’s headquarters in Palo Alto. Do we think that was by coincidence? Definitely not.

This is a company we want to own for the next few years.

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Action to Take: For our current buy-up-to price for Infineon (IFNNY), please see our online model portfolio.

Infineon is a German company that lists its shares in the U.S. as an American depository receipt (ADR). That means the liquidity may be a little lower than average compared to a normal Near Future Report recommendation.

International subscribers can also buy shares on Germany’s stock exchange under ticker symbol IFX. For portfolio purposes, we will be tracking the ADR (IFFNY).

Risk Management: Because we will be holding this stock without a stop loss, I encourage all readers to use rational position sizing. We should remember to never go “all-in” on any one investment. Our mission is to build a portfolio of our companies. That’s how we’ll optimize our success.

And these two companies aren’t my only recommendations following the future of transportation. To learn about another great way to profit from the rise of electric vehicles, go right here for the report.

Regards, Jeff Brown, Editor, The Near Future Report