X

M&G Analysis: Yin and Yang in the Year of the Ox – Autos & Semiconductors

Ahead of tomorrow’s Chinese New Year and the year of the Ox, Vikas Pershad, equities fund manager at M&G Investments, shines a light on two sectors with particularly exciting futures ahead and how they may be complementary

For decades, automotive production and semiconductors operated in mostly separate domains: steel, motors, glass and noise in one; silicon, switches and silent electrons whizzing about in another. The preponderance of the world’s fleet (in excess of 1 billion today for passenger cars alone) could make do with but a few hundred dollars of semiconductor content in each vehicle (merely a single digit percentage of a vehicle’s price). And innovations in personal computers, smartphones and datacentres were the impetus behind progress at the leading edge of semiconductor technology – the chips used in cars were inexpensive and at the lagging edge.

Today, however, the collective corporate response to climate change – coupled with advances in sensing, communications and energy storage – is driving a convergence of the world’s largest manufacturing industry with the companies operating at the smallest possible scale. Auto-semi duality is here.

Driven by increasingly exacting emissions norms and enabled by technology, the globally synchronous reimagining of the automotive is happening at every part of the value chain. Take the average passenger car of today: a petrol-fueled steel box with a centralized engine and motor, it sits idle for more than 90% of the day; and when in use, it is largely disconnected from its surroundings while being maneuvered – along a road – by a human driver with little attention to spare for any task beyond navigation. When describing the car of tomorrow, every part of that sentence will be written anew.

First, the power source: electricity, not fossil fuels. Vehicle electrification is leading to profound changes in energy generation, distribution and storage. Electricity from solar energy captured by polysilicon or hydrogen fuel cells will be transmitted via charging stations to cars that have shed many of the parts of legacy vehicles; they will simply not be needed, and will be replaced by fewer components but increased, distributed motorization, down to the wheels themselves. And the tiny battery that could once be jump started by connecting red and blue cables to another car will be replaced by a massive device that comprises a large portion of the vehicles cost. As power management becomes more crucial to efficiently running a car, semiconductors will play a vital role.

Second, connectivity: computer vision, improving memory technologies for both DRAM and NAND, and 5G and 6G communications will transform cars from islands in a sea of vehicles into nodes on a connected web. This web will, in time, allow the driver to become a passenger as autonomous vehicles proliferate. And it will allow all passengers to travel in a car as they would in a plane: less encumbered motion, with much more time to generate and consume ever more data. Connectivity and self-driving vehicles will require the most intense usage of advanced semiconductor technology – it will also be the one area where progress will be most reflexive: semiconductors will enable automotive connectivity, but the enormous demands from autos for instantaneous petabytes (not merely gigabytes or terabytes) of data capturing, processing, communicating and storing will drive innovation in semiconductors – from the lagging to the leading edge, and, perhaps, far beyond the silicon-based solutions we have today.

Third, utilization: higher, for more vehicles. As cars and trucks become more connected, more safe and less reliant on human guidance, they will be used for longer stretches of each day, and for a broader array of purposes. Paradoxically, this should mean more vehicles are needed, as peak demand each day will be far beyond what can be serviced with unit sales based on straight-lining recent sales trends. Again, fleet management will be driven by algorithms and data analytics, all powered by advanced computing and semiconductors.

Lastly, the path of travel: not only land, but also sky and sea. A light, autonomous, connected, emission-free vehicle need not be confined to a road. The reimagining of the car and truck of tomorrow should be total, and free of anachronism.

Featured News

This Week’s Most Read

  • Price of scarcity: Central banks are driving large valuation premiums on assets with limited supply

    By Charles-Henry Monchau, CIO at Syz Bank It is important to understand the concept of scarcity to better understand its mechanics and its impact on markets. Scarcity refers to the

  • Why now is the right time to invest in Japan

    By Masakazu Takeda, lead portfolio manager of the Japan Focus All Cap strategy at SPARX Asset Management The issues that have plagued Japan over the years are now at the doorstep of

  • Why high yield bonds could be the next ESG frontier

    By Lila Fekih & Mark Remington, Co-Portfolio Managers of the New Capital Sustainable World High-Yield Bond Fund at EFG Asset Management  Equities have garnered the most attention in the ESG

  • Fundsmith hints at bumpy ride

    Terry Smith’s annual letter to shareholders reports a slight underperformance of the MSCI World Index over one year Despite the value rally, quality stocks outperformed in 2021 Smith says unexpectedly

  • Brooks Macdonald Funds under Management hit £17.3bn

    Brooks Macdonald today publishes an update on its Funds under Management (“FUM”) for its second quarter ended 31 December 2021, together with a Trading Update for the half year. FUM

  • Ninety One appoints Juliana Hansveden

    Hansveden to develop emerging markets sustainable equity capability Ninety One has today announced the appointment of Juliana Hansveden, CFA, as Portfolio Manager, Emerging Markets Sustainable Equity. In this newly created

  • Man GLG’s Atherton: Governance revolution in Japan like the UK in the 80s and 90s

    The ESG-driven corporate governance revolution in Japan is creating investment opportunities similar to those in the UK in the 1980s and 1990s, says Jeff Atherton, manager of the Man GLG

  • US December CPI inflation rises 7% from a year ago

    David Goebel, Investment Strategist at Tilney Smith & Williamson, the wealth management and professional services group, comments on the latest US CPI inflation data: US December headline CPI inflation rose

  • BlackRock launches two new active Climate Action funds

    The BGF Climate Action Multi-Asset Fund and the BGF Climate Action Equity Fund leverage BlackRock’s deep expertise in active sustainable investing with the objective of generating positive environmental impact.  As

Wealth DFM