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The power of Disruption

7 August 2017

When a butterfly flaps its wings in one part of the world, it is argued that a hurricane can eventually be formed in some other part of the world, or so says Chaos Theory. Richard Philbin, chief investment officer at Wellian Investment Solutions explores the possible knock on “disruptions” could have on the investment world as we know it.

In my day job I get to interview hundreds of fund managers, strategists and economists per annum – some face-to-face, others via conference call and I am never bored. We all know there is not one correct way to manage money – if there were, there would only be one fund and this wonderful profession of ours just wouldn’t exist. Many market participants are in the market for many different reasons such as time frames or income requirements – performance is certainly one thing they look for, but not the only thing.

I enjoy talking with friends and family about conversations had whilst part of my day job and one meeting that tends to always bubble to the top is one where an external speaker presented to discuss “disruption.” I realise straight away that “disruption” is an incredibly subjective word – a bit like “risk” is and is an emotional topic to discuss. Chaos Theory is often cited. The reason for this piece is not necessarily about the first derivative of disruption (of which this company has certainly caused its own ripples), but the secondary and tertiary impacts. Without the first piece of disruption, the second or third pieces could not fall into place.

The presentation was from the UK head of Tesla – the automotive business. I confess immediately to being a “petrol head” and this keynote speech was one of the main reasons I attended the conference, but during this presentation I was amazed at all the angles that are presently offering themselves from a simple change – from a petrol / diesel engine to an electric one.

Now Tesla has massively shaken up the “car” market, but has no offerings in the bike, van or lorry market for instance, although “watch this space” might be the best placeholder. The group Chief, Elon Musk, also has fingers in many other pies; one of them, SpaceX, is creating rockets that will return and land, rather than disintegrate. Who knows where Tesla might actually end up? Another one of his businesses, SolarCity has just been purchased by Tesla, so maybe we could see the panels of the vehicles having some form of solar capacity thus keeping the batteries charged? Elon Musk allegedly has made more than $1bn each from 3 hugely different businesses and therefore you could argue he has been incredibly successful! PayPal was one, and that really isn’t related to Space Travel, battery-powered cars or solar panels for instance, but who knows where his thought process is taking him into the future?

Tesla is, no doubt, a technology business that is investing its time and energies into disrupting the car market. They do not use traditional petrol engines, instead focusing energies on battery-power thus creating disruption. They are not the first company to try battery-powered cars, and they are not meeting any of their targets (having made less than 100,000 in total) when it comes to production numbers, but at one stage this year, the company had a market capitalisation greater than General Motors who sells over 2m cars per annum.

Battery powered cars obviously do not burn fossil fuels and therefore are more environmentally friendly which wins the hearts and minds of many. With the advent of congestion charging and tax breaks for low emission vehicles there are other advantages too. Tesla also can boast cars with incredible power and 0-60 times that challenge super-car statistics. Even though they are expensive, they are a status symbol and still turn heads and have a fabulous safety track record too.

Back to the point of this note – second and third derivative disruption…. As previously mentioned, the technology in these cars is fantastic. Within a few years, these cars will be able to self-drive (assuming legislation allows – there is a whole other debate raging here mind you) and self-driving cars brings with it many other advantages.

One of the drawbacks to electric cars is the lack of “filling stations” – sure there are a number of charging points popping up – service stations, supermarkets, pub car parks and the like, but it doesn’t take a few minutes to charge an electric car like it does to fill up a combustion-engined car. Also, it takes a great amount of time (and money) to roll-out an infrastructure – but there must be an investment opportunity here.

If these cars can become self-driving, the opportunity to rent out the car becomes compelling too. A typical car spends more than 95% of the day stationary – doing nothing. It just sits there and depreciates. Surely putting your car into a pool of self-driving taxis is a great way to earn back some of the capital outlay? (Another investment opportunity?) All you need to do is tell the car to be back at a certain time for when you want it. Alternatively, why not just give up owning a car in the first place and have a driverless car at your beck and call whenever you need one – you could spend your capital in other more productive ways.

Driverless cars could equal the end of the taxi-driver. It is estimated that 70% of the fare paid goes to cover the cost of the driver, with 30% covering the cost associated with the car. Without a driver, the cost of travel falls. With one less person in the car, the fare can be distributed among more people – thus reducing costs further still.

The taxi driver business model is changing. Ride apps such as Uber and Lyft have introduced “surge pricing” – the demand for the vehicle dictates the price paid. Just think how much your car could earn you on Christmas Day or New Year’s Eve for instance if you didn’t need it; and on top of that, you haven’t even had to get off your sofa.

Self-driving cars can be sent away to charge themselves – this would be wonderful for owners who live in city centres and don’t have off-street parking or garages for instance where they can lay a cable from the home to the car. Another investment potential could be out of town charging hot spots.

There is an argument that driverless cars will reduce the number of cars on the road as those that are on the road become more efficiently used. More people will “rent” than own, but the cars in the rental pool will be fewer as they are more efficiently operated. This can have impacts for the wider car loan market, an individual’s credit rating, potentially the cost of loans and insurance.

Technological advancement also keeps cars up to date – just think how often your apps are upgraded on your mobile device and transfer this thinking to a car. In the presentation the example was given that 5 years ago the 0-60 time of the top of the range Tesla was 2.80 seconds. The brand new equivalent is 2.50 seconds. The 5 year old car has been upgraded through its on-board technology and it too can do 0-60 in 2.50 seconds; this is impossible in a standard car. Another investment opportunity exists in computer mapping, coding and so on.

Although this article started as a disruption piece surrounding the introduction of electric cars, the knock-on impacts can be massive should they become widely adopted. We’ve not even discussed what would happen to the oil price (and associated industries) as well as global GDP. From there, the argument of geopolitics can even be raised. When a butterfly flaps its wings….

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