Cars are getting smarter—or at least it seems that way. They warn me whenever I drift out of a lane or get too close to another vehicle. A rear-view camera helps me safely pull out of a parking space, and to parallel park.

I no longer need a map when I drive because GPS navigation—complete with verbal admonishment—is built in. Television screens have quieted my backseat drivers. My steering system is more sensitive, my brakes are more responsive and my gas mileage per gallon is better than ever.

Consumer demand and regulatory pressure for greater safety and fuel efficiency have combined to force more, and better, technology into cars. Just look at safety, for example.

Automatic stopping of cars is very attractive to governments and insurance companies. In the United States, nearly 30% of all accidents result from one car failing to stop quickly enough to avoid hitting the one in front of it.1 The cost of accidents is high, often with such results as physical injury and suffering, productivity loss, traffic disruption, vehicle repairs and so forth.

But as automatic stopping systems are developed, their inclusion in cars – in our opinion – will be government-mandated, just as seatbelts and airbags have been.

As growth investors, we take interest in this long-term trend, which gets us asking critical questions. Who will benefit from this trend? Will it be the car companies, or the companies that produce car components?

The former own the brands; control the manufacturing (i.e., assembly), design, marketing and distribution of their vehicles; and provide financing for consumers as well. But it’s the latter—the suppliers of increasingly sophisticated components—who own the ever greater share of intellectual property embodied in vehicular technology. The value balance is thus shifting away from car manufacturers to component suppliers, as a growing share of every dollar spent purchasing a car accrues to the makers of the components within it.

But who are the component makers? Who, for instance, is the leader in automatic-stopping technology? That would be the German company Continental AG. Although Continental is a well-known tire manufacturer, tires account for only 30% of its sales.2 Continental is actually a high-tech company that employs 12,000 software engineers. This may seem surprising until you learn that the average high-end car contains about 100 million lines of software code, compared with a mere 5.5 million lines for a Boeing 787 aircraft.3

We believe, this firepower of intellectual property provides Continental with strong pricing power, as reflected in their rising revenues, margins, cash flow and excess returns on capital.4 These are the attributes we look for in the companies in which we invest.

In our view, Continental can continue to ride the forces that are driving its market—pun intended—for quite some time.

Follow @OppFunds for more news and commentary.

1 Source: The National Highway Traffic Safety Administration.

2 Source: Bloomberg

3 Source: informationisbeautiful.net

4 Source: Bloomberg