IN BRIEF

• We are launching Themes for a new decade to explore key structural trends that we believe can fundamentally drive the future industry landscape.

• Investors with the ability to identify companies that can increase revenues, adopt and innovate their business models to these industry trends and capture structural growth potential can potentially enhance their public market equity returns.

• In this inaugural publication, we shine the spotlight on How Internet of Things (IoT) will change our world. Specifically, we take a closer look at two of the most widely-used applications of IoT, namely manufacturing (industrial automation) and transportation (autonomous vehicles).

• We also offer a glimpse into the unique investment insights from our integrated global research network as to which companies are well-positioned to benefit from these long-term trends.

Introduction

In the new decade, we see a growing need for investors to focus increasingly on themes for equity investing. The reality is that there are some growing challenges for top-down allocators to make regional and sectoral equity decisions. Changes in technology, consumption patterns, regulation, market structure and competitive dynamics are driving increased stock return dispersion, both at a within-country and within-sector level. Looking through a long-run theme lens can help investors to unravel the underlying growth drivers behind an industry’s evolution, reinforcing an active bottom-up stock selection process.

As highlighted in our 2021 Long-Term Capital Market Assumptions, we see trend growth projections remaining subdued and public market expected returns over the next 10-15 years generally lackluster, necessitating A new portfolio for a new decade¹. In a similar vein, we are launching this new publication, Themes for a new decade, with the objective of exploring key structural trends that we believe can fundamentally drive the future industry landscape. Investors with the ability to identify companies that can increase revenues, adapt and innovate their business models to these industry trends and capture structural growth potential can potentially enhance their public market equity returns.

In this inaugural publication, we shine the spotlight on How Internet of Things (IoT) will change our world. We recognize that the world we live in today is undergoing rapid digital transformation, and the world we will live in tomorrow will become increasingly connected with widespread technology adoption. Technological developments have connected human to device, and we are advancing toward connecting human-device–human. Here, we take a closer look at two of the most widely used applications of IoT, namely manufacturing (industrial automation) and transportation/mobility (autonomous vehicles).

Industrial automation

The adoption of industrial automation (IA) is still in a nascent stage, and there remains huge secular growth potential across the robotic, vision and laser industries.

For example, according to the International Federation of Robotics (IFR), the global average robot density in the manufacturing industry has now reached 113 units per 10,000 employees. However, this is still significantly below that in Japan (364) and Germany (346), and a small fraction of that in Singapore (918) and South Korea (855), thereby suggesting that there is much room for other markets to catch up (see Exhibit 1).

The adoption of industrial automation has enormous room for growth

Exhibit 1: Robot density in the manufacturing industry, 2019

Robots installed per 10,000 employees

Source: International Federation of Robotics, J.P. Morgan Asset Management. Data reflect most recently available as of 31/1/21.

Industry 4.0 – the fourth revolution of manufacturing

Source: Shutterstock, J.P. Morgan Asset Management.

China’s robot density (187) ranks 15^th worldwide, but it has been the most aggressive in capacity expansion, accounting for greater than 40% of the annual industrial robot installations in 2019. Back in 2015, automation was a means for China to upgrade its manufacturing sector (“Made in China 2025”) and address its shortage of labor. Today, automation has become increasingly important in helping China to achieve self-sufficiency in high-tech manufacturing and promote productivity growth under its dual circulation strategy (the latter spurred by the U.S.-China trade tension), as manufacturing wage inflation rises.

Across the Pacific, President Biden has recently signed an executive order to “Buy American,” aimed at revitalizing the U.S. manufacturing sector and localizing supply chains.² Since re-shoring suggests higher costs (e.g. labor costs), some U.S. manufacturers may increase automation, in order to enhance productivity and retain their profit margins.

Apart from capacity expansion, demand for automation is expected to come from capacity upgrades associated with new technologies. Industry 4.0 (Industrial Internet of Things (IIoT)) – the fourth revolution in manufacturing - follows close on the heels of Industry 3.0. Under Industry 3.0 (Digitization), most factory equipment (e.g. robots, machine tools and laser equipment) and enterprise processes have already been automated and digitalized.

However, automation technologies continue to run in silos and data flows primarily in one direction. As a result, changes in one part of the system require manual carry-over to other parts of the system.

Under Industry 4.0, IIoT will break these automation silos by integrating all parts of the system in a data loop, allowing a two-way data flow, i.e. IIoT will connect the physical system (things) with the virtual system (internet connection, digital twins). And together with artificial intelligence (AI) and 5G adoption, IIoT can significantly improve both the flexibility and productivity of automation systems, particularly in predictive maintenance, quality inspection and assurance, and manufacturing process optimization.

Investment implications

Industrial automation/IIoT is on a structural growth trend, as global manufacturers try to reduce labor costs and improve operational efficiency, amid the incremental reshoring of production. While broader adoption of IIoT platforms in the manufacturing industry is expected to be gradual, there is a huge potential market size for increased automation content in robotics (e.g. robot density, robots and cobots with enhanced flexibility), vision (e.g. vision penetration, 3D vision) and laser processing (e.g. laser penetration, ultra-high power lasers). This in turn can help to generate strong revenue streams and improve margins and earnings growth, as well as the return on invested capital (ROIC) for the IA/IIoT system solution providers. Among the IA/IIoT names, we prefer those with domain expertise, as we believe the IA/IIoT leaders of today will likely remain the IA/IIoT leaders of tomorrow, given the relatively high entry barriers.

Analyst Insights

Our integrated global research analyst network provides us with an in-depth understanding of these long-term trends across the entire value chain. By focusing on bottom-up drivers of profitability and growth, our portfolios are well positioned to participate in these trends through both emerging and leading companies.

The notes below provide a glimpse of how we think about such stocks; these are only historical snapshots and should not be construed as buy or sell recommendations.

Keyence Corporation

Keyence is perceived as a global leader in manufacturing parts, particularly sensors, used for factory automation. Manufacturing upgrades have continued, if not accelerated, during the recent pandemic. Structural factors such as rising wages in major manufacturing hubs like China are likely to drive factory automation as a long-term trend. Given wage levels for U.S. workers, so too will any reshoring of jobs in the U.S. on the back of geopolitical tension.

As factory automation continues to expand globally in scale and scope, we expect Keyence to benefit by offering machines that can improve product quality (work positioning, high precision processing checks), traceability (laser markers, image recognition), safety measures (prevention, predictive technology) and yield (static electricity elimination, testing for multiproduct variable quantity production). On the back of its leading market position, the company has a high and stable return on invested capital (ROIC), enabling strong cash generation that in turn underpins investment aimed at growing market share.

We are also encouraged by the strong governance attributes from the company, with competitive employee and talent incentives, plus the strong corporate focus on profitability.

Holding in JPM Funds³

JPMorgan Pacific Technology Fund (1.7% allocation)
JPM Global Unconstrained Fund (1.3% allocation / +1.1% vs. benchmark⁴)

Analog Devices

Headquartered in the U.S., Analog Devices is a leading analog semiconductor company focused on high-performance analog signal processing chips including data converters, amplifiers, interface, power management and digital signal processors. Analog Devices has a wide range of analog and digital capabilities that is helping clients to accelerate the transition to Industry 4.0. The company is leading the revolution in industrial robotics, in areas including motion control, functional safety, advanced sensing, and system-level design. This takes real-world input and translates them into valuable insights and outcomes, with applications in improving dynamic control and worker safety.

One such example is the use of condition-based monitoring, which enables early detection and diagnosis of machine and system abnormalities in real time. Identifying and isolating these issues creates opportunities for optimizing replacement part inventories, scheduling down-times for planned maintenance, and making run-time process adjustments that can extend the useful life of the equipment.

We like Analog Devices as it has significant exposures to some of our favorite themes (auto/industrial) at 67% of revenue. The acquisitions of Linear and Maxim will also likely benefit the company’s position, delivering greater revenue synergy over time. The Analog Devices/Linear Tech combination is a Global Top 3 high-performance analog supplier, with a leading market share in key categories (converters, power management, amplifiers, interface) as well as diversified end-market exposure (industrial 50%, auto 15-20%, consumer 15% and communications 15%).

Holding in JPM Funds³

JPM Global Dividend Fund (2.4% allocation / +2.3% vs. benchmark⁴)
JPM US Technology Fund (2.4% allocation / +1.7% vs. benchmark⁵)

Autonomous vehicles

Autonomous driving will transform the future of mobility.⁶ Mass market adoption of autonomous vehicles will markedly improve road safety and reduce traffic congestion and carbon dioxide emissions, enhancing the quality of lives of many.

The hard reality is that fully automated vehicles are still in the distant future. ⁷ The technology – algorithms and software – required to provide automotive grade safety in all driving conditions is still lacking. Cybersecurity also remains a concern.

However, we do not need to reach full automation to benefit from this structural trend. Continuing advancements of automotive driving technology are making good progress in improving the safety of semi-autonomous vehicles, which are attracting a wider consumer base.

Sensor technologies/ advanced driver assistance systems (ADAS) (e.g. ultrasonic sensors, cameras, radar, LIDAR) enable the digitalization of information for control and communication, and allow the automation of certain functions. Among them, adoptive cruise control, parking assist and fatigue recognition are becoming more common fixtures in motor vehicles.

Vehicle-to-vehicle (V2V), vehicle-to-infrastructure (V2I) and vehicle-to-everything (V2X) technologies are also starting to gain some traction. We are moving closer toward a connected vehicle eco-system, where via the Internet of Things (IoT) or wireless-network connectivity technology, vehicles can communicate and share vehicle safety data with each other (V2V), with infrastructure including traffic lights/ signs and roads (V2I) and with their surrounding environments in general (V2X). Such technologies play a critical role in warning drivers of potential collisions, thereby helping to prevent road accidents. They also help in traffic management and in reducing road pollution.

Here, China is expected to lead the V2X deployment. While the U.S. and Europe continue to debate over preferred V2X technologies and data protection and privacy issues, the Chinese government has moved ahead to incorporate LTE-V2X/5G-V2X as part of its Intelligent and Connected Vehicles (ICV) strategy.⁸ According to the “Strategy on Developing Smart Vehicles” blueprint published in February 2020, China will roll out LTE-V2X regionally and 5G-V2X in some cities and expressways by 2025. Many V2X pilot zones have already been established.

Elsewhere, progress has been slower, but in the right direction. Importantly, global policymakers are recognizing the social and environmental benefits of autonomous vehicles. The 3^rd Global Ministerial Conference on Road Safety held in Sweden, February 2020, culminated in 140 countries signing the “Stockholm Declaration,” which targets a global reduction in road traffic deaths and injuries by 50% in 2030, and calls for all vehicles sold by 2030 to include safety performance technology.

“The number of deaths on the world’s roads remains unacceptably high with 1.35 million people dying each year.” Source: WHO, 2018

Autonomous vehicles can help improve safety on the road

Exhibit 2: Number of motor vehicle deaths and fatal crashes in the U.S.

Number of deaths and fatal crashes

Source: Insurance Institute for Highway Safety, J.P. Morgan Asset Management. Data reflect most recently available as of 31/1/21.

The car that drives itself

Source: Shutterstock, J.P. Morgan Asset Management.

Investment implications

En route toward fully automated vehicles, we are seeing exciting developments in automotive technology, with heavy investments from major automaker companies and technology giants. We expect rising consumer demand with a wider adoption of autonomous vehicles, in part spurred by policymakers. The global autonomous car market, valued at USD 19.46 billion in 2020, is projected to grow at an 18.06% compound annual growth rate (CAGR) from 2021 to 2026⁹, and offers potentially attractive growth opportunities for automotive suppliers of sensors, controls and telematics.

Analyst insights

Our integrated global research analyst network provides us with an in-depth understanding of these long-term trends across the entire value chain. By focusing on bottom-up drivers of profitability and growth, our portfolios are well positioned to participate in these trends through both emerging and leading companies.

The notes below provide a glimpse of how we think about such stocks; these are only historical snapshots and should not be construed as buy or sell recommendations.

Tesla

We continue to see a secular shift toward electronic vehicles over time, and Tesla is a major disruptor in the global auto market. Tesla has a significant competitive advantage in terms of manufacturing cost, battery technology and, importantly, its autonomous driving platform.

None of Tesla’s competitors have the same scale benefits of data collection that Tesla has built over the last few years. Currently, there are over 1 million Teslas on the roads globally, all of them collecting data in real time that the company uses to make regular enhancements to its software, which is a huge advantage other companies in the auto space do not have. Furthermore, with its Gigafactories in the U.S., Asia and Europe, Tesla is likely able to increase its production going forward, which should bring down its production costs even further, making the cars more attractive at a lower price point.

The competitive advantages of Tesla are driven by 1) manufacturing cost, 2) battery technology and, importantly, its 3) autonomous driving platform. In particular, we believe that Tesla’s software capabilities are still an underappreciated aspect of the story. Why is autonomy important? Despite Tesla’s hardware 20% gross margin (car sales) being a leading figure in the automotive industry, Tesla’s autonomous software has gross margins that are higher than that, presenting an opportunity for improved margins for the company in the future.

Holding in JPM Funds¹⁰

JPM US Technology Fund (4.4% allocation / +4.4% vs. benchmark¹¹)
JPM US Growth Fund (4.8% allocation / +1.9% vs. benchmark¹²)

Xpeng

Electric vehicles sit at the intersection of two powerful forces in China. On the one hand, there is a growing cohort of younger and increasingly affluent consumers who place more importance on ESG factors when making purchasing decisions. On the other hand, the Chinese government has been placing a greater emphasis on sustainability within its growth plans – with positive implications for the environment. New energy vehicle (NEV) player Xpeng is a fast-moving beneficiary of these forces.

Xpeng is emerging as one of the leading NEV plays in China. While the company is not currently the number one selling NEV company in China, we believe its competitive autonomous and smart technology will allow it to grow faster in the longer term. It has already built up hardware architecture and software capabilities that are 1-2 years ahead of its startup peers, and 2-3 years ahead of internal combustion engine (ICE) brands, both local and global. The company’s ability to develop its autonomous software in-house offers a powerful competitive advantage.

If Xpeng uses its know-how to deliver a higher level of autonomous and smart content, it will forge a differentiated brand premium that will further enable it to gain market share.

Holding in JPM Funds¹⁰

JPMorgan Pacific Technology Fund (1.5% allocation)
JPM China Fund (0.8% allocation / +0.5% vs. benchmark¹³)
JPM Greater China Fund (0.7% allocation / +0.5% vs. benchmark¹⁴)

Texas Instruments

While electric vehicle manufacturers and brands like Tesla and Xpeng have been at the forefront of consumers’ minds, it’s important to go deeper into understanding the overall supply and value chain and identify key beneficiaries and leaders beyond the surface. One such example is Texas Instruments, which is a U.S. semiconductor company with a dominant position in supplying automotive semiconductors to automobile companies and brands.

The structural demand for semiconductors is on the rise in the automobile industry, driven primarily by consumer preference and awareness for electric and autonomous vehicles in recent years. Putting the demand in dollar terms, current conventional automobiles require around $350 worth of semi content, and an electric vehicle requires more than double that amount at around $750. As technology develops for a fully automated vehicle, the next levels (2, 3, 4 and 5) of semi contents are estimated to be around an additional $700, bringing the total value and required semi contents in a vehicle up to the $1,400 range.

We like Texas Instruments because it looks to be well positioned to further establish its market position, with the potential growth highlighted above on the demand of semi contents supported by its R&D. In additional to earnings growth, it has delivered consistent dividend growth to its shareholders for the past 10 years upwards of 20%, and from our research, we expect further capacity and willingness from this market leader to grow its future dividends as well.

Holding in JPM Funds¹⁵

JPM Global Unconstrained Equity Fund (2.6% allocation / +2.3% vs. benchmark¹⁶)
JPM Global Dividend Fund (1.8% allocation / +1.5% vs. benchmark¹⁶)
JPM US Growth (1.5% allocation / +1.1% vs. benchmark¹⁷)

Contemporary Amperex Technology Co Ltd (CATL)

Contemporary Amperex Technology Co Limited, or CATL, is a top electric vehicle (EV) battery supplier in China, specializing in the manufacture of lithium-ion batteries for EVs and energy storage systems. It is yet another great example of the way in which having an extensive research platform enables us to get beneath the bonnet in pursuit of the most attractive area within any supply chain. While we believe that NEV is an exciting industry, and that Xpeng is one of the leading NEV names in China as discussed before, the auto brand owners are not the only ways to play this theme. CATL, however, is a market leader in a product required by every brand owner.

CATL has nearly a 50% market share in China, and is growing its market share elsewhere. Global contract wins include current and future orders from customers such as BMW, Daimler and Honda. EV penetration is low but rising, which means that CATL has a large share of a rapidly growing pie. The company enjoys barriers to entry due to its experience in an industry in which expertise is crucial: know-how and investment offer a sustainable competitive advantage.

The combination of the industry that CATL operates in, and its own competitive position, offers a potentially long growth runway. An impressive forecast revenue growth rate, underpinned by ambitious capital expenditure plans for its three plants in China, should in turn result in rising earnings and an improvement in profitability as measured by return on equity (ROE).

Holding in JPM Funds¹⁵

JPM China A-Share Opportunities (1.4% allocation / +1.4% vs. benchmark¹⁸)
JPM China Fund (1.2% allocation / +0.9% vs. benchmark¹⁹)

¹ J.P.Morgan Asset Management 2021 25^th Annual Edition Long-Term Capital Market Assumptions.
Provided for information only to illustrate market trends, not to be construed as research or investment advice. Investments involve risks, not all investments are suitable for all investors.
² In light of the rising U.S.-China tensions and recent COVID-19 experience, many regions (e.g. the European Union) and countries are now focusing on building self-sufficiency and localization, in order to prevent supply chain disruptions and protect national security.
Provided for information only to illustrate market trends, not to be construed as research or investment advice. Investments involve risks, not all investments are suitable for all investors.
³ Source: J.P. Morgan Asset Management, the portfolio holdings as at 31 December 2020.
⁴ Russell 1000 EW Technology.
⁵ MSCI All Country World Index (ACWI). 
The companies/securities above are shown for illustrative purposes to demonstrate broad market trends based on current market conditions, subject to change from time to time. Their inclusion should not be interpreted as a research or recommendation to buy or sell. J.P. Morgan Asset Management may or may not hold positions on behalf of its clients in any or all of the aforementioned securities.
⁶ Ultimately, the goal for the future is for self-driving electric cars. Autonomous driving technologies and electric vehicles are complementary, with autonomy to bring about safer, more efficient driving and battery use, while electric cars can help to significantly reduce carbon emissions (green), fuel costs and maintenance.
⁷ Fully automated vehicles are vehicles that can perform all driving functions in all road conditions for an entire trip with no human intervention required.
⁸ 5G-V2X will likely be one of the most widespread applications of 5G in China.
⁹ Source: Mordor Intelligence.
¹⁰ Source: J.P. Morgan Asset Management, the portfolio holdings as at 31 December 2020.
¹¹ Russell 1000 EW Technology.
¹² Russell 1000 Growth.
¹³ MSCI China 10/40.
¹⁴ MSCI Golden Dragon.
The companies/securities above are shown for illustrative purposes to demonstrate broad market trends based on current market conditions, subject to change from time to time. Their inclusion should not be interpreted as a research or recommendation to buy or sell. J.P. Morgan Asset Management may or may not hold positions on behalf of its clients in any or all of the aforementioned securities.
¹⁵ Source: J.P. Morgan Asset Management, the portfolio holdings as at 31 December 2020.
¹⁶ MSCI All Country World Index (ACWI).
¹⁷ Russell 1000 Growth.
¹⁸ CSI 300.
¹⁹ MSCI China 10/40. 
The companies/securities above are shown for illustrative purposes to demonstrate broad market trends based on current market conditions, subject to change from time to time. Their inclusion should not be interpreted as a research or recommendation to buy or sell. J.P. Morgan Asset Management may or may not hold positions on behalf of its clients in any or all of the aforementioned securities.

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