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critical components

critical components

The car—and the car business—is being reinvented.

The car—and the car
business—is being reinvented.

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When you think of the car of the future, do you think of the “Jetsons?” Unfortunately, it doesn’t look like we’re going to be getting jetpacks or flying cars anytime soon. In fact, the cars of tomorrow will probably look much like the cars of today. But virtually everything else about those cars is destined to change.

Cars are being reinvented from the inside out, and so is the enormous and growing automotive industry. The biggest beneficiaries of this change are likely to be a small number of firms that much of the world has never heard of—making them a prime target for savvy investors.

Accelerating Change Accelerating
Change

Exhausting gridlock, grueling commutes, choking smog, deadly collisions, disastrous climate change—this is the global legacy of humanity’s need for convenient and high-speed transportation.

Fortunately, tomorrow’s cars look poised to change the narrative. They will run on electricity, sharply lowering greenhouse gas emissions. They’ll be smarter, making drivers safer and more efficient. And eventually, they will drive on their own.

To create these safer, cleaner cars of the future, automakers will obviously play a key role. But there are other firms—like specialized technology companies that supply individual car components—that are perhaps best positioned to benefit from this wave of progress.

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When you think of the car of the future, do you think of the “Jetsons”? Unfortunately, it doesn’t look like we’re going to be getting jetpacks or flying cars anytime soon. In fact, the cars of tomorrow will probably look much like the cars of today. But virtually everything else about those cars is destined to change.

Cars are being reinvented from the inside out, and so is the enormous and growing automotive industry. The biggest beneficiaries of this change are likely to be a small number of firms that much of the world has never heard of—making them a prime target for savvy investors.

Accelerating Change Accelerating
Change

Exhausting gridlock, grueling commutes, choking smog, deadly collisions, disastrous climate change—this is the global legacy of humanity’s need for convenient and high-speed transportation.

Fortunately, tomorrow’s cars look poised to change the narrative. They will run on electricity, sharply lowering greenhouse gas emissions. They’ll be smarter, making drivers safer and more efficient. And eventually, they will drive on their own.

To create these safer, cleaner cars of the future, automakers will obviously play a key role. But there are other firms—like specialized technology companies that supply individual car components—that are perhaps best positioned to benefit from this wave of progress.

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“[The market for in-vehicle electronics] will continue to grow rapidly post-2020 as these technologies become more ubiquitous.”

Robert Dunphy
Portfolio Manager at OppenheimerFunds

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Modern, hi-tech cars need a dazzling range of technologies in areas ranging from artificial intelligence to miniaturized sensors to energy storage. One component at a time, the automobile is turning from a mechanical machine into an electronic one.

“The modern car is a very sophisticated piece of technology, perhaps the most sophisticated that we own today,” said Shawn Slusser, VP of Sales and Marketing for Infineon Automotive, a semiconductor maker. “At the heart of this sophisticated system are the electronics which control all details of the car’s operations.”

[The market for in-vehicle electronics] will continue to grow rapidly post-2020 as these technologies become more ubiquitous," says Robert Dunphy, portfolio manager at OppenheimerFunds.

Lines of code

So you think the Space Shuttle requires a lot of lines of code?
Read on to find out how many are in the average car.

So you think the Space Shuttle requires a lot of lines of code? Read on to find out how many are in the average car.

space shuttle

400,000

400,000

boeing 787

14 million

14 million

typical new car

100 million

100 million

Source: Information Is Beautiful

Here, There, and Everywhere Here, There, and
Everywhere

Autonomous cars, electrified cars, connected cars: Are these truly the cars of the future, or just the cars of the wealthy? Will demand for safer, cleaner cars grow steadily over time, or will it rise and fall with the tides of customer fashion or government regulation?

The question has gained urgency as a new U.S. administration pledges to roll back regulations affecting the auto industry, including those affecting emissions standards and potentially safety. Regardless, much of the world is moving forward with the development of safer and cleaner cars.

“The largest car market in the world is China, which is nearly the size of the U.S. and European markets combined,” notes George Evans, chief investment officer, equities and portfolio manager with OppenheimerFunds.

“In China, fewer than 20 percent of households own a car,”1 Evans says. “Car ownership is rising thanks to urbanization and rising affluence. But China is choking on its car emissions. The government recently announced it would set a deadline for automakers to end all sales of fossil-fuel-powered vehicles, joining countries including the U.K. and France.”

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Today’s luxury safety options will be in the standard package tomorrow

George Evans
Chief Investment Officer, Equities and Portfolio Manager at OppenheimerFunds

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In the realm of safety, too, forward movement appears inevitable, says Evans. “Today’s luxury safety options will be in the standard package tomorrow,” Evans says. “And as newer safety features like automatic braking are developed, we believe they will be government-mandated just as seatbelts and airbags have been.”

Evans says that the biggest shift, however, will be the transition to electric cars, which are destined to replace today’s gas-guzzlers just as gas-powered cars replaced horse-drawn carriages a century ago. “Call it a tipping point. The worldwide drive toward smarter, safer, autonomous and electric cars and trucks is well-nigh unstoppable,” he adds.

Changes in the auto industry align with two of the megatrends the OppenheimerFunds Global Equity Team has identified: the rise of mass affluence and the spread of technological innovations that are transforming lifestyles and businesses. Once they’ve identified these trends, the team—which includes Evans and Dunphy—handpicks the companies most poised to benefit from them.

Suppliers Hold the Cards Suppliers Hold
the Cards

Who will benefit the most from this transformation in mobility? Will it be the car companies, or the companies that produce car components?

As auto manufacturers struggled through the 2000s, they outsourced much of the development of systems and components to their suppliers. “A growing share of every dollar spent purchasing a car is accruing to these components makers, because they own the patents behind these increasingly important technologies,” Evans says.

Just a handful of suppliers are leading the development of this new wave of specialized electronics and software for automobiles. “You can’t just put the electronics from a regular computer or cellphone into a car and expect it to work, because the harsh environment and long life of cars must be factored in,” Slusser says. “Not everyone can participate in this future growth unless they can produce the quality that’s expected.”

These suppliers are the pioneers of new product categories with cost models and profit margins more typical of high-growth software firms. Imagine, for example, a new car feature that can be installed via a wireless software update. A driver could purchase this feature without having to buy a new vehicle or even visit a mechanic.

“The intellectual property of these suppliers will give them a strong pricing power in the market,” Evans says. “And given the long-term trends in the auto industry, we think that pricing power will be sustainable. That’s what really interests us as investors.”

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