Morningstar - Q2 2023 - 67

EXHIBIT 1
minimize the risk that it's their fault. What you
see in the industry is more proactive recalls,
which helps mitigate potential lawsuits, fees, and
even headline risk.
One aspect of product governance that's adding
complexity to that ESG risk is the increasing use of
technology in cars. That's something investors
should consider as cars incorporate softwarebased
technology in particular. While that offers
a lot of upside potential, especially from revenue
from subscriptions, it also introduces new
risks, such as hacking.
The other three material ESG risks for the industry
are human capital, corporate governance,
and business ethics. With human capital, it's
worth looking at the relationship to unions
for the Detroit Three as well as a growing need for
software developers across the industry. As
for corporate governance, the average shareholder
may not have the voting power that they
would in other industries. A popular example
is Elon Musk's outsize control at Tesla TSLA.
At other auto companies, there are supervoting
shares and the like that might minimize
your shareholder power. From a business ethics
perspective, the " dieselgate " scandal at
Volkswagen VWAGY is probably the worst-case
example that you'll ever see in the auto industry.
Lallos: Risks can be opportunities. What companies
stand to benefit as the sales of EVs increase?
Hilgert: For the traditional automakers, it's a
case of substituting one kind of volume for another,
so there's not necessarily a profit boost
from vehicle electrification. If anything, the profit
boost that could materialize is from vehicles
becoming fully digitized, though I'm skeptical.
A fully digitized vehicle offers the possibility
of subscription-type services. BMW BMW:DE, for
example, recently tried to make heated seats
a subscription service. Boy, that went over
like a lead balloon. So, we'll see how this develops.
Payment services, entertainment services are
things that they're trying to figure out.
The real beneficiary of electrification is going
to be the supply base. For companies like
BorgWarner BWA, Vitesco VTSC:DE, Aptiv APTV,
and Lear LEA, the content per vehicle is much
Navigating the Landscape There are values to be had in the automotive sector.
Name
Economic
Moat
Aptiv APTV
Bayerische Motoren Werke BMW:DE
BorgWarner BWA
CarMax KMX
Ford Motor F
General Motors GM
Gentex GNTX
Lear LEA
Tesla TSLA
Vitesco Technologies Group VTSC:DE
Volkswagen ADR VWAGY
Source: Morningstar Direct. Data as of March 31, 2023.
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None
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Price
$112.19
Narrow EUR 109.67
$49.11
$64.28
$12.60
$36.68
$28.03
$139.49
$207.06
Narrow EUR 72.41
$17.10
Fair Value
$158.00
EUR 156.00
$80.00
$141.00
$20.00
$78.00
$35.00
$148.00
$225.00
EUR 109.00
$36.00
P/FV
Morningstar
Rating
0.71 QQQQ
0.65 QQQQ
0.61 QQQQQ
0.46 QQQQQ
0.63 QQQQQ
0.47 QQQQQ
0.80 QQQQ
0.94 QQQ
0.92 QQQ
0.61 QQQQ
0.48 QQQQQ
higher on products for electric vehicles. Growth in
electrification more than offsets declines from
internal combustion engines, so it's reasonable to
expect these companies to continue to grow their
revenue at percentage increases that are greater
than the percentage change in the overall market.
Whiston: Rich talked about the infotainment
and subscription opportunities, and there's
also autonomous capabilities. GM is targeting
$50 billion in revenue by the end of the decade for
its Cruise subsidiary. They're also talking
about having autonomous capability in personal
vehicles by 2025. Even today, you can go to
San Francisco and take an autonomous taxi ride
without a safety driver, a robotaxi. GM will be
producing their Cruise Origin vehicle, a fully
autonomous vehicle with no driver area, just a
passenger seating compartment like a living room.
Lallos: There are lots of negative headlines on the
safety of autonomous cars. Do you see regulatory limits
being placed on this kind of technology?
Whiston: I hope not to the point that AVs are
stifled, because the technology can save lives.
In the U.S. alone, we have nearly 40,000
Americans die on roads every year, and a lot
of that is preventable. As Kris said earlier, it's very
often human error, not machine error. The fact that
San Francisco was willing to allow robotaxis-
after a multipermit process-gives me hope that
there is a path to getting this done. What we
really need is a national rule rather than state by
state legislation.
Hilgert: The precursors to autonomy-Level 1
[driver assistance] and Level 2 [partial driver
automation]-are gaining penetration. But
because of the legislative and liability concerns of
the automakers, they're not going into Level 3
[conditional automation]. But they've come
up with Level 2+, which gets you some of the
technology of Level 3, but the driver has
to be ready to take control at all times. Mercedes
has been the first to get a Level 3 certified,
over in Germany, and in January they got certified
in Nevada. That's it. Nobody else has done it.
In my forecasts, I see a long tail for vehicles
with no autonomous technology because a lot of
vehicles around the world are in developing
markets where people can't afford this kind of
advanced technology. Safety standards are
generally set in Europe and the United States, and
China follows very closely. But then we have
developing markets that are way behind.
morningstar.com/products/magazine
67
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Morningstar - Q2 2023

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