Autonomous & Electric – On the brakes.

The great reset spreads.

• The migration towards electric and autonomous is showing signs of strain with crashing valuations and signs of a significant slowdown in progress.
• This is good news for the OEMs who have been served notice by the technology industry, but which has spectacularly failed to live up to the timetable giving them more time to get their houses in order.
• Furthermore, the correction in Tesla’s valuation from insanity to just plain silly has taken a large slice out of the rest of the industry which has been riding on its coattails.
• Back in 2017 when RFM launched its automotive coverage (see here) it predicted that autonomy would become a reality in 2028 while the industry itself was confidently predicting that it would do away with the driver by 2019 or 2020.
• The industry’s position on autonomy has now shifted as it turns out that driving is much more difficult than anyone predicted, and the expectation has now shifted to “sometime in the next 10 years”.
• In English, this statement means “we don’t know” which when you are venture-funded is incredibly dangerous as without steady cash flow anyone working in this area will have to keep coming back for more money.
• This has led to a number of companies running out of money and being acquired by larger players at knockdown prices.
• This has been going on for some time which combined with a significant shortening of Waymo’s lead (Baidu in China) (see here), implies that the pace of performance improvement is slowing to a crawl as players come close to the performance limits of the systems they have developed to date.
• This is why I think that a slightly different approach is probably going to be required which is one that fuses the statistical-based learning systems for vision and the logic-based software systems for decision making.
• I still think a working solution is possible by 2028 but it will probably require fairly strict constraints such as only operating within a certain area in order to meet the safety requirement.
• This reset has been going on for some time and the recent departure of John Krafcik from Waymo to be replaced by 2 co-CEO’s is just another sign of the continuing trend.
• However, this is now spilling over into the world of electric vehicles which has raised vast amounts of capital very cheaply thanks to the valuation of Tesla driving a hype cycle for electric vehicles that has left many investors terrified of missing out.
• The danger of this is that the valuation of Tesla is carrying the whole sector which is now suffering heavily from its correction.
• Since its peak at the end of January 2021, Tesla has fallen by 25% which has caused ripples of panic through the rest of the sector whose valuation has largely been predicated on this one stock.
• This has taken NIO down 37%, Lucid Motors’s SPAC (CCIV) down 59%, Faraday Future’s SPAC (PSAC) down 35%, Innoviz SPAC (CGRO) down 41%, BYD down 36%, Canoo down 59% and even VW which spiked hugely when it when all-in on electric vehicles has already shed 12%.
• This puts many of these companies in very dangerous territory.
• This is because many of them have not raised enough money to see them through to cash flow break-even meaning that they will need to come back to the market.
• The result could be substantial down rounds which will be very dilutive for the investors who are putting in money now.
• There is still a lot of momentum for EVs but if the capital inflows and the optimism around the sector dries up, this means that it will take much longer for widespread adoption.
• All of this is good news for OEMs who are scrambling to catch up because it means that the great changes that are coming to their industry will take longer to materialise and to complete.
• It also means that there may well be some good acquisitions to be had as the sector falls out of favour with fickle, fear-driven investors.
• It sounds bad for the automotive sector, but I think this provides the OEMs with some of the help they badly need.