JULIUS BÄR | FUTURE MOBILITY: EVOLUTION OR REVOLUTION

RESEARCH FOCUS | WEDNESDAY, 30 MAY 2018; 10:23 CET

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FUTURE MOBILITY EVOLUTION OR REVOLUTION • Mobility is at the beginning of a new era. Electric cars and autonomous driving could solve today’s congestion and pollution issues. Asia’s rising middle class, urbanisation and consumer preferences shifting from owning to using are other key trends to watch.

• The future mobility could follow an evolutionary or revolutionary scenario. There has hardly ever been a vision as clear and uncontested as the coming age of electric, autonomous and pooled vehicles.

• The impact on the auto business will be significant, triggering shifts in value pools and creating winners and losers. Suppliers benefit from growing technology and electronics use. A new business of mobility services emerges.

Automakers see more threats than opportunities.

• Thematic investing is tactical investing. Financial markets are forward-looking but their restless temperament overshadows slow-paced structural shifts. Most growth stories come with rich valuations while concerns about peak oil demand are overdone. Aptiv (Buy, Price/Target: USD95.52/105) and Infineon (Buy, Price/Target: EUR23.6/27) are among our top picks today.

Norbert Rücker +41 (0)58 886 2107, norbert.ruecker@juliusbaer.com

ENERGY TRANSITION World energy markets and related industries are undergoing profound structural change. The dependence on fossil fuels, the past decades’ high prices, climate change and environmental pollution are only some of the many challenges that spur investments and nourish innovation. We believe that we are in the midst of a transition where new technologies satisfy our growing energy needs without further depleting fossil resources.

Introduction: Mobility, the economy’s artery system Mobility is essential in today’s world. We commute to work, factories ship goods and supermarkets receive fresh supplies daily. Meeting family and friends, or spending free time away from home, enriches our social life. Mobility is a key determinant of economic growth, the artery system of our society enabling well-being and wealth.

According to the World Bank’s statistics, road and rail infrastructure have a clear impact on a country’s wealth and development. China became an economic powerhouse and lifted millions of people out of poverty by investing decisively in transport infrastructure. Smoothly operating ports are a prerequisite for trade, a tight-knit highway and rail system makes for seamless freight transport, and reliable urban connectivity supports business exchange and thus investments. Put differently, alongside governance risks, the lack of infrastructure too often is the main reason why poor countries are incapable of sustainably exploiting their full economic potential.

However, today’s mobility is a dead end. Congestion takes its economic toll as growing traffic runs up against infrastructure constraints. Unnecessarily long commutes limit the accessibility to the job market. Supply delays curb the productivity of factories. Congestion across the United States, the United Kingdom and Germany cost an estimated USD 975 per capita in 2017, according to the traffic data company Inrix. Transportation is a key source of urban air pollution and meaningfully contributes to climate change. China’s push for cleaner skies and the diesel scandal have moved the air pollution issue into focus. A growing body of scientific studies delivers mounting evidence of urban air pollution’s detrimental effects on public health. Besides power plants, cars and trucks are key emitters of greenhouse gases, and a target of climate policy.

Julius Baer Research | Please find important legal information at the end of this document.

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

Talk urban mobility, think global economy The world’s metropolitan regions are the engine of the global economy. Within the European Union, cities account for 80% of economic output, according to the European Parliamentary Research Service. Cities are more productive and accumulate more wealth. Urbanisation is a megatrend set to continue. By 2050, the United Nations estimates the number of people living in the world’s urban areas to grow by 70%, from 3.7 billion to 6.2 billion. Sustainable global economic growth requires alternatives to today’s mobility, solutions that maintain the flow of people and goods without passing burdensome healthcare liabilities on to future generations.

We believe mobility is at the beginning of a new era. Congestion and pollution need solutions, which technology might provide, while the overall environment shifts due to demographical and social trends. The theme is complex, multifaceted and raises many questions among investors.

Are electric cars becoming a mass market? Is the future of the combustion engine in question? Are oil reserves stranded assets? In the following pages, we will try to find answers to these and related questions; we will have a look at the current state of mobility, bring to the fore today’s trends and assess the likelihood and the consequences of possible market and business disruption.

The rising Asian middle class Wealth and population in large parts determine our mobility demands. With a job comes the need to commute.

With income comes the choice of leisure activities, and most often the desire to own a car that brings comfort and convenience. Passenger miles increase with economic output. How we get around varies within cities, countries and continents, but cars and roads currently dominate our mobility globally. Cars account for 80% of passenger mileage

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in developed economies, while buses and two-wheelers account for up to 50% of passenger mileage in developing economies. Leisure activities, rather than commute, represent the lion’s share of daily trips in the Western world.

The rising Asian middle class structurally drives world economic growth today. One of the key questions about future mobility is to what extent Asia, and specifically China, will reach car ownership levels comparable to the Western world.

The West drives, the East rides. ______ The rising pool of first-time car buyers in Asia continues to shape the auto business. China became the world’s largest car market around 2010, and remains the growth hotspot.

With buyers becoming more demanding and moving to premium products, China has been a key source of profits for Western automakers. At the same time, market growth and government policies fostering a domestic auto industry gave rise to Chinese players, which have so far remained focused on Asia but have caught up to the global leaders in terms of output. The country’s decision to ease restrictions on foreign ownership of domestic automakers keeps the market dynamics elevated.

The wealth effect on mobility is strong and the rising Asian middle class structurally supports growth of global mileage and car sales. That said, China’s demographics are slowly turning. The working population has already peaked. India and South East Asia, for their part, are less likely to follow China’s path of economic development on the fast lane, as infrastructure development in these countries is slower due to social, financial and political reasons.

Both trends imply that the wealth effect on mobility, and particularly on the car market, might be less dynamic going forward. Nevertheless, Asia’s growth shapes the mobility future, and the region will account for the majority of

Passenger miles by mode (2012)

Passenger kilometres and economic output (2015)

%

Passenger kilometres (thousand per capita, inland)

100

18 16

80

Germany France

14

12

60

Japan South Korea

10 8

40

United States

Canada United Kingdom

Switzerland

6

20

4

India

2

0 United States

Europe Rail

Japan

Bra zil

Two-whee l

China Bus

Source: US Energy Information Administration, Julius Baer

India Car

China

0 0

20

40 60 80 100 Gross domestic product per capita (USD)

Source: Worldbank, International Transport Forum, Julius Baer

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

passenger and freight mileage over the decades to come.

According to the International Transport Forum’s latest outlook, by 2050, 43% of passenger transport is expected to take place in Asia. In brief: • Asia in the driving seat. Economic and population growth propel passenger and freight transport, with Asia driving these dynamics until 2050. The wealth effect raises Asian car ownership closer to Western world levels.

• Dynamics slow as China’s economy matures. China’s economic development on the fast lane shapes the present of global transport markets, but with demographics turning and no strong contender in sight, the past decade’s growth dynamics are set to slow.

Urbanisation and a city’s mobility needs The wealth effect is only part of the story, however. It is too simplistic a view to assume that economic growth will lift Asian and specifically Chinese car ownership to the levels seen in the Western world. The mobility demands differ between urban, suburban and rural areas. The density element explains the mobility differences between Europe and North America; European cities have evolved over centuries, whereas North American cities have been expressly built with car accessibility in mind. Density and historic context also applies to Asia, where megacities already today have car ownership rates comparable to their Western world counterparts. Simplistically seen, North America is suburban, Europe and Asia are rather urban or rural. Density means more people take shorter trips, which bodes well for two-wheelers as well as mass transport systems such as buses and subways. Singapore and Hong Kong, with their strongly interconnected mobility and traffic systems, are a case in point.

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Less noticed from a Western world perspective, however, is the fact that motorcycles account for a substantial segment of the broader transport market in Asia. It was not until 2014 that the number of cars sold in China surpassed the number of motorcycles sold. While sales are in decline in China, motorcycles remain the hot market in India and most other parts of Southeast Asia. Indian annual car sales of roughly 3.3 million units are dwarfed by two-wheeler sales of roughly 20 million units. Notorious congestion and affordability are the main reasons why consumers prefer bikes to cars. More recently, this preference manifests itself in the bike-sharing boom. Flashily coloured bikes have flooded, in particular, Chinese cities, offering users the possibility of convenient short-distance rides.

Urban congestion and pollution are tangible issues for which voters demand solutions. Cities rather than countries drive the policy agenda. Paris announced its ban on diesel-powered vehicles starting in 2024, Madrid starting in 2025. Oslo and Oxford announced their bans on cars in city centres by next year and from 2020, respectively. The list of cities making similar announcements grows longer by the year. This year’s German court decision to impose restrictions on diesel car use paves the way for cities to consider such measures. These timelines are tight and, in comparison, French and German pledges to phase out gasoline and diesel cars by 2040 look less challenging and threatening. Moreover, cities increasingly combine legislation with urban planning by giving space and priority to sustainable mobility, including walking and biking.

Cities are sidelining cars. ______ Asia overall is unlikely ever to catch up to car ownership levels in the Western world because of its megacities and population density. Urbanisation is a global trend. In the developed world, cities have become more attractive to

Car and motorcycle sales (2017)

Car ownership (2015)

Million units 30

Cars per capita (1000 inhabitants) 1000 900

25

United States

800

20

700 600

15

Switzerland Europe Japan

Cities

500 10

400 300

5

200 0

United States

Europe

Japan

Bra zil

China India Car Two-whee l

100

Countries

Zurich London New York

Beijing T okyo

China India

0

Sources: Auto and motorbike associations, Organisation Internationale des Constructeurs d’Automobiles, World Bank, Bundesamt für Statistik, US Federal Highway Administration, International Energy Agency, Julius Baer

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

live partly because of de-industrialisation and advanced urban planning. In the developing world, megacities are the economic hubs that expand and spread. While car ownership levels in Europe and North America have likely peaked and can only erode going forward, in Asia urbanisation slows the car market growth path set by rising incomes and population growth. Another consequence is that cities are the breeding and testing ground for future mobility solutions because of their high social, economic and political dynamics. In brief: • Urbanisation offsets the wealth effect. Cities have lower car usage given the many mobility alternatives. Urbanisation partially offsets the wealth effect and slows the growth in global car ownership.

• Cities raise the policy dynamics. Cities co-shape future mobility through policy and their drive to solve congestion and pollution issues. The extent to which cities strive for sustainable solutions determines the global policy framework and its impact on future mobility.

The big electrification shift One of the most popular talking points these days is the electric car. Indeed, the momentum and market share gains over the past years have been impressive and unexpected, forcing automakers to commit to the technology and add models to their offering. Electric cars still account for a comparably small share (2%) of global sales but this is up from almost zero not too long ago. One key question about future mobility is whether electric cars will become a mass market. Today’s hype about electric cars somewhat distracts from the broader technology progress. Specifically, drivetrain technology has evolved considerably because of engineers’ passion for enhancing performance and the policy demand to cut fuel use and air pollution.

National regulation covering car markets globally sets a visible roadmap for emission reductions in the near future.

The current shift from lab to on-road emission testing will lead to further fuel efficiency and tailpipe emission improvements.

Drivetrain technology is becoming increasingly complex.

Combustion engines become smaller and more powerful by adding technologies such as turbo-charging and direct fuel injection. This so-called ‘downsizing’ improves the engine’s thermal efficiencies and cuts fuel consumption.

However, combustion engines are inferior in terms of energy efficiency and performance compared to electric motors. Car manufacturers are combining combustion engines and electric motors, the so-called ‘hybrids’, to reap the benefits of both worlds: the long mileage and convenient refuelling of fossil fuels, and the low emissions and high performance of electric motors. Plug-in hybrids represent the most complex combination. These cars have all

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the latest features: downsized combustion engines, sophisticated gearboxes and electric drivetrains with batteries, enabling short-range electric-only driving. Future cars will most likely all have some sort of hybrid configuration.

The shift from 12 to 48 voltage (V) systems is widely seen as a cost-effective ‘hybridisation’. This shift raises acceleration performance, allows for short periods of electric driving with conventional cars, the so-called ‘coasting’, and enables brake energy recuperation, by adding a small electric motor and a more powerful battery. The 48V approach offers fuel efficiency gains at system costs comparable to diesel engines. Its adoption likely further erodes diesel market shares.

48V systems bring hybrids to the masses. ______ Electric cars are on track to double their market share by 2020. So far, sales have been mostly regulation-driven.

Purchase price subsidies and other benefits, such as exemptions from licensing restrictions, preferential access to parking and driving lanes, and free use of charging services explain the concentrated market share gains in Norway and China, the two leading electric car markets.

Worldwide, every second electric car is sold in China. Regulatory support should become less important. Consumers decide less on the cost than on the convenience and ‘coolness’ factor. There is a common misperception about costs, with consumers mostly unaware that electric cars already offer affordable driving despite the higher upfront purchase prices.

Automakers will significantly expand their electric car offering towards 2020. The new models will cover additional needs, while battery technology developments will bring a longer driving range and lower costs. The broader choice should erode consumer doubts about the driving range, everyday convenience and costs. Today’s leading electric

Electric car sales Million units 0.12 0.10

0.08

Europe

China 0.06 0.04

United S tates Japan

0.02 0.00 2014

2015

2016

Source: EV Sales Blogspot, Julius Baer

2017

2018

2019

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

car manufacturer recently revealed that range anxiety eases when vehicles offer ranges beyond 300 kilometres.

The market niche in which electric cars successfully compete expands but still mostly consists of homeowners, or at least private parking owners, households with more than one car, or households with car-based commutes.

Road-charging infrastructure remains a key concern, although the available data shows that electric cars are most of the time charged at home or at work. Several factors grind the barriers towards an electric car mass market: the auto business’s commitment, the ongoing investments in mass manufacturing and offering that lowers costs and improves choice, the battery technology development, and the roll-out of charging infrastructure at work and along highways. Intense manufacturing competition, the still steep learning curve with hybrid and all-electric technology and the ongoing fuel efficiency gains are all factors that should lower the real, i.e. inflation-adjusted, costs of the individual mobility offered by cars.

Electric cars: more expensive in the shop, but more affordable on the road. ______

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Battery technology progress in part determines the speed of the electrification shift. Manufacturers have been able to increase driving ranges by around 50% between their first- and second-generation models. Evolutionary steps including manufacturing scale, tweaks in chemistry and smarter packaging have driven the improvements. There is great visibility in the near term, and scaling up production and additional chemistry tweaks should lead to battery prices falling towards USD 100 per kilowatt-hour by 2025, i.e. into ranges seen as the tipping point for the adoption of electric vehicles.

A battery technology revolution is not necessary to bring electric cars to the mass market. Lithium-ion is the dominant battery technology and the shift towards more nickel-rich electrodes is underway, which should incrementally improve energy density, i.e. driving ranges. Another likely shift is from lithium-ion to so-called solid-state batteries. This technology receives broad attention and research funding, and should bring substantial energy density gains. Solid-state batteries could show up in electric cars by 2025, but moving from test lab to practical use has proved to be more difficult than expected.

The impact of electrification is already visible today. Electric cars have levelled the playing field for automakers and intensified competition. New entrants dominate the list of the world’s top-selling electric cars and electric delivery vans. These market dynamics are particularly strong in China. Fuel efficiency has increased and caused a decoupling of miles driven and road fuel use. Despite the past years’ solid economic growth, oil demand in the Western world has roughly flatlined over the past decade. Meanwhile, Chinese gasoline consumption growth has been softer than structurally expected, for which the ‘new energy vehicle’ policy is one of the few plausible explanations. The government regulation has had its desired effect.

Another uncertainty element surrounding the electrification trend is regulation. Policies such as Europe’s fleet emission targets have been pivotal driving forces, yet the risk of global regulation unwinding seems small. The current US government threatened to undo fuel economy standards, but its power to do so is limited. California enjoys special status and implements strict emission regulations, which several other states are following. In this regard, single states have legal power over the federal government. Europe’s auto business is set to miss the 2020 emission target, not least due to the popularity of sports utility vehicles. Today’s fleet average remains above 120 grams of CO2 emissions, and the 95-gramme target by

Lithium-ion battery prices

Diesel share of car sales in Europe (top 5 markets)

USD per kWh 1200

% 60

1000

55

800

50

600

Average auto maker targets

400

150

200 0 2010

Projection based on scale efffect

2012

2014

2016

2018

2020

96

2022

2024

Source: Bloomberg New Energy Finance, Julius Baer (kWh: kilowatt-hour)

45 40 35 30 2008

2010

2012

2014

Source: Bloomberg Finance L.P., Julius Baer

2016

2018

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

2020 seems well out of reach. The diesel scandal has increased awareness of the detrimental effects and costs related to air pollution. Although newly sold diesel cars now meet the emission limits, consumers are shunning the technology. The scandal destroyed trust. Europe is unlikely to deviate much from its policy road map, which enjoys public support. Moreover, as mentioned earlier, cities have become the driving force behind the broader global regulatory framework. Their anti-combustion engine policies co-shape the car manufacturers’ technology road map. In sum: • Electric cars at the cusp of the mass market. Electric cars grow their market share as new models and battery technology progress expand the addressable market.

• Lower fuel use, more affordable driving costs. Electrification decouples fuel use from car usage and makes individual mobility more affordable.

• Intensified competition among automakers. Electric cars level the playing field and new entrants raise competitive threats among automakers. The steep technology learning curve brings additional dynamics.

• Battery technology wild card. Any breakthrough in battery chemistry would accelerate the shift towards electric mobility. Technology, not policy, is the key uncertainty element in the electrification trend.

The autonomous driving promise The advances in autonomous driving shape the vision of future mobility. Cameras, sensors and software make cars evermore intelligent. Most of these components have become affordable, except for laser systems seen as critical for advanced self-driving capability. Driving assistance features that enhance comfort and safety are increasingly common and already present in low-end car models. The industry differentiates between five levels of autonomous driving. Level 1 is no support to the driver. Systems such as cruise control, emergency braking or lane departure warning are commonly referred to as level 2. The latest premium cars have reached level 3, characterised by the car’s ability to autonomously drive in certain circumstances (e.g. highway driving on sunny days, with the driver alert to retake control any time). Broad adoption of these autopilot functions across the premium segment is expected by 2020. Level 4 describes autonomous driving under defined conditions, and level 5 stands for autonomous driving under all conditions. Car manufacturers embed the technology as consumers are willing to pay extra for driving assistance. Looking ahead, specific features, such as emergency braking, are set to become mandated safety requirements. The focus of attention is on self-driving cars. The question as to when these will hit the road is a defining one for future mobility. Unsurprisingly, Silicon Valley is most optimistic, while scientists and researchers

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Digging deeper Diesel scandal: Dirty or not?

• Diesel cars are a European phenomenon thanks to government support, including favourable fuel taxes and emission regulation, which used to put laxer standards on diesel compared to gasoline cars. While the emission regulation gap is closing, the fuel taxation gap between gasoline and diesel remains uncontested.

• The scandal shed light on the many loopholes in emission testing, mirrored in the fuel consumption differences between the test lab and real driving conditions.

• There is a trade-off between fuel efficiency and clean emissions. Engine software delivered the latter in the lab and the former on the road. Irregularities in diesel cars were found at almost all automakers.

• Direct injection gasoline cars without particulate filters are more polluting than diesel cars with filters.

• Air pollution is improving in Europe, but remains above regulatory limits. The European Commission and German courts have undertaken judicative action.

• Diesel and gasoline cars meeting the latest emission regulation are considered clean, except for cold start conditions. Catalysts need time to heat up and properly clean the exhaust gases, i.e. short drives are still polluting. Preheating catalysts could solve the cold start issue but there is no regulatory requirement yet to apply this technology.

Electric cars: A better environmental footprint?

• Electric cars generally emit less CO2 than comparable cars with combustion engines, even with today’s coaloriented power mix in Germany or the United States, and even taking into account battery manufacturing.

• The CO2 footprint of charging electric cars varies seasonally and with the time of day. In Europe, the electricity mix contains most CO2 during winter evenings.

• All things considered (i.e. from mining battery metals to air and noise pollution), the sustainability footprint of electric cars is generally better.

• Cobalt mining in Africa burdens batteries and electric cars with environmental, social and governance (ESG) issues. The latter affect copper, gold and other metals too, and should also be measured up against the ESG challenges faced by oil, which include the ‘resource curse’, oil spills, and natural gas flaring. Cobalt brings challenges but does not change the footprint comparison.

• Battery technology progress, the shift towards renewable electricity generation and the creation of a battery recycling supply chain will all improve the electric car’s footprint in the future.

• Preliminary results from intense electric-car driving, i.e. in excess of 200,000 miles, shows battery degradation and performance losses of around 6%. (Source: Tesloop)

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

are more cautious. At a recent Bloomberg New Energy Finance summit, 40% of the audience expected self-driving cars in dealerships starting in 2030. While the equipment and sensors are largely developed, the software still has a considerable way to go. Technology giants and automakers will continue to log miles with their self-driving vehicles. The last mile, i.e. the 1% of all driving conditions characterised by poor road signalisation, complex urban traffic involving pedestrians and cyclists, and/or harsh weather such as snow, remains the toughest to log.

The focus should be less on self-driving cars themselves and more on market niches where autonomous driving potentially develops first. Well-maintained highways and urban roads, or predefined routes within cities or campuses, offer the combination of a controllable environment and demand for mobility services based on autonomous driving. Robot taxis have been successfully in service in Singapore since last year. Truck manufacturers have been gaining experience with platooning, i.e. self-driving truck convoys, for some time. Recently, a German automaker presented another tangible application: autonomous parking.

Such a service saves time for drivers and improves revenues for parking operators, with the available space used more efficiently.

While fully self-driving cars are still years away, autonomous driving is conquering its niches today. ______ The impact of autonomous driving technology is diverse.

An estimated 90% of accidents are due to human fault.

Self-driving cars would reduce accidents and related healthcare costs significantly. Initial experience with current autopilot systems confirms the reduction in crash rates. Autonomous driving also lowers fuel consumption as traffic becomes more fluid and avoids unnecessary acceleration and braking. Information about route profiles improves the fuel efficiency of hybrid cars by having the system recharge the batteries ahead of, say, a more mountainous road.

Research shows that autonomous driving brings substantial fuel efficiency gains. A study conducted by the Paul Scherrer Institute in Switzerland points to roughly 25% lower fuel demand due to smoother traffic, with the biggest impact on urban driving, and roughly 10% lower fuel demand due to platooning, with the biggest impact on highway driving. Most importantly, autonomous driving enables different kinds of convenient and user-friendly mobility as a service: robot taxis, automakers sending out vehicles to customers for temporary use, or car sharing among friends and family without the need to pick up the vehicle.

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Looking ahead, the uncertainty element surrounding the trend towards autonomous driving is not technology but rather regulation. Defining emission limits seems like an easy task compared to the challenges raised by driverless vehicles. Today’s legal framework makes drivers and owners, not cars themselves, liable in the case of accidents.

Germany leads the way in the regulatory catch-up to the fast-changing technological landscape and since 2017 has provided legal certainty up to at least level 3 of autonomous driving. Elsewhere, the legislation wheels are turning at walking speed.

Technology anxiety is a drag. ______ Questions about the liability of driverless vehicles and usage of mounting data gathered have no easy answers.

Slow legislative processes, opposition from lobby groups, technology anxiety and fear of automation can only slow the adoption of autonomous driving and the introduction of robot taxis. On the other hand, the swift provision of guidance on these complex issues would accelerate the transition. For example, data transparency improves traffic flows and connects the different mobility systems, including cars, bikes and public transport. Road infrastructure could be equipped with sensors to facilitate driverless vehicle operations under diverse weather conditions. Separate lanes would accommodate the different speeds of autonomous shuttles, cars or bikes, and in consequence improve the overall traffic flow. The emotional debate and public reaction to the first accidents of partially autonomous driving cars reveals the technology anxiety. Statistically, these accidents were lying in waiting. The record of partially autonomous driving cars is safe, the few headline-grabbing fatal accidents notwithstanding. In brief, autonomous driving influences mobility as follows: • Raising comfort and safety. Driving assistance systems have entered the mass market. These technologies improve comfort, road security and fuel efficiency.

The vision of driverless mobility services. In the longer term, autonomous driving is more about the driverless services it enables and less about self-driving cars themselves, which are still years away from hitting the road. • Mobility at the mercy of policy. Policy, not technology, is the key uncertainty surrounding autonomous driving due to questions about liability and technology anxiety. Public policy will define the speed of the transition towards autonomous driving.

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

Mobility services and changing consumer attitudes Consumers prefer using to owning and this trend fundamentally transforms the mobility business. Mobility services such as ride hailing and car and bike sharing have become widely popular, enabled not least by digitalisation and smart phones. Swiss company Mobility (not listed) was the car sharing pioneer that inspired similar services in Europe and North America. Ride hailing gained ground even faster in urban areas with the likes of Uber, Didi or Ola (all not listed) disrupting the taxi business across the globe. According to recent Bloomberg New Energy Finance estimates, there are 900 million active users of ride hailing services globally, outsizing the much smaller car sharing segment with roughly 1.5 million cars in use. The intense dynamics make reliable market data difficult to come by. China is the leading ride hailing market, followed by the United States. The most explosive growth in recent years has come from bike sharing services, with millions of bikes flooding in particular Chinese cities.

These mobility services have become omnipresent in cities, not least as their affordability and convenience meet consumer demands. Adoption rates are the highest in cities with expensive living costs, such as San Francisco, New York and Madrid – or where congestion, the lack of parking and the hassle-prone registration process weigh on car ownership, such as in Beijing. However, the ride hailing and bike sharing business models have yet to prove their economic viability. Most of these companies continue to burn through cash pursuing ambitious growth strategies and relying on risk-loving venture capitalists for funding.

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electric bikes are set to complement the bike sharing offering in the future and various fleet operators are already moving in this direction. Electric bikes could steel market share from other travel options because of their ease of use, speed and range, as well as the advantage of door-todoor transport. The auto business is carefully observing the shift towards mobility services and pondering its options, besides owning stakes in this new business. Some automakers have begun to offer parts of their model range on a subscription basis. Unlike leasing contracts, the monthly subscription fees cover all service expenses, insurance coverage, registration process, and at times include the option of temporarily swapping car models.

Mobility services conquer cities. ______ These mobility services have a diverse impact. Consumers have greater choice of travel options and the new mobility sharing business intensifies competition in the transport market. The new options blur the lines between public and private transport. The phenomenon is still new but several studies indicate that mobility sharing services reduce private car use and ownership in urban areas. The Chinese city of Shenzhen concludes that the half a million shared bikes replace 10% of car travel and 13% of gasoline consumption. Similarly, the Chinese Report of Traffic Analysis claims that short-distance car travel in Beijing and Shanghai have dropped since bike sharing became popular. Congestion improved in most Chinese cities last year.

The business environment remains highly dynamic and mobility services should continue to evolve rapidly going forward. Ride hailing companies race towards autonomous taxis. Waymo (not listed) announced the public trial of its driver-free service for this year. Other peers have selfdriving car test fleets on the roads. Electric scooters and

A Swiss case study on car sharing points in a similar direction, with model calculations showing less need for individually owned cars and higher utilisation rates of the car fleet overall. The fact is that fewer people own driving licences, in particular among the younger generation. The rise of mobility sharing services possibly explains the downtrend in driving licence holders. On the other hand,

Car license holders

Car costs overview

Licenced drivers per age group (%)

Operational costs (EURc/km)

100

180

160

90

Combustion engine cars

140

80

120 Electric cars

100

70

80

60

60

US (age 20-24) 50

40

US (age 25-29)

20

Switzerland (age 18-24) 40

Purchase price (EUR)

0

1990

1995

2000

2005

2010

2015

2020

Source: US Federal Highway Administration, Bundesamt fĂźr Statistik, Julius Baer

0

20'000 40'000 60'000 80'000 100'000 120'000 140'000

Source: Allgemeiner Deutscher Automobil-Club (ADAC), Julius Baer

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

the downtrend in the United States could also mirror rising living costs and widening economic inequality in the major cities.

The key question is how profoundly mobility services will influence consumer behaviour. With the shift from owning to using comes a greater individual understanding of mobility demands and the related costs. Ride hailing or bike sharing puts the benefits and conveniences of a trip transparently against its costs, i.e. the price paid per mile or minute. According McKinsey’s 2017 survey of Chinese auto consumers, millennials are more open to the idea of living without a car and twice as likely to use sharing services compared to older generations. Most consumers do not know the total cost of owning a car. Paying for fuel at a petrol station offers an approximation to costs per mile, but omits the lion’s share of costs, including servicing, fees or value depreciation. After housing, cars are usually the most meaningful household expense, although the average car is not in use 95% of the time. Today, most consumers are not aware of the price they are willing to pay for unlimited mobility offered by self-owned cars. Mobility services improve the cost transparency, fill this information void and bring convenient alternatives.

Ride hailing and bike sharing teach consumers about mobility needs and costs. ______ A comparison of purchase prices and usage costs across different car models and segments yields interesting results; for example that we are willing to pay substantial premiums for comfort, high performance and extended electric vehicle driving range, features which only a minority of trips in fact call for. Or that electric cars are already affordable, as higher purchase prices are offset by lower usage costs in comparison to like-for-like combustion cars.

The rising awareness of mobility needs and related costs should influence consumption decisions going forward in favour of mobility services and electric cars. The complexity increases particularly in cities. New mobility sharing services multiply the options and complicate the choice.

There is another aspect to changing consumer attitudes.

Being stuck in traffic in the privately owned car could come to be seen as an ‘uncool’, unproductive waste of time, once autonomous taxis become available. Mobility is a status symbol and that is unlikely to change, but alternatives to owning premium cars are likely to emerge in future.

The bike sharing boom launched the overdue debate about the use of public space. Sidewalks and streets clogged with partially broken bikes are not supportive to the acceptance of these shared mobility services. As with autonomous driving, public policy has to catch up to the

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fast pace and intense dynamics of the market. The stance taken on the use of public space will also affect more visionary mobility topics, such as last mile logistics offered by drones or autonomous parcel delivery vehicles. In sum, mobility services influence mobility in two key respects.

• New era of mobility services. On-demand mobility services such as ride hailing and bike sharing have become very popular, particularly in cities. This trend raises the complexity of traffic, the mobility business’ market dynamics and legislative challenges.

• Consumer attitude shift. Mobility services increase the awareness of mobility needs and related costs. Consumer attitudes are shifting from owning to using, which weighs on car ownership levels.

Digging deeper Fuel cells: A hydrogen future?

• The expectations pinned on fuel cell technology remain unfulfilled. The momentum of electric cars and battery technology has been much stronger.

• Both key technologies, fuel cells and electrolysers have progressed and costs decreased, but the ‘chicken-andegg’ issue of building a costly fuel station infrastructure is a challenge for broad adoption.

• The energy losses inherent to the production and combustion of hydrogen are meaningful. In comparison, electric cars have a cleaner environmental footprint.

• Trucking might become the market niche for fuel cells.

Hydrogen is energy-dense fuel and allows long driving ranges under heavy loads. Trucks need fewer fuel stations and often return to a fleet base, which makes the hydrogen infrastructure more competitive.

• The pre-orders for fuel cell trucks are a magnitude higher than those for battery trucks. In this segment, the competing technology is not batteries but liquefied natural gas, which is increasingly used for trucking and shipping due to cost and environmental reasons.

Drones: The eternal vision?

• Drones fuel the imagination and shape today’s perception of the future mobility. Companies work on applications including delivery and passenger transport.

• Batteries put limits on range and load, while policy regulates the airspace for security and privacy reasons.

Drones are unlikely to grow beyond niche applications.

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

Scenarios: Evolution …

The trends outlined so far shape the future of mobility over the coming decades. To assess the market impact and understand the related business risks and opportunities, we made the following assumptions, in addition to population growth, about the key determinants: • Slow-paced car ownership growth. Urbanisation, ageing societies and mobility services keep a lid on car ownership in the Western world. The wealth effect lifts car usage in developing countries, but dense city structures and urbanisation suggest that they are unlikely to ever catch up to Western levels.

• Electric car mass market. The momentum of electric mobility has grown past the tipping point. An expanded offering, extended range and increased affordability translate into rising market shares for electric cars.

• Urban mobility services. Autonomous taxis, bike sharing and other types of mobility services account for a meaningful share of trips, particularly in cities. The preference for individual, car-based mobility remains strong.

In more detail, car sales continue to expand, but at slower growth rates. Western world markets are saturated and growth leadership among emerging markets changes. Chinese car sales will plateau over the coming years as demographics and urbanisation offset the wealth effect.

Other emerging markets, such as India, cannot fully make up for China’s slowing dynamics, not least because twowheelers remain a popular alternative to cars. Electric cars represent a large part, but not the majority, of car sales.

Their market share is particularly high in suburban areas, where commutes are regular and car ownership is above average. Commercial fleets, such as delivery vans, become largely electric due to the cost and maintenance benefits.

Road fuel use grows, not least because it takes between 10 and 15 years to replace a car fleet. Fleet growth offsets fuel efficiency gains. The average fuel consumption declines, as electric cars, hybrids and driving assistance systems optimise energy use according to route and traffic conditions. Governments continue to toughen emission and fuel efficiency regulation.

In sum, this scenario for 2030 and beyond is evolutionary and brings changes to the relative size of regional markets and to the technology content of cars. While urban air pollution eases, the congestion and climate challenges remain largely unsolved. Human behaviour changes little and the preference for owning over using largely prevails.

Only a minority of cities enact policies that support shared transport solutions and limit conventional car usage.

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… or Revolution Electric cars, autonomous driving and mobility services are trends that could have a self-reinforcing, disruptive impact. Electric vehicles and autonomous driving are somewhat complementary technologies, especially in the case of fleets. The cost advantage grows with usage, and automated charging brings operational convenience, not least because the charging infrastructure is scalable and applicable almost everywhere. Mobility services could encourage a shift in consumer attitude towards using and sharing rather than owning. There has hardly ever been a vision as clear and uncontested as the coming era of electric, autonomous and pooled cars. This revolutionary scenario is based on the following key assumptions: • Car ownership in decline. Western world car ownership slumps as mobility becomes a service. The shift in consumer attitude embraces the technology change. The wealth effect lifts developing world car usage, but Asia’s affinity for technology and urbanisation brings an even faster shift towards mobility services.

• The age of electric mobility. Electric cars take over and a broader electric mobility ecosystem develops. The scale and learning effect lowers technology costs. Logistics enters a new era based on autonomous electric delivery vehicles.

• Better affordability, more mobility. Autonomous taxis, pooled minibuses and other means of mobility services account for the lion’s share of trips within urban and suburban areas, alongside mass transport systems.

The affordability, convenience and accessibility translate into greater demand, i.e. more passenger mileage.

This revolutionary scenario leads to the debate about peaking car and oil demand. Global car sales plateau after 2030, combined with a chaotic reorganisation of the supply chain due to the shift towards electric mobility. The combustion engine is slowly displaced. Global road fuel consumption drops, which, in combination with the shift towards renewables and natural gas, translates into peaking oil demand around 2035. Autonomous driving and electric vehicles follow the S-curve adaptation characterised by positive feedback loops in terms of technology development, costs and consumer acceptance. One prerequisite also is a step change in battery technology.

How we ride, not what we drive, becomes emotionally more relevant. ______ The affordability of mobility services is a determining factor and subject to much discussion. Autonomous taxis are estimated to cost around USD 20-USD 40 cents per kilometre, largely depending on assumptions about distances driven and additional costs, such as vehicle cleaning. This

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

compares favourably to the total cost of owned conventional vehicles today at an estimated USD 50-USD 60 cents per kilometre. Looking ahead, electrification moves this cost range lower to an estimated USD 35-USD 45 cents per kilometre. The cost difference is not excessive, and shows that only the combination of convenience gains, a change of mindset and affordability will cause the shift towards autonomous taxis and pooled vehicles. Fully autonomous cars are still years away from becoming widely available for private use. In the meantime, riding shared or pooled autonomous vehicles could make driving owned cars outdated and unfashionable, on condition that public policy gives these vehicles a head start.

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scenario. Autonomous, shared or pooled vehicles can mitigate congestion, while self-driving privately owned cars most likely will not. Cities have the opportunity to solve their mobility issues, and initiatives such as ‘C40 cities’ are initial steps in this direction. Tackling congestion and improving traffic flow requires legislation and urban planning action that gives advantage to riding shared mobility services over driving privately owned cars.

What mobility future do we want? ______ In the revolutionary scenario, government tax revenues on transport fuels collapse and mobility pricing schemes are introduced to cover infrastructure funding. Mobility pricing, i.e. tariffs per mileage driven, is a political hot potato as it includes taxes and data. However, electric cars eventually need to pay their fair share of infrastructure costs and there are no economically convincing policy alternatives. In fact, mobility pricing could accelerate the transition from owning to using because it sharpens the individual’s perception of mobility demands and related costs.

The momentum of both electric mobility and autonomous driving was strong in 2016 and 2017, with many companies embracing these technologies, and thus shifting the odds marginally in favour of a revolutionary scenario. History shows that trends are hardly ever constant. The evolutionary and revolutionary scenarios presented here are only two of several probable scenarios for the future of mobility.

Cities and urban areas are the breeding ground for this revolutionary future mobility scenario. This is because of the inconvenience and high cost of owning a car, the density and comparably short distances travelled, and the usually forward-looking and technology-friendly mindset of urban residents, particularly in Asia. The era of electric, autonomous and pooled vehicles mitigates air pollution and climate emissions, but does not necessarily solve the congestion problem. Improved accessibility and increased affordability should translate into greater demand for mobility, i.e. more passenger mileage. To be precise, mobility services include autonomous taxis or shuttles, self-driving cars shared among friends or family, and cars offered on subscription by automakers. As shown in the previous section, public policy and in particular the legislative framework prepared by cities will help shape the revolutionary

Future mobility scenarios Today

2035

2035

Status quo

Evolution scenario

Revolution scenario

Car sales (millions) Plug-in sales / fleet* Shared autonomous driving* Average costs (USD cents/km)

80

110

89

2% / 0.2% 0% 60

26% /11% <1% 45

45% / 17% <5% 40

Autos

Market size (USD billion)

1,800

2,600

2,400

Auto parts Electronics Batteries

Market size (USD billion)

500 50 5

800 230 150

750 200 200

Mobility services

Market size (USD billion)

10

60

400

Fuel use

Million barrels per day

28

36

32

Charging

Plug-ins of total electricity use

0.0%

2.5%

<5%

Insurance

Trend

up

flat

down

Market

Source: Julius Baer. *Plug in: plug-in hybrid and electric cars, figures depict market shares of total car sales, i.e. total passenger car distance driven.

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

The winners and losers The scenarios outlined above trigger large shifts of value pools across the broader auto business. Taking a closer look inside a car and distinguishing its key components helps to separate and quantify the individual value pools.

Owning a car involves various ‘operating’ costs, including fuel, insurance, taxes, and maintenance and repair expenses. These ‘operating’ costs represent roughly half of a car’s mobility costs, alongside the ‘fixed’ costs, i.e. purchase price depreciation. The ‘operating’ costs reveal that future mobility has implications, both positive and negative, not just for the automakers, but also for a wide range of businesses within the car’s entire ecosystem.

• Automakers. (●●●)* Slowing car sales growth, new entrants and the loss of content per car to auto suppliers bring headwinds in the longer term. The future mobility holds more threats than opportunities for automakers.

• Auto suppliers. (●●●)* Hybrid technology and more complex exhaust systems bring more content per car.

Drivetrain components sales grow disproportionately, particularly in the evolutionary scenario.

• Tech suppliers. (●●●)* Autonomous driving, electric powertrains and in-car entertainment require more electronics, e.g. semiconductors. The auto business has become a key revenue source for the technology sector.

Technology content grows in both scenarios.

• Battery metals. (●)* Electric mobility needs batteries, which fuels demand for metals such as lithium or cobalt.

Both markets multiply in size in the revolutionary scenario. Despite the growth, these metals remain a small value pool of the future mobility business and are insignificant from a global mining perspective.

• Mobility services. (●●●)* Autonomous taxis, pooled minibuses and other means of mobility services account for a growing share of passenger mileage. However, this business is in its infancy and lacks the listing of pure play companies on capital markets.

• Public transport. (●●●)* Mobility services steal customers from public transport and limit the latter’s monopoly to rail-based mass transport.

• Auto retailers. (●●●)* The revolutionary scenario presents nightmares for auto retailers, as car sales drop and electric cars need less maintenance. Today, car maintenance adds up to an estimated USD 1,500 per year.

• Energy. (●●)* Households spend an estimated USD 1,250 per year on fuels per car. Road fuel use continues to grow in the near term but could plateau or peak after 2030. The growing gas and chemicals business offsets the peak oil headwinds for producers, but there is no shelter for Western world refiners.

• Utilities. (●)* The impact on electricity use tends to be overestimated. Electric cars are energy efficient and at an estimated cost of USD 270 per year, the full charge is

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far cheaper than the full tank. The threat from clean energy is bigger than the electric mobility opportunity.

• Insurance. (●●)* Autonomous driving reduces crash rates, which shrinks the value pool of car insurance premiums in the longer term. Today, insurance coverage costs an estimated USD 1,000 per year per car. * (●) low impact /negative implications for the business (●●●) high impact / positive implications for the business

There are fewer winners than losers. Mobility, both owned and used, becomes more affordable. This is a boon for consumers but shrinks the market size on a per capita basis. Furthermore, the many new entrants from developing countries and sectors (e.g. technology) add to the competitive pressure and fight for market share. Structural change is deflationary, which is a main feature of capitalism. On the following pages, we will take a closer look at the different shifts in the value pool and the winners and losers that may result from them. In addition to the expansion of the value pool and the shrinking at the macroeconomic level, there are important factors to consider at the microeconomic level. Companies with financial flexibility to pursue investments, with differentiated products, without distracting legacy issues and with a forward-looking and adaptive management are shown to capture market share from laggards in times of structural change. In addition, these direct business impacts have indirect economic, social and political implications. What follows is a broad and incomplete assessment, which naturally merits further reflection.

• Consumption shift and productivity gains. Households spend less on mobility and thus have more budget available for other expenses or savings. Moreover, autonomous vehicles could bring productivity gains, particularly in commercial use. The future mobility adds to economic growth in the longer term.

• Social interactions. Autonomous driving makes mobility accessible to everyone, including children and the elderly. Distances shrink and social interactions expand.

Inequality lessens, as jobs and education becomes more widely accessible.

• Change of face for urban space. The fleets of autonomous vehicles make street parking obsolete, freeing up urban space for other use. The varying size and speed of the new mobility options require smart road systems to handle the complex traffic.

• Geopolitical power shift. Charging the car at home with rooftop solar power exemplifies a bigger story: electric cars and renewables democratise energy. Energy use shifts from resources to technology, from trade to selfreliance, and from big to small, triggering a geopolitical power shift.

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

Automakers: Road kill risks There are more threats than opportunities for the estimated USD 1.8 trillion global car manufacturing industry.

The pie grows at a slower pace whilst there are more players fighting for their piece. It requires full pockets of cash and a solid corporate culture to execute the needed technology investments and stay on top in this period of above-normal business dynamics. The structural trends largely bear negative consequences for the industry, especially in the revolutionary scenario. The shift towards mobility services would shrink the industry’s addressable market. The key competitive challenges for car manufacturers are: • Volume growth. Market growth slows and emerging market competition increases. The low- and medium-car segment is most under pressure from Asian competition and self-driving cars, as consumers in these segments are cost-conscious and less emotionally driven. Electric vehicles open the business to new entrants.

• Technology content. Electric drivetrain and autonomous driving technology means that suppliers take a growing share of the content value per car from the manufacturers, whose intellectual property remains centred on the combustion engine.

• Battery ownership. Batteries account for a significant part of the value content of an electric car and manufacturers might decide to own rather than source this technology component. However, batteries are a competitive, low-margin business demanding plenty of capital and different manufacturing competences. The engagement in battery metal sourcing, in particular, is risky as commodity cycles and prices can turn quickly.

• Software strategy. Connectivity brings new business opportunities for selling services to the drivers via the on-board software. A car’s operating system will become a key differentiating factor of the future car.

• Mobility services. Self-driving cars present the opportunity to sell mobility services, not just cars. However, owning a fleet of self-driving cars and charging consumers per ride is an entirely different business to manufacturing.

We believe that the combination of the following factors determines the competitive positioning (see structural exposure rating) and helps to distinguish potential winners from potential losers. A foothold in electric drivetrains is essential to understanding and capitalising on today’s technology trends. A solid financial situation based on a profitable ‘legacy’ business provides the ability and flexibility to pursue investments. The investment needs might be the single-largest challenge for the incumbent automakers. The change in business model requires fresh management minds without distraction from ‘legacy’ business issues. The risks are high that some companies will

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Scenarios for passenger car sales Million units 140

Evolution vs Revolution

120 100 80

91

99

104

110

115 100

98

96

76

60 62

40 20

0 2010 2015 2020 2025 2030 2035 2040

2030 2035 2040

Source: Julius Baer

Automakers business positioning Company

Structural exposure* (impact/implications)

Rating (Equity)

●●● ●●●

Hold Reduce

●●● ●●● ●●● ●●● ●●● ●●● ●●●

Hold

First movers BYD Tesla Fast followers Baic Motor BMW Daimler Geely Automobiles GM Toyota Volkswagen Late movers Brilliance

Hold Buy Buy Hold Hold Hold Buy

●●● ●●● ●●● ●●● ●●● ●●● ●●● ●●●

Dongfeng Motor Group Fiat Chrysler Ford Great Wall Motors Guangzhou Automobiles Peugeot Renault

Hold Hold Hold Hold Buy Hold Buy

Source: Julius Baer. *Structural exposure: low impact /negative implications (●) to high impact / positive implications (●●●). Please note that the relevant equity information may be found in the annex at the end of this publication.

Scenarios for passenger car sales by country 2020

2025

2030

2035

2040

17.8

17.9

18.0

18.1

18.1

15.6 4.1

15.6 3.7

15.3 3.6

15.3 3.4

15.0 3.4

27.5 5.2

29.5 8.2

30.0 10.2

29.6 11.9

28.4 13.7

90.5

98.6

104.3

109.9

114.5

17.8

17.9

17.0

15.8

14.1

15.6

15.3

14.5

13.2

11.5

4.1 27.5

3.7 29.5

3.3 28.8

3.0 26.8

2.7 24.5

5.2 90.5

8.2 98.3

9.6 99.7

10.6 98.2

11.6 95.5

Evolutionary scenario United States Europe Japan China India World Revolutionary scenario United States Europe Japan China India World Source: Julius Baer

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

become road kill as they miss to adjust to market trends, overinvest in the highly competitive technology segment (e.g. batteries) or overestimate their software capabilities.

Future business textbooks might well list a car manufacturer alongside well-known solar and mobile phone manufacturers as a case study on company failure.

The early movers are BYD and Tesla, both with a strong focus on electric mobility. Tesla’s growth ambitions come with high external capital needs, which make the company particularly vulnerable to any supply- or demand-side hiccup. BYD is a vertically integrated automaker with significant in-house battery competence and manufacturing scale. The fast followers include the German manufacturers, which have deep pockets of cash to develop their electric mobility competence and already have a foothold in the mobility services business through various subsidiaries and partnerships. The premium segment seems less at risk from the shift from owning to using, which is a plus for the German brands. We also see General Motors and the Renault-Nissan alliance as fast followers due to their electric car competence. We believe Toyota has largely lost the hybrid technology lead, and has been rather late in shifting focus and resources to battery technology and autonomous driving. The Chinese car manufacturers generally have a more positive cash flow outlook given the tailwinds from domestic car ownership growth. That said, foreign competition stiffens on the back of the incremental market opening.

In the near term, cyclically toppish car markets bear additional risks. ______ The coming years will likely bring their own set of challenges in addition to the structural market dynamics. The car market seems close to a cyclical top. US sales are trending sideways as the economy matures and financing conditions tighten. Expired subsidies and tax changes bring near-term headwinds in China. The global economic cycle is well advanced and a slowdown very likely to happen towards the end of the decade. These shorter-term cyclical topics dominate the longer-term structural theme.

The automakers’ equity valuations have treaded water in the past years, in contrast to the broader market’s revaluation, demonstrating that the structural challenges are widely perceived. Company-specific factors largely determine our equity ratings. For example, Tesla’s high cash burn and shaky balance sheet bear high risks that make the company’s equity valuation look rather demanding, justifying a Reduce rating.

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Auto suppliers: Technology takes over Large parts of car manufacturing are outsourced to suppliers. The estimated 500 billion supplier business should continue to benefit from increased technology content and represents one of the growth niches within the broader auto ecosystem. Tightening fuel efficiency rules and hybrid technology are the sweet spot for the traditional auto suppliers and bear opportunities to increase their content per car. The shift towards electric drivetrains, connectivity and self-driving cars meanwhile mainly benefits the technology sector, for which the car market becomes an evermore meaningful source of revenue. ‘Peak car’ equals ‘peak content per car’ and thus the vision of mobility services is more a threat than an opportunity for the traditional players. New technologies and new entrants grow the auto supplier industry not only in size but also in diversity. The following segments should be distinguished: • Fuel efficiency and emission technology. Auto suppliers deliver the components that save fuel, such as turbochargers, injectors, exhaust gas recirculation systems and hybrid drivetrains. The incremental cost of hybrid technology ranges between USD 500 for simple startstop systems, USD 1,000 for 48 Volt architecture, and USD 10,000 for complex plug-in packages. Tighter emission standards suggest that catalysts and filters become more complex, costly and widely applied. Sophisticated emission treatment adds up to USD 1,000 to gasoline and up to USD 1,500 to diesel engines.

• Driving assistance and electronics. Assisted driving features require cameras, sensors, computing power and software to read and process the huge amounts of data.

Autonomous driving adds hardware and software costs to an estimated USD 2,500 for advanced features, such as lane-keeping and overtaking. Laser systems are the next technology step, but high costs are a hurdle to broader application. Electric drivetrains and connectivity additionally inflate the electronics content in cars. The automotive business has become a key market for electronics suppliers and the long-term growth prospects look intact in both future mobility scenarios.

• Electric vehicles and batteries. Batteries capture the lion’s share of the value of electric cars at costs between USD 7,500 and USD 17,000 depending on their size. The introduction of long-range models over the coming years should increase average pack size and costs. Simultaneously, technology progress and the significant ramp-up of manufacturing capacity is cost deflationary.

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

The technology offering is key for the competitive positioning of the auto suppliers. The traditional suppliers face many challenges as their legacy business (e.g. based on combustion engine components or gearboxes) likely wanes, while the more electronics-geared parts are already a crowded business. Financial strength, a clear corporate vision and solid governance are prerequisites to successfully invest, develop and grow the technology competence for electrified drivetrains and driving assistance systems.

These are the factors determining the structural exposure rating. Growing technology content is a positive, but we also believe that this content becomes more commoditised as usage expands and competition grows. The resulting price and margin pressure is a general negative for auto suppliers going forward. In addition, unforeseen technology developments could render some research and manufacturing investments worthless.

Competitive pressure sours the battery story. ______

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Scenarios for technology market shares % (of car sales) 100 80

Electric

60

Plug-in hybrid

40

Hybrid

Evolution vs Revolution

14

29

22

38

49

9

20 0 2010 2015 2020 2025 2030 2035 2040

2030 2035 2040

Source: Julius Baer

Auto suppliers business positioning Company

Structural exposure* (impact/implications)

Rating (Equity)

●●● ●●● ●●● ●●● ●●● ●● ●●● ●●●

Reduce n.c.

●●● ●●● ● ●●● ●●● ●● ●●● ●●●

Buy

Traditional suppliers Autoliv BorgWarner Continental Delphi Automotive Denso

Thanks to their competence in hybrid technology and generally broad product portfolio, companies including Continental, Delphi Automotive or Valeo seem well positioned for the initial stage of electrification. High fixed costs and expertise raise the entry barriers into electronics, in particular chip making. This translates to above-average margins for technology suppliers compared to auto suppliers and, together with the structural technology growth story, explain our positive exposure rating for companies such as Infineon Technologies. In comparison, the battery business looks less attractive, despite the strong growth story.

Battery suppliers should face similar challenges to those in the solar business: high investment needs, a commodity product, many new entrants out of Asia, cost deflation and high competitive forces. Although the solar market grew faster than expected, the companies were unable to translate shipment growth into cash flow growth and sustainable returns to investors. In fact, today’s leading battery suppliers are not breaking even on their electric car business and for most of them automobiles represent only a small share of their overall exposure. Due to market share losses and cost deflation, we do not see a convincing structural exposure. Lithium-ion technology should remain dominant over the coming years, but alternatives will exit laboratories and become commercially available, warranting additional business risks.

21

Georg Fischer Schaeffler AG Valeo Electronics suppliers Aptiv Infineon Technologies Nvidia On Semiconductors Renesas Electronics STMicroelectronics TE Connectivity U-Blox Battery suppliers LG Chem

Hold n.c. n.c.

Hold n.c.

Hold

Buy Hold n.c. n.c.

Hold n.c.

Hold

● ● ●●

Panasonic Samsung SDI

n.c.

Hold n.c.

Source: Julius Baer. * Structural exposure: low impact /negative implications (●) to high impact / positive implications (●●●). This list contains covered and non-covered (n.c.) stocks by Julius Baer; the selection of noncovered stocks does not imply any recommendation by Julius Baer. Please note that the relevant equity information may be found in the annex at the end of this publication.

Scenarios for auto content costs (average car) Evolutionary scenario Auto parts (USD) Driving assistance (USD) Battery costs (USD/kWh)

2020

2025

2030

2035

2040

7500 800

7750 1400

7750 1725

7500 2100

7000 2250

160

110

90

75

65

7500 800

7750 1400

7750 1725

7500 2000

7000 2025

160

110

85

70

60

Revolutionary scenario Auto parts (USD) Driving assistance (USD) Battery costs (USD/kWh)

Source: Julius Baer (kWh: kilowatt-hour)

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

Mobility services: New kids on the road It is still early days in the era of mobility services and this business has the potential to grow to meaningful size in the long term. Ride hailing is seen as the most relevant precursor of the mobility services future. According to recent Bloomberg New Energy Finance estimates, the top three companies (Uber, Didi, Lyft, all not listed) have a combined valuation of roughly USD 140 billion based on the latest financing rounds. The estimated 900 billion users globally are likely booking millions of rides daily, but exact data remains unavailable. We believe the following factors are key for competitive positioning: • Local scale. The fleet size determines accessibility for users and thus business success. However, this network effect depends on local and regional scale rather than on the global footprint. There will be room for several regional champions. Cooperation with other mobility providers enhances accessibility for users.

• Service costs. Driver-based ride hailing today is an expensive service and future market growth depends on lowering costs and raising affordability for users. The options include autonomous driving, electric vehicles or enhancing the fleet with lower-cost alternatives, such as scooters and bikes.

Low entry barriers, the growth imperative and capital needs related to the race for scale, and the high dynamics of this young business are the main factors framing a highly competitive environment. Today’s players are still years away from sustainable cash flows and positive margins. Yet there is no shortage of capital as technology giants, venture capitalists and automakers are all eager to gain a foothold in this nascent and promising market. So far, investors are left out. The ride hailing, car and bike sharing companies remain in private hands, but public listings are likely over the coming years. Meanwhile, investors should not consider technology giants or automakers for their stakes in mobility services as their exposure remains irrelevant.

Scenarios for mobility services market shares % (of passenger car kilometres) 6

Evolution vs Revolution

5 4 3

2

Shared driver

1

Shared autonomous

4.1

0.7

0

2010 2015 2020 2025 2030 2035 2040

Source: BP, Julius Baer

1.2

2030 2035 2040

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Battery metals: Running red-hot The average car weight increased over the past decade as consumers took pleasure in sports utility vehicles, comfort features and entertainment options. At almost 1.4 tonnes, cars are a heavy consumer item that accounts for significant use of metals and materials. Three trends need to be distinguished in order to assess future shifts. First, automakers aim to offset the weight gains by increasingly using special strength steel, aluminium or even composite materials. This so-called ‘light weighting’ is one measure to comply with tightening fuel efficiency standards.

Lighter cars drive equally well with smaller engines. Second, the increased electronics content entails a wide range of additional functional metals. For example, the semiconductors built into driving assistance and engine control systems contain silver and gold, the additional wiring requires copper, and electric motors need rare earth metals.

The big impact on metals content per car, however, comes from batteries, which depending on the specific model add between 200 and 500 kilogrammes. Redundant gearboxes and the lighter and more compact electric motors compared to combustion engines in part offset these weight gains. Third, tighter pollution limits require more effective and complex exhaust treatment systems. Palladium and platinum are key ingredients in car catalysts, alongside the engine control software that allows meeting future emission standards. The following metals and materials are in focus: • Lithium gets most of the attention, although, to quote Tesla Motors founder Elon Musk, it is only “the salt on the salad”, accounting for roughly 1.5% of battery weight. Lithium has many different applications and the auto sector only accounts for less than a quarter of lithium output today. The projected strong growth in battery usage, however, should see the lithium market multiply. Lithium is no scarce resource and is widely available in both brines, i.e. salt lakes in desert areas such as South America, and hard-rock resources such as in Australia or Canada.

• Cobalt, manganese and nickel are the key ingredients of lithium-ion batteries today and account for roughly 4% of total battery weight each. The most promising chemistries are nickel-manganese-cobalt (NMC) and nickel-cobalt-aluminium (NCA). Nickel and manganese are commonly used industrial metals, which tempers the impact of strong battery demand growth on the overall market. Cobalt is an expensive metal and the most valuable single battery ingredient. As with lithium, the cobalt market should multiply. However, the outlook is more uncertain. There is a shift in battery chemistry that substitutes cobalt with nickel to raise energy density and cut costs. The leading battery makers should introduce the so-called NMC 811 chemistry after 2020, which cuts cobalt use per car in half. Moreover, solid-state batteries

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

•

•

•

•

•

could partially replace lithium-ion in the longer term, curbing cobalt use significantly. Unlike lithium, cobalt is potentially more supply constraint. Resources are scarcer and less accessible in politically unstable countries such as the Democratic Republic of Congo.

Graphite is the most commonly found material in batteries, accounting for roughly 15% of their weight.

Graphite is either mined or produced synthetically, and is primarily used in steel making. Graphite use will grow with electric cars, but there are longer-term technology and substitution risks (e.g. silicon).

Copper content in cars has steadily increased in recent years largely due to digitalisation and comfort, leading to a multiplication of wiring. Conventional cars contain up to an estimated 25kg of copper. With electric motors and batteries, the copper content increases up to an estimated 75kg because of the additional wiring and foils used in batteries. The charging infrastructure needs are minimal compared to car needs. However, copper has many applications and automobiles account for roughly 5% of total use today. The projected significant growth of plug-in vehicles is a tailwind for copper demand, but only one of many opposing structural trends.

Aluminium is possibly the most versatile metal used in cars. Many body parts, engine components, electronic devices including batteries contain aluminium, which in total adds up to on average 150kg per car today. Despite the light-weighting trends, automotive use should remain around 20% of the total aluminium market.

Palladium’s and platinum’s future prospects are binary. Tightening emission standards and the declining market share of diesel technology are supportive for palladium demand. Car catalyst use could increase from around 50% today to roughly 60% by 2025, with the recycling effect easing supplies thereafter. The fast adoption of electric mobility, however, would translate into steep declines in catalyst demand in the long term. Electric vehicles have no tailpipes and the marginal palladium and platinum use in electronics cannot make up for catalysts.

Lead is mainly used in lead-acid batteries, for which autos account for over 80% of total demand. The shift towards hybrids and plug-in vehicles, as well as the possible substitution of lead-acid with lithium-ion batteries in conventional cars, should weigh on lead usage.

The future looks bright for lithium and cobalt, but our projections should be taken with a grain of salt. Future demand is not only subject to the unclear growth in plug-in vehicles but also to the uncertainties surrounding battery technology and recycling rates. Solid-metal batteries are superior to lithium-ion solutions in terms of storage capacity and safety, and could exit the laboratories and enter commercial production before 2030. Recycling of lith-

17/28

Scenarios for auto battery use T erawatt-hours 4.0

Evolution vs Revolution

3.5 3.0

3.4

2.5

2.8

2.4

2.0

1.5

1.9

1.0

1.6

1.2

0.5

0.7

0.0

2010 2015 2020 2025 2030 2035 2040

2030 2035 2040

Source: Julius Baer

Materials business positioning Company

Business

Structural exposure* (impact/implications)

Albemarle AMG

Lithium Lithium

FMC

Lithium

SQM

Lithium

Glencore

Cobalt

●●● ●● ● ●●● ●● ●●● ●●● ●●

Johnson Matthey

Catalysts

Umicore

Catalysts

Toray Industries

Composites

Rating (Equity) n.c. n.c. n.c. n.c.

Hold n.c. n.c.

Hold

Source: Julius Baer. * Structural exposure: low impact /negative implications (●) to high impact / positive implications (●●●). This list contains covered and non-covered (n.c.) stocks by Julius Baer; the selection of noncovered stocks does not imply any recommendation by Julius Baer. Please note that the relevant equity information may be found in the annex at the end of this publication.

Electric car metals use assumptions Commodity

Today

2035

Lithium

kg/car 4.6

kg/car 5.3

Use Battery

Cobalt Manganese

9 9

4.6 4.6

Battery Battery

Nickel Graphite

22 32

38.5 52.5

Battery Battery

Copper Aluminium

75 200

70 220

Battery, motor, wires, electronics Battery, body, motor, wires

Source: Bloomberg New Energy Finance, Recycling Journal, Macquarie, Citigroup, UBS, Julius Baer

Scenarios for auto metals use Evolutionary scenario Lithium carbonate (kt) Cobalt (kt) Copper (kt)

2020

2025

2030

2035

2040

85 25

290 60

465 75

665 100

720 110

1755

2175

2745

3095

3330

85 25

295 60

650 105

1040 165

1090 170

1755

2175

2960

3460

3515

Revolutionary scenario Lithium carbonate (kt) Cobalt (kt) Copper (kt)

Source: Julius Baer (kt: thousand tonnes)

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

18/28

ium-ion batteries is possible but is still in its infancy. Recovery rates above 80% are likely according to initial indications. Recycling should become competitive with scale and will ease the supply impact. Further risks include general efficiency gains. For example, the looming shift to semiconductor materials used in power electronics would bring a sea change in terms of energy efficiency and thus battery capacity needs. Incremental metals use in autos could peak around 2030 depending on autonomous driving, car ownership and recycling rates.

Energy: The when, not if, of peak oil Autos burn fuels. Selling these fuels is almost as big a business as selling autos, estimated at USD 1.5 trillion globally. Passenger cars are the single most important use for oil, representing around 25 million barrels per day out of the more than 90 million barrels daily total. US passenger vehicles alone consume more than 9 million. Trucks sum up to almost 20 million barrels per day. With road fuel use representing half of oil demand, the outlook for mobility has an important bearing on future oil demand.

Lithium and cobalt: riding the ups and downs of the commodity cycle. ______

Fuel efficiency gains and, to a lesser extent, electric cars partly offset oil demand from rising car ownership globally. In the Western world, road fuel consumption has largely decoupled from driving. Oil demand peaked between 2003 and 2005 in Europe and Japan. In the United States, it peaked in 2007 but returned to these highs last year. Chinese gasoline demand has trailed economic growth for some time, which might be an early sign of the country’s ambitious electrification strategy. Fuel efficiency will increase further with the spreading of hybrid technology and autonomous driving. As shown earlier, simple features such as automated distant control smooth traffic and cut fuel use. Car fuel use could peak between 2030 and 2035. The revolutionary scenario, the shift towards electric mobility and mobility services, translates into an earlier and more pronounced peak.

The battery metals growth story is exceptional and has gained investor attention. Lithium and cobalt prices have multiplied over the past years, but we believe that both metals look toppish. These battery metals are following a traditional commodity cycle, where rapidly rising demand raises scarcity fears and prices, followed by a period of booming investments and rising supplies that eventually ends in a temporary bust. We believe that both lithium and cobalt prices will trade below today’s levels and closer to production costs by 2020. The battery metals are comparably small commodity markets without transparent pricing and ruled by a handful of companies. Albemarle and SQM, which together account for more than half of total supplies, announced that they will multiply production by 2025, which should adequately match demand growth over that period. Cobalt is a by-product of copper and nickel mining. Glencore is the leading global producer, and cobalt is a small but nevertheless earnings-relevant commodity. Many miners are currently capitalising on their previously untapped cobalt by-product stream, which, in addition to mining expansion over the coming years, should raise cobalt supplies. However, the vast majority of cobalt resources are in the central African copper belt, making the longer-term supply outlook subject to political risks.

The longer-term opportunities in mobility should be put in perspective by considering some of the tangible mediumterm threats. First, a global growth slowdown is very likely to happen towards the end of the decade, which usually puts pressure on industrial metal prices. Second, in particular copper and nickel also face easing structural tailwinds. China’s construction- and infrastructure-related demand growth is slowing due to an ageing society, a property overhang and a shift in economic model from investment to consumption. Given the high industry dynamics, looming price pressure and many Chinese new entrants, the battery metals should see some consolidation before growth kicks off for real.

The peak in total oil demand depends on further factors.

Freight represents another significant part of the oil market, with trucks accounting for the lion’s share of global diesel consumption. While short-haul logistics likely sees a swift shift towards electric vehicles, long-haul logistics could rely for longer on the energy density benefits of diesel fuel. However, in both North America and China parts of the trucking fleet are switching to natural gas. Clean energy technologies have become competitive and should replace oil use for power generation. Diesel generators lose market share to solar and battery storage solutions.

Although these account for roughly 6% of total use only, the substitution would nevertheless slow overall oil demand growth. The shale boom has unlocked cheap and abundant gas resources. Natural gas is gaining market share as a petrochemical feedstock and becomes the alternative fuel for ships. Out in the sea, air pollution limits are tightening and natural gas has become a viable alternative to bunker fuels. Only air traffic remains shielded from structural headwinds and will need more oil going forward, but the growth is from a low base, roughly 6% of total oil use today. Thus, most segments face structural headwinds and oil demand could peak around 2035.

The consequences for the energy industry, however, are not outright negative. The longer-term outlook bears threats on the oil side, but brings opportunities on the

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

natural gas side. Two opposing structural trends collide.

Moreover, compared to automakers, the impact on the energy business is delayed. It takes time for a car fleet on the road to be fully replaced. A company’s positioning along the value chain determines its longer-term growth prospects. The following business areas should therefore be distinguished:

19/28

Scenarios for passenger car road fuel use Million barrels per day 40

Evolution vs Revolution

35 30 25 20

27

29

32

35

36

36

37

34

32

29

15 10

• Shale oil and gas. North American shale irreversibly altered global energy markets. Ample resources and competitive costs due to persistent productivity gains suggest that North American shale will account for large parts of the incremental oil & gas supply growth and determine oil & gas price trends into the near future. Shale wells produce both oil & gas and thus exposure to this segment is a key producer strategy to maintain volume growth. Moreover, shale projects’ lead times are measured in weeks, not years, and capital expenses in millions, not billions. Shale projects bear lower balance sheet risks than conventional offshore projects in times of greater longer-term market uncertainty.

• Petrochemicals. Global growth and particularly emerging markets propel the use of plastics. There are alternative feedstock to oil & gas, such as biomass, but they should remain a niche in the future. No ‘peak chemicals’ is to be expected in the foreseeable future.

• Liquefied natural gas. The natural gas market is undergoing a sea change. Rising Australian, US and longerterm African supplies swamp the market and create demand for liquefied natural gas (LNG) trade. Evermore countries become LNG importers. The large integrated oil companies have a foothold in the LNG business, not least because building the infrastructure requires lots of capital and experience with big projects.

• Refining. Refineries transform crude oil into fuels such as gasoline and diesel and are thus the most exposed segment along the energy value chain to peak oil. The implications are particularly negative and imminent in the Western world, while emerging economies should continue to experience growth of road fuel demand over the coming decade. China and India have large and expanding capacities and Western world refiners are thus unlikely to be able to offset weakening domestic demand with growing exports.

5 0 2010 2015 2020 2025 2030 2035 2040

2030 2035 2040

Source: Julius Baer

Energy business positioning Company

Business

Structural exposure* (impact/implications)

BP Chevron

Integrated Integrated

China Petroleum

Integrated

Exxon Mobil

Integrated

OMV

Integrated

Shell

Integrated

Total

Integrated

●● ●● ●● ●● ●●● ●● ●● ●●● ●●● ●●●

Marathon Petroleum

Refining

Phillips 66 Valero

Refining Refining

Rating (Equity) Hold Buy Buy Hold Hold Buy Hold Hold Hold Hold

Source: Julius Baer. *Structural exposure: low impact /negative implications (●) to high impact / positive implications (●●●). Please note that the relevant equity information may be found in the annex at the end of this publication.

United States and China gasoline use Million barrels per day 10 United States 9

Million barrels per day 10 China 9

8

8

7

7

6

6

5

5

4

4

3

3

2

2

1

1

0 1975 1985 1995 2005 2015

0 2008 2010 2012 2014 2016 2018

Source: Energy Information Administration, China Customs, Julius Baer

The big oil companies have been highly profitable in recent quarters thanks to cost control and rising oil prices.

Yet the peak oil debate has put into question their business model and their ability to pay dividends in the long term. The diversification of the integrated business model is often underestimated. The big oil companies have significant stakes in chemicals and natural gas, which mitigate the peak oil risks inherent to refining. Exemplary are Shell’s LNG operations or Exxon’s petrochemicals and shale gas exposure. Moreover, electric mobility’s impact

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

on the energy business is delayed and its timing uncertain.

Into the near future, the energy sector’s risks are determined by the eventual downturn in the business cycle rather than by the peak oil threat. From our perspective, today’s valuation discount is not justified.

Road fuel threats versus natural gas opportunities. ______ Meanwhile, refiners’ stocks fluctuate with gasoline and diesel margins. Nevertheless, the underlying structural threats to their business model should not be underestimated. Their operations are mostly regional, and companies focused on North America and Europe in particular, such as Valero or OMV, should face medium-term headwinds from increasing fuel efficiency and longer-term headwinds from electric vehicles. That said, these refiners prudently allocated capital in recent years, which supports solid free cash flow generation. The shale-focused oil & gas producers are less exposed to the peak oil threat, partly because of their high gas exposure but mostly because of their flexible and short-term capital allocation.

The shale business remains the growth niche within the energy segment thanks to its competitive costs and flexible operations; it must, however, become financially selfreliant and cut its debt addiction.

Opinion Stranded assets • The ‘stranded assets’ or ‘carbon bubble’ debate gained popularity over the past years. The debate sees energy companies, or rather their assets, at risk because curbing climate pollution directly undermines the value of fossil fuel reserves. The debate is complex and involves moral considerations as well as risk-awareness.

• The present report shows that the risks posed by peak oil demand and climate change policies are manageable for the energy sector, even under the assumption of a swift and decisive shift away from the combustion engine.

Thus, from a risk-conscious point of view, selling energy shares is not reasonable.

• The moral point of view boils down to the question of who is responsible for CO2 emissions. The carbon footprint ultimately is with consumers, because it is their choice which car to buy, how far to commute and how often to travel abroad. Selling shares of oil and gas companies does not curb CO2 emissions.

• Responsible investors engage with companies to ensure environmentally, socially and governance (ESG) compliant operations. This is the homework most energy companies still have to do. Failing to do so largely determines the ESG risks of owning their shares, not the oil exposure itself.

20/28

Utilities: A slow charge Electric mobility needs electricity. The impact on the electricity market, however, tends to be overestimated. Electric cars are almost four times more energy efficient than conventional cars with a combustion engine. Household electricity consumption increases by roughly 50% with the purchase of an electric car, based on the average driving and electricity usage patterns and assuming 100% home charging. Household consumption, however, only accounts for roughly 30% of total electricity use. Overall electricity demand has been trending sideways and remains below the peaks reached ten years ago in both Europe and the United States, as efficiency gains compensate for population and economic growth. Even within the revolutionary scenario, mobility will account for less than 5% of today’s electricity use by 2035 in both Europe and the United States, according to our calculations. Continued efficiency gains suggest that the incremental demand growth should be even smaller.

Clean energy, such as wind and solar, become cost-competitive and contribute to ample electricity supply in the long term. The challenge with electric vehicles is not demand per se, but how to adjust the power grid in a smart way that avoids unnecessary demand spikes because of simultaneous charging. Electric cars are likely to accelerate the decentralisation of the power grid. Battery storage use at home should grow as costs drop with mass production. Combined with rooftop solar, households will decrease their dependency on utilities. This emerging ecosystem brings new entrants and raises the competitive dynamics within the utility business. A full charge at home usually costs less than USD 10. Average driving sums up to less than USD 300 of additional annual electricity expenses. The competitive threats unleashed by the transition to clean energy, the new entrants contesting the market with the rollout of charging infrastructure, or digitalisation and cybersecurity: the utility business will continue to face big challenges for the foreseeable future.

Scenarios for plug-in electricity use (Europe) Average driving (km p.a.)

Fuel use (kWh per 100km) Evolutionary scenario Plug-in* fleet (% of total) Electricity demand (TWh) … of total use today (%)

2020

2025

2030

2035

2040

14000 17.6

14000 17.1

14000 16.7

14000 16.3

14000 15.9

0.8

3.1

7.3

12

15.1

4.8 0.2

18 0.7

41.4 1.5

68.1 2.5

84.2 3.1

Revolutionary scenario Plug-in* fleet (% of total) Electricity demand (TWh) … of total use today (%)

0.8

3.3

9

18

27.1

4.8 0.2

18.7 0.7

49.7 1.8

94.1 3.4

122.5 4.5

Source: Eurostat, Julius Baer. *Plug-in: plug-in hybrids and electric cars. kWh: kilowatt-hour, TWh: terawatt-hour.

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

Insurance and telecom: Some collateral damage Auto insurance is a big business, estimated at USD 200 billion in annual premiums in the United States alone and up to USD 1 trillion globally. Drivers tend to spend just as much on insurance and taxes per year as on fuel. The near-term trends towards more technology are business supportive, as crashes create higher property damage, which is compensated for by higher premiums. The longer-term trends towards autonomous driving and declining auto ownership, however, are negative. First, selfdriving cars are safer. Various sources expect a 40% reduction in accidents, and interestingly, Tesla reported exactly a 40% reduction in crash rates. The comparison of driving data before and after the introduction of autonomous driving features for the same model and driver allows for an accurate comparison. Second, mobility services reduce car ownership, i.e. there are fewer cars to be insured. Finally, the insurance mix shifts towards more competitive commercial fleet and product liability offerings.

Although there is much uncertainty, especially with regard to the product liabilities of self-driving cars, the future suggests headwinds for the car insurance business. For the time being, however, there are other, more relevant factors at play, which overall frame a positive backdrop for insurance companies’ shares.

The consequences for the telecom business are opaque.

Increased connectivity, autonomous driving and real-time mapping are data-intensive technologies and should multiply mobile data traffic. However, data usage has grown substantially as of late on the back of mobile usage, increased content sharing and video streaming. The telecom industry, however, has struggled so far to translate this pick-up in data traffic into cash flows and earnings. Expensive up-front infrastructure investments and pricesensitive consumers make telecom a highly competitive business, operating at slim margins. Telecom companies will likely capitalise on the future mobility by delivering specialised content rather than by providing the infrastructure for increasing data traffic.

Insurance business positioning Company

Business

Structural exposure* (impact/implications)

Allianz

Insurance

Axa Direct Line

Insurance Insurance

Helvetia Progressive

Insurance Insurance

Travelers Cos Zurich

Insurance Insurance

● ● ●●● ● ●●● ●● ●

Rating (Equity) Buy Hold Hold Buy Buy Hold Hold

Source: Julius Baer. *Structural exposure: low impact /negative implications (●) to high impact / positive implications (●●●). Please note that the relevant equity information may be found in the annex at the end of this publication.

21/28

Today’s observations on tomorrow’s mobility We believe mobility is at the beginning of a new era. Public policy tackles congestion and pollution and has a bearing on the transport market. At the same time, economic, technological, demographical and social trends influence corporate investment decisions and consumer buying considerations. These multifaceted trends add to the complexity of the theme. Our evolutionary and revolutionary scenarios should serve as a guide to grasp the potential impact and understand the underlying uncertainties.

These are our key observations: • Cities shape the mobility future. The dense urban environment is the breeding ground for new mobility solutions. Asia might lead the way due to pollution issues and technology affinity. Autonomous driving can solve congestion; public policy decides how quickly.

• The future mobility looks clean and affordable. Electric cars become a mass market and new services make mobility more affordable and accessible. Pollution decreases, cities become greener, social interactions expand and economic productivity grows.

• The mobility business is prone to value shifts. Electrification and autonomous driving level the playing field of the auto business. New entrants and new technology raise competitive threats. Growth is in electronics and mobility services; the challenges are with automakers.

• Thematic investing is tactical investing. Financial markets are forward-looking, but their restless temperament overshadows slow-paced structural shifts. Most growth stories come with rich valuations, while the threats to automakers and oil companies are overdone.

Investors should bear in mind the cyclically toppish car markets and the likely economic slowdown before 2020.

• Today’s future mobility top picks. Aptiv (Buy, Price/Target: USD95.52/105), Geely Automobiles (Buy, Price/Target: HKD22.75/32), and Infineon Technologies (Buy, Price/Target: EUR23.6/27).

• Peak oil heralds the democratisation of energy. Oil demand could peak around 2035. Energy use shifts from resources to technology, from trade to self-reliance, and from big to small. Electric cars and clean energy are selfreinforcing technologies, likely causing tectonic power shifts and geopolitical tremors.

• Politics faces inconvenient decisions. Mobility services challenge the public transport monopolies, putting public capital at risk. Fuel tax income erodes as fuel use declines and mobility pricing is the only viable option.

RESEARCH FOCUS | FUTURE MOBILITY | WEDNESDAY, 30 MAY 2018; 10:23 CET

22/28

Thematic future mobility equity overview Company

Exposure*

Julius

Consensus

Impact (implications)

Baer

(Buy/Hold/Sell)

BMW

high (-)

Hold

Hold (10/15/7)

BYD

high (++)

Hold

Buy (15/7/5)

Price Ccy

Market cap.

Performance (%) 3m 12m

ISIN

(USDbn)

1m

5y

86.1 EUR

64.48

-6

-1

2

18

DE0005190003

50.8 HKD

21.03

-8

-30

12

46

CNE100000296

Auto makers

Daimler

high (-)

Buy

Buy (14/14/4)

63.1 EUR

77.95

-4

-10

-4

30

DE0007100000

Dongfeng Motor Group

high (=)

Hold

Hold (10/15/2)

9.1 HKD

10.02

4

-8

4

-26

CNE100000312

Fiat Chrysler

high (--)

Hold

Hold (10/12/4)

18.3 EUR

32.59

-4

4

97

-

NL0010877643

Ford

high (-)

Hold

Hold (4/20/1)

11.4 USD

45.43

-1

7

5

-26

US3453708600

Geely Automobiles

high (+)

Buy

Buy (33/5/3)

22.8 HKD

26.03

8

-11

90 491

KYG3777B1032

GM

high (-)

Hold

Buy (12/11/2)

37.6 USD

52.94

0

-5

14

8

US37045V1008

Great Wall Motors

high (=)

Hold

Buy (21/10/8)

7.8 HKD

13.21

-6

-16

-6

-39

CNE100000338

Guangzhou Automobiles

high (=)

Buy

Buy (29/8/0)

13.3 HKD

18.13

-8

-24

5

58

CNE100000Q35

Renault

high (--)

Buy

Buy (17/6/3)

83.6 EUR

28.55

-6

-7

-1

41

FR0000131906

Tesla

high (++)

281.9 USD

47.88

-4

-18

-13 169

US88160R1014

Reduce Hold (10/11/9)

Toyota

high (-)

Hold

Hold (8/12/2)

6976 JPY

209.70

-3

-4

17

15

JP3633400001

Volkswagen

high (-)

Hold

Buy (24/3/4)

161.8 EUR

93.39

-7

1

18

-4

DE0007664039

Autoliv

high (+)

Reduce

Hold (9/14/7)

143.2 USD

12.48

5

0

31

83

US0528001094

BorgWarner

high (++)

n.c.

Hold (8/9/2)

48.5 USD

10.18

-2

-1

18

17

US0997241064

Continental

high (++)

Hold

Buy (21/10/2)

216.8 EUR

50.10

-3

-3

9 114

DE0005439004

Delphi Technologies

high (++)

n.c.

Buy (10/7/0)

49.6 USD

4.40

1

4

-

-

JE00BD85SC56

Denso

high (+)

n.c.

Buy (9/9/0)

5382.0 JPY

39.37

-6

-14

13

25

JP3551500006

medium (=)

Hold

Buy (5/2/0)

1278.0 CHF

5.28

3

-8

38 198

CH0001752309

Hella

high (+)

n.c.

Hold (10/11/2)

53.8 EUR

6.91

5

-3

19

DE000A13SX22

Magna

high (-)

n.c.

Buy (12/5/3)

82.4 CAD

22.32

9

17

37 137

Schaeffler AG

high (-)

n.c.

Buy (10/8/1)

12.7 EUR

9.77

-1

-5

Aptiv

high (++)

Buy

Buy (21/2/2)

95.5 USD

25.29

11

5

Cree

medium (++)

n.c.

Hold (2/9/2)

46.9 USD

4.72

23

24

Infineon Technologies

high (++)

Buy

Buy (18/10/2)

23.6 EUR

30.99

10

Komax

high (+)

n.c.

Buy (3/2/0)

279.6 CHF

1.08

Leoni

high (+)

n.c.

Buy (12/7/1)

53 EUR

2.00

Melexis

high (+)

n.c.

Buy (3/3/1)

85.5 EUR

3.99

Nvidia

low (++)

Hold

Buy (26/11/2)

248 USD

On Semiconductor

high (++)

n.c.

Buy (13/6/1)

Panasonic

low (++)

Hold

Buy (15/5/1)

Renesas Electronics

high (++)

n.c.

Buy (7/7/0)

STMicroelectronics

medium (++)

Hold

Auto suppliers

Georg Fischer

-17

-

CA5592224011

-

DE000SHA0159

30 131

JE00B783TY65

Tech suppliers 96

-26

US2254471012

5

20 257

DE0006231004

2

-7

3 216

CH0010702154

2

-6

7

DE0005408884

7

-6

6 434

BE0165385973

150.68

10

3

75 1597

US67066G1040

25 USD

10.84

10

6

64 198

US6821891057

1513.0 JPY

34.19

-7

-10

1075.0 JPY

16.51

-6

-13

20 126

JP3164720009

Buy (10/10/2)

20.3 EUR

21.34

12

8

40 176

NL0000226223

8

31

88

JP3866800000

TE Connectivity

high (+)

n.c.

Buy (12/4/0)

92.4 USD

32.35

-1

-10

18 105

CH0102993182

U-Blox

high (+)

Hold

Hold (1/6/0)

183 CHF

1.29

0

-11

-9 216

CH0033361673

Visteon

high (+)

n.c.

Buy (9/7/1)

127 USD

3.74

3

2

26 239

US92839U2069

Albemarle

high (++)

n.c.

Buy (14/8/1)

93.1 USD

10.32

-4

-7

-18

35

FMC

low (++)

n.c.

Buy (18/5/0)

87.8 USD

11.81

8

12

17

37

US3024913036

medium (+)

Hold

Buy (23/5/1)

370.9 GBp

70.92

1

-2

30

28

JE00B4T3BW64

Johnson Matthey

high (++)

n.c.

Buy (10/5/1)

3379 GBp

8.67

2

8

6

31

GB00BZ4BQC70

Orocobre

high (++)

n.c.

Buy (8/2/1)

6 AUD

1.16

5

-9

61 303

AU000000ORE0

medium (=)

n.c.

Buy (5/3/3)

10.2 EUR

1.44

-10

-12

-5

-59

DE0007235301

high (++)

n.c.

Buy (8/6/0)

50.4 USD

13.26

-8

2

36

16

US8336351056

medium (+)

Hold

Buy (11/5/0)

908.0 JPY

13.65

-11

-16

-2

30

JP3621000003

high (++)

n.c.

Buy (10/7/3)

47.4 EUR

13.49

3

2

57 150

BE0974320526

Materials

Glencore

SGL Carbon SQM Toray Industries Umicore

US0126531013

Source: Bloomberg Finance L.P., Julius Baer. This list contains covered and non-covered (n.c.) stocks by Julius Baer; the selection of non-covered stocks does not imply any recommendation by Julius Baer. Please note that the relevant equity information may be found in the annex at the end of this publication; *Exposure = thematic exposure rating (or ‘theme exposure rating’, ‘Next Generation rating’, ‘NG Rating’)follows the Next Generation investment selection process, which analyses a company’s exposure to structural market growth in relation to a particular investment theme or topic; CCY = currency.

Price data as of 29/05/2018.

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Annex: Equity coverage information Company

Rating

Price

Target

Currency

Analyst

BYD Tesla

Hold Reduce

50.75 281.91

64 230

HKD USD

E. Mak M. Racheter

Baic Motor BMW

Hold Hold

7.42 86.08

8.6 95

HKD EUR

E. Mak M. Racheter

Daimler Geely Automobiles

Buy Buy

63.06 22.75

75 32

EUR HKD

M. Racheter E. Mak

GM Toyota

Hold Hold

37.55 6976

40 7500

USD JPY

M. Racheter J. Chua

Volkswagen Brilliance

Hold Buy

161.82 14

180 23

EUR HKD

M. Racheter E. Mak

Dongfeng Motor Group Fiat Chrysler

Hold Hold

9.12 18.28

10 20

HKD EUR

E. Mak M. Racheter

Ford Great Wall Motors

Hold Hold

11.4 7.75

12 10.2

USD HKD

M. Racheter E. Mak

Guangzhou Automobiles Peugeot

Buy Hold

13.3 20.14

19.3 22

HKD EUR

E. Mak M. Racheter

Buy Reduce

83.55 143.24

105 130

EUR USD

M. Racheter M. Racheter

Continental Georg Fischer

Hold Hold

216.8 1278

235 1350

EUR CHF

M. Racheter B. Simon

Valeo Aptiv

Hold Buy

54.36 95.52

60 105

EUR USD

M. Racheter M. Racheter

Renault Autoliv

Infineon Technologies

Buy

23.6

27

EUR

M. Studer

Nvidia

Hold

248.23

260

USD

M. Studer

STMicroelectronics U-Blox

Hold Hold

20.27 182.7

20 185

EUR CHF

M. Studer M. Studer

Panasonic Glencore

Hold Hold

1513 370.85

1700 400

JPY GBp

K. Chia P. Lienhardt

Toray Industries Allianz

Hold Buy

908 180.06

1150 222

JPY EUR

K. Chia P. Casanova

Axa Direct Line

Hold Hold

21.53 356.7

24 380

EUR GBp

P. Casanova P. Casanova

Helvetia Progressive

Buy Buy

561.5 61.64

630 70

CHF USD

P. Casanova P. Casanova

Travelers Cos Zurich

Hold Hold

128.25 296.4

144 330

USD CHF

P. Casanova P. Casanova

BP Chevron

Hold Buy

559.2 120.6

590 145

GBp USD

R. Cominotto R. Cominotto

China Petroleum Exxon Mobil

Buy Hold

7.25 77.78

8.8 80

HKD USD

I. Chow R. Cominotto

OMV Shell

Hold Buy

49.33 2552

52 33

EUR GBp

R. Cominotto R. Cominotto

Total Marathon Petroleum

Hold Hold

51.01 77.61

56 65

EUR USD

R. Cominotto R. Cominotto

Phillips 66 Valero

Hold Hold

116.8 119.33

100 120

USD USD

R. Cominotto R. Cominotto

Source: Bloomberg Finance L.P., Julius Baer. Price data as of 29/5/2018.

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IMPORTANT LEGAL INFORMATION This publication constitutes investment research and has been produced by Bank Julius Baer & Co. Ltd., Zurich, which is authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA). This publication series is issued regularly. Information on financial instruments and issuers will be updated irregularly or in response to important events.

IMPRINT Authors Norbert RĂźcker, Head Macro & Commodity Research, norbert.ruecker@juliusbaer.com 1) 1) This analyst is employed by Bank Julius Baer & Co. Ltd., Zurich, which is authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

APPENDIX Analyst certification The analysts hereby certify that views about the companies discussed in this report accurately reflect their personal view about the companies and securities. They further certify that no part of their compensation was, is, or will be directly or indirectly linked to the specific recommendations or views in this report.

Methodology Please refer to the following link for more information on the research methodology used by Julius Baer analysts: www.juliusbaer.com/research-methodology

Structure References in this publication to Julius Baer include subsidiaries and affiliates. For additional information on our structure, please refer to the following link: www.juliusbaer.com/structure

Price information Unless otherwise stated, the price information reflects the closing price of the previous trading day.

Disclosure Helvetia: Julius Baer holds > 0.5% net short position of the total issued share capital.

Equity research Frequently used abbreviations CAGR DCF EBIT EBITDA Consensus rating

Compound annual growth EPS rate Discounted cash flow EV Earnings before interest and FCF taxes Earnings before interest, taxes, MV depreciation and amortisation Consensus rating indicates the Consensus taranalysts' opinions on the security. get It shows the number of analysts covering the security and the breakdown between Buy, Hold and Sell ratings.

Earnings per share

P/B

Price-to-book value

Enterprise value Free cash flow

P/E PEG

Market value

ROE

Price-to-earnings ratio P/E divided by year-on-year EPS growth Return on equity

The consensus target is the aver- FY age price to which analysts expect the security to rise.

Fiscal year

64.8%

4.26%

Equity rating allocation as of 29/05/2018 Buy

30.95%

Hold

Reduce

Equity recommendation history Please refer to the following link for more information on the current and 12-month historical investment recommendations made in relation to equities covered by Julius Baer Research. www.juliusbaer.com/recommendation-history

Rating system for global equity research (stock rating) Buy Hold

Expected to outperform the regional industry group by at least 5% in the coming 9-12 months, unless otherwise stated.

Expected to perform in line (Âą5%) with the regional industry group in the coming 9-12 months, unless otherwise stated.

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Reduce

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Expected to underperform the regional industry group by at least 5% in the coming 9-12 months, unless otherwise stated.

Frequency of equity rating updates An update on Buy-rated equities will be provided on a quarterly basis. An update for Hold and Reduce-rated equities will be provided semi-annually or on an ad-hoc basis.

Risk rating system for global equity research (stock rating) The risk rating (High/Medium/Low) is a measure of a stock’s expected volatility and risk of losses in case of negative news flow. This non-quantitative rating is based on criteria such as historical volatility, industry, earnings risk, valuation and balance sheet strength.

Thematic research / Next Generation Theme exposure rating (“NG Rating”) for Next Generation research Companies are rated according to exposure towards a given theme or topic. Any theme exposure rating (“Next Generation Rating” or “NG Rating”) must be understood in connection with a corresponding theme or topic. Companies’ exposure is rated as outlined in the table below.

High Medium Low

Company which business model is defined by its role in providing critical services/products consistent with the investment theme or topic, and showing a high sales share in the context of the theme or topic.

Company which business model is defined by its role in providing services/products consistent with the investment theme or topic, but showing a moderate sales share in the context of the theme or topic.

Company which business model is not defined by its role in providing services/products consistent with the investment theme or topic, but showing limited or projected sales exposure in the context of the theme or topic.

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