Fork in the road ahead for the global automotive industry

14 mins. to read
Fork in the road ahead for the global automotive industry

The automotive industry globally is entering a phase of radical disruption driven by a number of coinciding trends. Some volume car producers will survive the upheaval. Others will fail, writes Victor Hill.

Nissan’s travails

On Monday (04 February) Nissan (TYO:7201) announced that it will not build its new model, the X-Trail – a diesel-powered SUV – at its Sunderland plant as planned. Instead it will be manufactured in Japan. Remainer-inclined media blamed Brexit for Nissan’s decision. But given that Japan and the EU have just concluded a trade deal, Nissan does not need to produce its vehicles within the EU to avoid the EU’s external tariffs any more. There is now no benefit for Nissan to manufacture the same vehicle (which is already in production in Japan) at two different sites, entailing duplication of machinery and personnel.

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A cheaper yen is also making Japan more competitive as a manufacturing hub. Moreover, the X-Trail will be largely pitched at the US and Chinese markets. Geographically, Japan is better situated to reach the world’s two largest economies – the USA and China. The company stated that “Brexit does not help” – a regurgitation of the blindingly obvious. But even if the UK were to remain a member of the EU, the decision would have been the same.

As Carlos Ghosn, CEO of both Renault (EPA:RNO) and Nissan, continues to recline in a Tokyo prison cell (apparently abandoned by Macron & Co.), where he has been since 19 November last year, the vexed questions surrounding the reported £61 million sweetener promised by HMG to Nissan in 2016 remains unanswered. Supposedly, that was contingent on Nissan continuing production of the Qashqai in Sunderland – and on manufacturing the X-Trail there[i].

When Emmanuel Macron was French Economy Minister in December 2015, the French government increased its stake in Renault to 19.7 percent and introduced laws that strengthened the voting rights of long-term investors in the company. Since April 2016 the French government has controlled more than 30 percent of the voting rights in Renault, making it the largest shareholder. Renault has owned 43.4 percent of Nissan since the carmakers formed an alliance in 1999. But Nissan’s stake in the French carmaker currently carries no voting rights on strategic decisions. That is why the Japanese are now cutting up rough against their French partners.

On the plus side, the electric roadster the Nissan Leaf, manufactured in Sunderland, is doing well. The outlook for this model looks excellent, so Nissan is likely to remain in Tyne and Weir for quite some time to come. The problem is not Sunderland – it is the entire global automotive industry…

European automotive: a slow-motion car crash

Demand for new cars grew in Europe by just 0.5 percent last year despite benign economic conditions. The recent downturn in manufacturing output in Europe has been largely driven by a dramatic slowdown in car production, which is only partially caused by the fall in demand from China. Chinese car sales fell by about 6 percent in 2018 and Goldman Sachs is predicting a bigger decline in 2019.

The Chinese car market is critical for all of Europe’s volume automotive manufacturers which have ruled the roost for so long, complacent behind huge barriers to entry to new players. These include Volkswagen (ETR:VOW), Daimler AG (ETR:DAI), BMW (ETR:BMW), Nissan (TYO:7251), General Motors (NYSE:GM), Ford (NYSE:F), Peugeot SA (EPA:UG) and Jaguar Land Rover (JLR, owned by Tata Motors (NYSE:TTM)).

JLR announced 4,800 job losses in early January, mostly in the UK where it employs about 40,000 people. This followed the announcement of a £354 million half-year loss. Some of its production is relocating to Slovakia with the help of a €130 million subsidy from Brussels. Ford, which employs 13,000 at its Bridgend and Dagenham engine plants in the UK, also announced a shakeup of its European business. Ford reported a $1 billion loss in Europe last year. Sales at Nissan’s UK business fell by £93 million last year to £6.3 billion and Nissan’s car production fell by 6.2 percent to 487,000 units.

European car makers are facing the challenge of tighter regulations limiting the use of diesel engines and the move away from the internal combustion engine towards electric-powered vehicles. The shadow over the future of diesel was lengthened by the emissions scandals afflicting both VW and Mercedes. While they are investing heavily in electrification, it is taking longer than expected for them to roll-out a full range of electric vehicles. In the meantime, Tesla (NASDAQ:TSLA) turned in excellent numbers for Q4 2018 thanks to strong sales of its Model 3. (The Model 3 does seem to have some reliability issues, however.)

Few doubt that electric vehicles are the industry’s future though it is still unclear whether lithium battery or hydrogen fuel cell technology will finally win out. According to the BNEF the number of electric vehicle models on the market will rise from 155 in 2017 to an estimated 289 in 2022, after which date it predicts that sales of internal combustion engine-powered vehicles will go into terminal decline ahead of being outlawed (in the UK and France) by 2040. (2030 in India.) Yet most established automotive leaders are still some way from offering a full range of electric-powered vehicles.

Production of cars in the UK was 129,030 in November last year – down by one fifth on November 2017. More than 80 percent of British cars are exported. About 1.7 million cars were manufactured in the UK with an estimated 60 percent of their components coming from abroad, making the industry uniquely sensitive to the outcome of the Brexit negotiations.

VW reported record sales in January, though some analysts fear that this may have come at the expense of profits as the company is thought to have discounted heavily. The company’s over-dependence on diesel has prompted a massive investment programme in electric and self-driving technology which is yet to bear fruit.

European automotive stocks slumped in December. The markets have assigned poor valuations to Germany’s three major car manufacturers while assigning optimistic valuations on more speculative stocks such as Tesla (despite the efforts of the short-sellers). All of the European volume manufacturers have huge fixed costs and enormous pension fund deficits. That is not likely to change.

US automotive: breaking hard

US sales of cars and trucks are projected to fall from 17.2 million units in 2018 to 16.8 million units in 2019[ii]. Cox Automotive thinks that that will slip further to 16.5 million units in 2020. President Trump has threatened to put a 25 percent tariff on imported cars and auto parts during 2019 which could further discourage car sales.

GM announced 14,000 redundancies in November and the closure of four plants, prompting President Trump to threaten to withdraw all subsidies in an angry tweet. The company is on a mission to cut costs by $6 billion.

If uncertainty around Brexit is inhibiting new investment in the automotive sector in the UK, something similar is unfolding in America. The United States-Mexico-Canada (“USMCA”) agreement to update NAFTA was signed off on 30 November but has not yet been ratified. American unions are lukewarm about the deal and the new Democrat-controlled House of Representatives has concerns about the enforcement of workers’ rights in Mexico.

European car producers with production facilities in the US are better placed to ride out President Trump’s threat of higher tariffs on imported cars. Volkswagen is changing up a gear in the USA. At the Detroit auto show last month it announced plans to upgrade its plant in Chattanooga, Tennessee, where it will build its first electric vehicle facility in the USA. The $800 million investment is expected to create another 1,000 jobs. The first electric vehicle is expected to roll off the Chattanooga production line in 2022.

At the same show Volkswagen announced plans to form a global alliance with Ford jointly to build pickups and vans from 2022. Ford will design and build pickups and larger commercial vans, while VW will develop a light “city van”. VW’s Transporter van has lost ground to Ford’s Transit model in recent years. Both are losing out to models offered by PSA and Mercedes.

Home, James – driverless cars accelerate

The other aspect of the automotive revolution – the advent of driverless cars – is also taxing the volume producers. This requires that they invest in a whole range of related technologies, of which artificial intelligence (AI) is just one. European governments cannot afford to subsidise this investment on the scale that the Chinese can.

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“We will have self-driving vehicles on British roads before the end of this year”. So says Dr Daniel Ruiz[iii]. The organisation set up by the UK Department of Transport (DOT) to help develop driverless cars is called Meridian and is run by Dr Ruiz. Addison Lee (a privately owned courier company) and Oxbotica (a privately owned software company) will be trialling self-driving vehicles on British roads very soon under licence from the DOT in the London Borough of Greenwich. (There will be human beings in the vehicles ready to take over if need be.)

In the US Waymo, a Google subsidiary, is also doing great things in this domain. That all sounds very exciting but no one seems to know when we shall be able to purchase a self-driving vehicle and command it to take us home. Players like Oxbotica and Waymo are software companies and will never manufacture cars. The major automotive players just don’t seem to have worked out where this technology will take them. Are they going to mass produce self-driving cars or not? If so: when?

Consumer behaviour

I have consistently urged investors to observe their own spending behaviour and those of their friends and to infer the investment implications of this. Last year I determined that I was never going to buy a diesel car – partly because I am concerned about particulate emissions and partly because I fear that diesel cars will be increasingly punished by governments.

From April this year the latest diesel cars in London’s Ultra Low Emissions Zone (ULEZ – covering central London) will be subject to a charge of £12.50 per day – and older ones banned altogether. From 25 October 2021, the ULEZ area will be expanded to include the inner London area bounded by the North and South Circular Roads (i.e. most of Greater London).

I also concluded before Christmas that I was not going to replace my petrol-powered gas-guzzler this year because I figured that in 2-3 years the price of electric cars will have come down. This is a classic example of deferred purchase – which implies falling demand. And people who drive gas-guzzlers will probably be regarded in the same way as people who today wear fur coats by then – so we shall all be under increasing peer pressure to go electric.

Actually, I no longer feel so guilty about driving my gas-guzzler. In How bad are bananas? Mike Berners-Lee explains that most of the carbon emissions arising from cars are embedded in their manufacture. So, if I buy a gas-guzzler and keep it for 10 years that is more or less equivalent in CO2 terms to buying four spanking new economy cars (say, a Citroën C) over the same period. Because cars are generally better engineered these days (thanks to better design and production technology) most decent cars will be perfectly serviceable for ten years. My hunch is that people will tend to change their car less often as time goes by.

What’s more, the rise of the sharing economy means that many people, not least in the USA, are hiring cars as and when they need one rather than buying one outright. Uber and its competitors (e.g. Lyft) are now ubiquitous in the developed world. (Significantly, Toyota recently invested a reported $500 million in Uber.) Car rental companies are also doing well – but even they are under threat from the rise of peer-to-peer car-hire apps such as Turo.

Turo is a San Francisco based unicorn which enables car owners to generate revenues from their cars by renting them out on a daily basis to people in need of transport. In 2017, according to Turo, four million users had registered to use the service and 170,000 privately owned cars were available for rental in 5,500 locations across the USA, Canada, the UK and Germany. The service is especially popular with tourists – it’s big in Hawaii, as I found out recently. But users need to be pre-approved before they can summon a hire car. Check it out.

Millennials seem to be less inclined to buy cars than their parents. Car ownership by under-35s in the USA is plummeting. Fewer British millennials are even bothering to pass their driving test. That may be partly a function of life-style: they tend to live in cities with good public transport and they are also more conscious of the environmental impact of motoring. Cars do not seem to be such a status symbol amongst the young who are supposedly more focussed on experiences than stuff.

What is clear is that car ownership – electric-powered and self-driving, or not – is likely to decline in coming years. That suggests that there is overcapacity in the global automotive industry.

Niche brands

One bright spot might be niche luxury automobile brands. Italy’s Ferrari (BIT:RACE) has an unrivalled brand image and is in the process of increasing production. Currently it produces 8,500 vehicles a year in two classes as compared with Porsche (ETR:PAH) which produces 250,000 units in six classes. Ferrari will never rival Porsche in production but there is huge potential to scale its operation. It was spun off from FIAT (Fiat Chrysler (BIT:FCA)) in January 2016 but has been around since 1940. Ferrari can command high margins and is very profitable. Miton European Opportunities Fund regards it as a long-term holding.

That said, the price point of Ferraris and other luxury brands entails that they will have only a marginal impact on overall car ownership. At the other end of the scale, the disastrous failure of the Tata Nano in India – the cheap car to surpass all cheap cars – shows that consumers, even in developing countries, would rather not have a car at all that drive a motorised egg box. All over the world, these days, bicycles are cool. Crap cars aren’t.

Conclusion and consequences

The global automotive industry faces a systemic threat. Demand for new cars is falling as the economy slows; people are delaying new purchases in anticipation of electrification and driverless technology; and life-style factors cool demand thanks to the sharing economy. The traditional barriers to entry which have protected established volume producers are falling. A successful manufacturer of vacuum cleaners and hand dryers (Dyson – private) is currently building a factory which will produce electric cars in Singapore for the East Asian market.

The disruption of the global automotive market could not have come at a worse time for Germany and France. In both countries, car production accounts for a large proportion of total manufacturing.

And a slump in Germany, in turn, could have dramatic consequences for the future of the single currency. Brexit has restated the fundamental question of what the EU project is about. Is it a Europe of sovereign nation states trading amicably, or a federal European super-state led by Germany? Frau Merkel’s open-door immigration policies have led to the anti-immigrant Alternative für Deutschland (AfD) shooting up from zero votes in 2013 to the country’s third-largest political party in the September 2017 elections. Not to mention the open hostility of the Hungarians, the Poles and now the Italians.

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The French automotive industry is particularly skewed towards diesel since diesel was actually favoured by tax incentives until about a decade ago. (Diesel fuel is still cheaper than petrol in France – the opposite is true in the UK.)

Meanwhile, France is distracted by a slow-burn revolution caused by an elitist globalist president who slashed taxes for billionaires but slammed new carbon taxes on semi-skilled tradespeople. Last Saturday, another 60,000 people rioted in most major French cities, confronted by 80,000 combat-clad policemen. French friends tell me that resentment about police conduct is now reaching boiling point. It is sad to see a country one loves in a state of such distemper.

Thus a protracted downturn in European manufacturing, with fewer cars produced, is likely to come at a moment of extreme economic and political uncertainty. The Chinese – who already buy over one million electric cars each year – will probably ride out the great disruption of the automotive sector with relative equanimity. I doubt if Europe will.

[i]Daily Telegraph, 05 February 2019. The Nissan Deal by Christopher Hope, page 4.

[ii]USA Today, 18 January 2019.

[iii]Speaking on The World at One, BBC R4 on Wednesday, 06 February 2019. Interview available at:

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