The Mobility Revolution & Investors (part II)

The Mobility Revolution: Relevance for Infrastructure Investors
Part (B)

This is the third of four columns on the impact of the “mobility revolution.” In our last column, we assessed the significant opportunities for investors in the infrastructure space related to the development of new ride-sharing models. In this column, we assess the opportunities for investors related to electric and self-drive vehicles, and mass transit.

Bottom line: by 2025, the mobility revolution may add $150 billion or more annually to transport-related infrastructure investment opportunities in Emerging Markets. This is over 50% of estimated EM transport related infrastructure investment today. Investors and lenders should be developing their ability to evaluate opportunities and place capital in these areas.

Electric Vehicles
The rapid growth in electric vehicle usage has received widespread press coverage and will continue to do so. With wind and solar power generation, new technology was initially seen as (a) delivering on a climate-related agenda but (b) more expensive than traditional alternatives, only to progressively become the low-cost option. The same dynamic is now playing out with EVs, with cost convergence between EVs and equivalent internal combustion engine (ICE) models anywhere from 3 to 10 years away. Some press coverage predicts EVs will take much longer to achieve penetration in Emerging Markets than in OECD markets – on the grounds that Emerging Markets are less attuned to climate change issues and that the development of charging infrastructure will be too high a barrier. Infrastructure Ideas believes this to be incorrect – cost advantages for EVs relative to ICEs will in fact be more relevant in lower income markets, and – much as we saw with renewable energy generation – adoption of the new technology will come quickly in most emerging markets.

From an infrastructure investor perspective, it is not EV sales per se that are of most interest, but rather how EVs affect infrastructure. The big impact here will clearly be the need EVs will trigger for charging infrastructure. Put another way, EVs will require changes to traditional electricity distribution models. These changes will imply significant new investments. On May 31, both California and New York made announcements of planned additional investment in EV charging infrastructure, of $1 billion in aggregate. Overall, this segment has seen about $5 billion in worldwide capital spending to date, and is projected by Grand View Research to become a $45 billion market by 2025, growing at over 40% a year. For context, this is about the size of the current worldwide annual investment in ports and terminals. So EV charging infrastructure is likely to become a major market of the future for infrastructure investors, and therefore understanding its dynamics and opportunities will be important for investors.

Initially one saw competition between alternative providers of this new charging infrastructure: gasoline retailers (who today provide the transportation fueling infrastructure which will be increasingly substituted by charging infrastructure); car manufacturers (Volkswagen is installing 2,800 stations in the US in the next 12 months); governments (as is the case for early rollouts in Europe); electricity distribution companies (80% of access points in the US today are in homes, with NRG also moving into stand-alone stations); and specialty providers. At this stage, specialty providers have the largest share in the non-home market. Chargepoint is probably the biggest player in the US, but there are several competing networks. Technologies and operating models still vary considerably: while the image is of the need for several hours to charge a car, new Level 3 stations enable a charge in about 20 minutes, and Shell has announced imminent roll-out of a technology enabling full-charging in 8 minutes. Tesla’s new supercharger stations have been described as a mix between airline waiting room and coffee shop. Sweden is experimenting with a completely different approach – electrified roads which enable charging while driving – now on two highways, while Italy is doing the same with contact-less charging at intersections and parking bays for buses. Which approach becomes “the standard” is not clear yet, but what is clear is that a lot of investment is headed this way.

In EVs, the market segment which appears to be developing the fastest is actually not cars, but buses. Because of a combination of lower relative costs (EV buses vs ICE buses), lower maintenance costs, and concerns over urban air quality, Bloomberg New Energy Finance forecasts a much faster rate of adoption for EV buses than EV cars. BNEF predicts electric buses will capture as much as 84% of the new bus sales market as early as 2030. China has 300,000 electric buses already on the road. This will have a big impact on city governments everywhere, in terms of procurement for publicly-owned bus fleets, of addressing transition costs for informal bus fleets in many emerging market cities, and in terms of ensuring the presence of appropriate charging infrastructure. And as our previous column outlined, “EV” bike and scooters may also become very widespread, further contributing to the demand for charging infrastructure.

Automated Vehicles
Unlike EVs, the market for Automated or self-driving vehicles (AVs) is still nascent. Yet many of the same drivers (no pun intended) of large-scale high growth are present: lower costs and greater efficiency, to which will be added greater user convenience.

For infrastructure investors, the implications of a large AV market are important, but quite different, than those of a large EV market. The main implications will be the rise of fleet management, the market for installing sensing infrastructure, and large data generation. It is early to put numbers on this, but let’s have a look at these three areas, starting with fleet management. For most transport today, the working model is for someone (generally the public sector, though occasionally a public-private partnership) to build the “hard” infrastructure (a road), and then users to self-finance “rolling stock” on a decentralized basis (i.e., individual drivers purchasing their own cars). Early TNCs (Transport Network Companies, like Uber) follow a similar model, building in this case data and communications infrastructure, while individual drivers self-finance their cars on a decentralized basis. EVs and AVs together will change this model. As costs become cheaper for EVs than existing ICE vehicles, this will create pressure on TNCs to not wait for decentralized procurement from individual drivers. TNCs who are slow to adopt lower cost technologies will find that they are more expensive than their rivals who have done so: this will create a new dynamic, whereby TNCs will increasingly look to directly source first their lower-cost EV vehicle fleets rather than waiting for individual drivers to make these shifts on their own time, and then to directly source yet-lower cost AVs, which of course individual drivers will not do themselves. The Boston Consulting Group estimated in 2015 that the extra hardware costs to make a car fully self-driving will initially amount to about $10,000 – which amortized over 5 years would be much cheaper than the costs of paying human drivers over a year – and will keep coming down. Therefore the TNC model will increasingly shift to TNC-owned fleets, implying very large capital expenditures for TNCs which do not exist today. Back of the envelope numbers would put the eventual value of global TNC EV/AV car fleets in the range of $200-500 billion, with annual fleet replenishments in the $40-100B range. So TNC business models will become much more capital intensive.

The supporting infrastructure for AVs will also be a multibillion dollar proposition. Self-driving cars need better roads, better lane markings, better traffic-light timing, and better maintenance to behave predictably. The city of Atlanta estimated in 2017 that it could take 50,000 environmental sensors, 20,000 pedestrian and mobility sensors, 10,000 cameras and more than 50,000 street lights to convert its city grid to “smart street” status. It’s not clear what the bill will be for making streets AV-friendly, but the lowest estimates for the US alone start at $50B and go much higher. It’s safe to say that the global cost of installing sensing infrastructure for AVs will exceed $100B, and may approach or exceed $1 trillion. It will be a large new segment of infrastructure capital costs for which someone will have to pay. And finally data generation. AVs will accelerate the already rapid growth in data generation from vehicles, data which can be used and marketed in many ways. No numbers for this at the moment, but again a large associated market.

Mass transit
The impacts of technology on transportation are not limited to individual vehicles, TNCs, EVs and AVs which this series has covered so far. The market for mass transit infrastructure is also evolving.

The number of BRT systems has been growing rapidly. In 2000, 33 cities had them; from 2000-2010, 73 cities created one. Since 2010, another 61 cities have done so. An added 121 have BRTs in planning or under construction. Using back of the envelope numbers, somewhere between $4 and $6 billion is being spent annually on new BRT systems, and probably $1-2B a year on maintenance and expansion of these systems. Of this the bulk is coming in Emerging Markets. One can expect the interest in BRTs to continue growing substantially, especially in EMs. BRT operating costs are likely to decrease considerably, with the shift to EVs, and eventually co-benefits from the signaling and other infrastructure investments being made to accommodate EVs. By 2030, one could expect the global BRT market to be on the order of $10-15B a year, 75% or more in Emerging Markets.

As with BRTs, the market for metro rail systems has shifted largely to Emerging Market countries. Already 50% of existing subway systems are in EMs, while 75% of all new metro systems under construction are in EMs. The adoption rate for new systems is significantly lower than for BRTs, with 40 under construction, or less than half the number of new BRT systems. China also accounts for a very large share of this: over 40% of all EM metro systems under construction. With significantly higher capital costs per system, metros probably constitute an infrastructure market of between $10-15 billion per annum. One would not expect demand for these systems to grow in the same way as other transport market segments, as metro rail technology is not benefitting from the kind of reduced costs and increased convenience that alternative transportation modes are. The main cost of metro systems is construction, and construction productivity is one of the few sectors seeing limited if any benefits from technology.

Other segments
Technology will continue to create new segments for infrastructure investments. We will not attempt to quantify them here, but they could include

• More infrastructure investments by municipalities in general
• underlying data management and communications for mass transit systems (a market today largely dominated by Korean companies)
• Companies specialized in 3D construction, adopting and using new 3D printing technologies for various infrastructure companies with a cost advantage over local construction industry players
• Shared service air taxis, currently under development by Rolls Royce, Uber and several others.

Summary
Underlying drivers — more urbanization, and the roll out of new technologies which lower costs and increase convenience – will significantly change the landscape for investors in transportation-related infrastructure. In the coming decades, investors will see the development of new and large opportunity segments.

While the numbers remain fairly preliminary at the moment, they are large. Below is an idea of what we might expect by 2025-2030, in terms of annual capital expenditures for transportation infrastructure.

Car-based TNCs                             $25-50B (Emerging Markets only)
Bike-sharing infrastructure          $5-10B
EV charging infrastructure         $30-50B (Emerging Markets only)
TMC fleets                                     $40-100B
AV related infrastructure            $ 5-50B
BRTs                                                $10-15B
Metro rail                                       $10-15B

Total                                           $150-250B

With today’s total spending on transportation infrastructure in Emerging Markets probably between $250-300 billion, one can see the significance of these new technology-impacted segments.

Our final post in this series will address the impacts of these new transport-related technologies for policy-makers.