I can remember holding shares of Porsche for a short while 15 years or so ago and Peugeot and Toyota (the latter a mistake), again for a short time, in the mid-1980s. I mention this to communicate two things–I’m not an expert on the auto industry and avoiding autos has never put a noticeable dent in my investment performance.
But, as it turns out, the other day I misread a headline on Yahoo Finance. It was something like “used cars are losing their value fast” and turned out to be list of famous clunker cars, like the Yugo. I had taken it to be a more general assertion that because electric cars are becoming better and cheaper, the value of used cars (including, of course, the two in my driveway) are beginning to sag. That plus AAPL’s announcement that it will sponsor an electric car in 2024 collected up the scattered fragments of car info swimming around in my head and into popped the whole car issue into the front of my brain.
The issues, as I see them:
–the auto manufacturing industry is mature in most of the world and has been plagued by chronic overcapacity for as long as I’ve been aware of it. This is why, except for the beginning of reemergence from a deep recession, which causes sales of new cars to plummet, they’ve generally been poor performers. Overall weak management hasn’t helped
–the key proprietary skill for traditional carmakers is designing and building internal combustion engines. Other components, from brakes to lights to windshield wipers, have been farmed out over the years to specialist parts suppliers. This is why, I think, controls look pretty much the same in different brands’ offerings. More important, these component suppliers own much of the auto industry non-engine intellectual property. For my money, ex engines, traditional car companies are all about brand management/product design plus what in the electronics industry would be called contract assembly
–strong consumer backlash after the recent diesel fuel economy scandal in the EU (carmakers there gave out false fuel economy data “supported” by faked test results to show they met state-mandated mileage requirements) has accelerated Europe’s move to electric cars. No one wants to be tricked a second time into buying a diesel engine. China has backed electric strongly, too, as a partial solution to its severe air pollution problem
–in the electric car age, the craft skill accumulated, and machinery used, to build IC engines for cars and most trucks will have no economic value. Not a good thing for an industry whose boosters look at book value. A side note: is AAPL planning to use otherwise idle capacity at, say, BMW to manufacture its Apple electric car?
–what happens to the vast array of aftermarket businesses aimed at servicing and repairing IC engines? …to gasoline stations? …to Jiffy Lube? …auto parts stores? Again, nothing good, although some gas stations may be able to repurpose themselves to become charging stations
–although the US is home to about 4% of the world population, it produces about 20 million barrels of oil daily, 20% of the world’s total. It consumes basically that entire amount, half in the form of motor fuel. (If I read the data correctly, the US consumes 40% of the world’s gasoline, something I hadn’t thought about before). Petroleum industry think tanks argue that the switch from oil to electricity will proceed slowly and take about two decades, so this nascent trend will not be a supply/demand issue for a couple of decades.
I suspect this is more a hope than an actual forecast. If the US gasoline market disappeared tomorrow, world petroleum demand would fall by about 10% and half of US oil production would need to be sold in foreign markets. This would mean a sharp decline in oil prices that would likely shut down drilling in all but the lowest-cost areas, like the Middle East.
my bottom line
I don’t think the switch to electric is imminent, but I think the little-by-little change over twenty+ years that the petroleum industry is projecting is equally unlikely. In addition, I think the stock market will, as usual, begin to aggressively discount future prospects well in advance of actual events. I don’t think this has really started yet.
Some signs of worry in the politically powerful auto and oil industries are already evident, though, in the administration attempt to roll back fuel efficiency guidelines and remove conservationist barriers to more widespread oil drilling. Why else the proposed rush marriage between GM and an apparently iffy startup Nicola? Why else the nosebleed valuation for Tesla?
There are about 275 million hydrocarbon-driven autos operating in the US, according to Google. If their average value is $10,000 today (I have no idea what the actual number might be), that’s close to $3 trillion in future lawn sculpture.
I don’t think worries about climate change play much of a role in the current automobile dynamic. This is something else I don’t understand–but will write about tomorrow anyway.