Technology and telecoms firms could be the big winners in a connected car market that may be worth $50 billion over the next decade, luring investors away from traditional automakers.
Chip-makers or tech giants such as Infineon and Google are among a variety of companies involved in the rapid development and testing of intelligent cars from those that drive themselves to those allowing a driver to use mobile phone apps through the dashboard. A number of carmakers are embracing the trend, with Nissan Motor Co, Volkswagen AG's Audi and Toyota Motor Corp working with outside tech firms to test self-driving car technology.
However, it is the tech and telecom firms - from U.S. bellwethers to small European companies - that are seen benefiting the most, fund managers and analysts said.
Related: Google's Driverless Car: A Chaffeur for Bad Drivers
"It's a whole new market emerging," said Christian Jimenez, fund manager and president of Diamant Bleu Gestion. "The best way to play it for investors in the long term is to buy names such as Microsoft or chip makers such as Infineon, not (automakers) Peugeot and Renault."
If the new market grows to $50 billion as forecast by French bank Exane BNP Paribas that would be roughly half the size of German carmaker BMW's revenues last year. Internet giant Google Inc is leading the charge among tech companies, trying to break into the century-old industry as it works on its own prototypes of fully autonomous vehicles.
It may be a few years before driverless cars hit the road but Google is already shaking things up in the sector, saying last week that the first cars running its Android Auto - a voice-enabled software allowing drivers to navigate maps and send messages while behind the wheel - will hit showrooms later this year. Apple is also in the race, with its new CarPlay - which integrates iPhone functionality - allowing drivers to use applications directly via the dashboard to view maps, make calls, listen to music and send and receive text messages.
Only about 10 percent of vehicles have built-in connectivity today, but the number is expected to rise to more than 90 percent by 2020, according to the British consulting firm Machina Research. "This is not a distant dream, but a five-year race where there is money to be made, or lost," Exane BNP analyst Stuart Pearson said in a note to clients, predicting that the market for connected car services would grow by an estimated 30 percent a year through to 2020.
European Presence
Investors are also keen to pick smaller, specialized companies at the heart of changes in the car driving. AKKA technologies, a French engineering firm which has been developing a prototype of electrical driverless car, has seen its stock soared by nearly six-fold since 2009.
"The autonomous car is not science fiction, it's real and it's happening now. The technology is ready, it's just a question of regulation at this point," said Philippe Obry, head of research and development at AKKA. "The idea is not to upgrade existing cars with new technologies, it's to rethink the whole sector and the way people will use cars in the future...We're not a car maker, so it's been easier for us to think outside the box."
Related: Google Preps Self-Driving Cars for City Traffic
Shares in French electric car battery maker Blue Solutions have jumped 130 percent since their initial public offering last October, which was more than 15 times oversubscribed. Among big European tech stocks, Nokia and TomTom are seen facing their make-or-break moment with the connected car, Exane's Pearson said.
"The two map-makers hold a duopoly in maps for embedded solutions of original equipment manufacturers and auto part suppliers. If these embedded solutions dominate in the long run, our TomTom fair value could rise by 32 percent, 13 percent at Nokia."
Chip Makers Profit
Analysts and fund managers also see chip makers such as Germany's Infineon and Texas Instruments profiting from the push into driverless cars, while telecom operators will also win from the increased data revenue, with larger, cross-border operators set to dominate.
Last April, Infineon - whose chips activate airbags, enable cruise control and cut vehicle emissions - raised its profit outlook for the year and said it would lift its dividend after posting forecast-beating quarterly results, buoyed by robust demand from the automotive sector. Qualcomm and Intel are already competing to supply chips that connect cars to the Internet and processors for increasingly sophisticated navigation and entertainment systems.
Whether made with 3G chips from Qualcomm or Bluetooth and Wifi chips from Broadcom, every wirelessly connected car needs components to handle power amplification, switching and filtering, made by companies such RF Micro Devices Inc and Skyworks Solutions. This year, those two companies have seen their stocks surge 91 percent and 68 percent respectively.
"Whether it's connectivity from a phone or a car or a Nest thermostat or a home security system, the only thing ubiquitous across the Internet of Things is they have to connect wirelessly," said Ascendiant Capital analyst Cody Acree, who recommends Skyworks as a play on connected cars.
Bosch, STMicro and San Jose, California-based InvenSense are supplying growing numbers of sophisticated sensor chips for braking, driver assist and other safety functions that are bringing cars nearer to becoming autonomous.
With additional reporting by Noel Randewich in San Francisco of Reuters.
