The evolution of Advanced Driver Assistance Systems (ADAS) continues to accelerate, with self-driving cars making more headlines than ever. Though tremendous gains in technology and public opinion have been made, there remain both barriers to adoption and opportunities for interested investors.

Technology in the Driver’s Seat

This time last year, we explored the expected trajectory of self-driving cars anticipated to develop over the next decade. Recent research from Mizuho, however, hints that the paradigm shift might be closer than it initially appeared, with impending benchmarks expediting the realization of ADAS technologies.

As a quick refresher, below is the framework from the National Highway Traffic Safety Administration (NHTSA) for the five stages of vehicular automation, with Level 5 connoting fully autonomous vehicles.

“Currently, most manufacturers are either in Level 1 or Level 2, but all have plans to move to Level 3 or 4 in the next four to five years,” writes Mizuho semiconductor analyst Vijay Rakesh, who has been closely following the ADAS evolution for the past few years.

Despite the low levels of automation currently available, manufacturers have set the bar quite high for a ramp-up over the coming years. “70% of Global OEMs are expecting to launch Level-3/4 vehicles in 2019-20,” including “leaders such as Volvo, BMW, GM, Ford, Nissan and Honda.”

Furthermore, Rakesh sees 2018-2020 as the “golden age” for the automotive component suppliers as the race to master ADAS heats up.

LiDAR: A Visionary Technology

As you might imagine, a central component of creating cars able to drive themselves is a vision system – and one that will be more precise than the human eye. In fact, there is consensus among experts that Light Detection and Ranging (LiDAR) is the technology primed to catapult ADAS into the next stage of realization.

LiDAR is a remote sensing method that uses light waves as radar instead of radio waves. In other words, a LiDAR-based sensor will use light movement to detect distance from an object with a high degree of accuracy. It is already used in a variety of functions, from ocean mapping to architecture to oil and gas exploration.

“The next leg will be driven by vision ADAS and solid state LiDAR achieving manufacturability milestones to accelerate the move to fusion ADAS systems with multiple domain systems driving safety and redundancy,” Rakesh writes, with ramp-ups in the U.S. and Europe expected to grow to 20-30% by 2020/2025. 

LiDAR leaders include Ford and Uber, according to Rakesh, with Ford testing 5,000-8,000 cars in the U.S. and Uber testing cars with LiDAR across multiple states.

A Winding Roadmap for Investors

When it comes to the read-throughs for investors, a few key companies come to mind. As Rakesh also noted here, certain players are well-positioned to gain from the large – and growing – ADAS market opportunity. 

For example, ADAS presents an alternative source of revenue for semiconductor companies whose previous sources of innovation and market expansion have been contracting. 

“Given the challenges and cyclicality in PCs and handsets, we believe the automotive market could start to provide the point of convergence of mobility, connectivity, processing and speed for semiconductor suppliers,” said Rakesh. “For NXP (NXPI), Cypress (CY) and ON (ON), automotive is now 35-45% of revenue, improving stability and better visibility long term.”

As Level 3 ramps up and LiDAR adoption accelerates into 2018, Mizuho expects benefits for Autoliv (ALV), CY, NXPI, Mobileye (MBLY), Nvidia (NVDA) and ON.

Consumers Waffle, Regulators Delay

Contrasting the advancement of ADAS technologies are public perception and regulatory challenges that remain barriers.

Evidence of consumer enthusiasm for autonomous automobiles appears contradictory. Cornell researchers, for example, concluded that Americans would pay an additional $5,000 for a fully autonomous automobile while also demonstrating that “demand distribution for self-driving technology was evenly spread between high, modest and low interest”.  And as Fortune concludes, auto dealers are best advised to offer flexible sales options as more robust automation features come to market.

Perhaps a more significant obstacle is present at the regulatory level, as officials have less incentive than the auto and technology industries to expedite solutions that will ensure safety and standardization while advancing ADAS accessibility. 

To put it succinctly, as Recode writes, many state “…officials are not even sure that federal rules and regulations can be in place by 2020 to meet the aggressive schedule of some automakers who want to have fleets of self-driving cars in major cities by then.”

With a futuristic vision for the roadway, ADAS presents opportunities for investors and drivers alike as technology, regulation and demand coalesce to create a fast-paced, competitive landscape that continues to rev headlines and bottom lines. 

Simon Hylson-Smith
CEO, Paragon
Simon Hylson-Smith is a former financial industry editor and currently CEO of Paragon.