Summary: The world’s largest economies are engaged in a trade war, and auto makers are getting caught in the crossfire. The industry also faces a slew of other problems which will be hard to overcome.
The auto industry’s headwinds are getting stiffer by the day, reinforcing MRP’s Short Autos theme. A confluence of factors including shifts in consumer preferences, rising interest rates, the proliferation of mobility services, and an escalating global trade war that could push car prices higher. Consequently, we expect vehicle sales to slow this year and over the next several years.
The sedan segment appears to be the weakest within the broader industry. This year, car sales are on pace to be the slowest since 1958 as more Americans flock to light-trucks, a category that includes SUVs, pickups and minivans. Just five years ago, U.S. vehicle sales were evenly split between cars and light trucks. Now, the sales ratio is more than 2:1 in favor of light trucks.
That shift puts manufacturers with car-heavy sales mixes at a big disadvantage. Light trucks will account for 75-80% of U.S. vehicle sales by 2025, as even upscale auto buyers are feeling the lure. Indeed, at least half of all full-size pickups are now being sold as luxury-oriented models.
The resulting rapid growth of the luxury truck and SUV segment has substantially increased U.S. carmakers’ share of domestic sales of models with an average price of $60,000 or more, at the expense of companies like Mercedes-Benz, BMW, Lexus, and Porsche.
Still, although total vehicle sales in the U.S. were up 1.8% during the first half of 2018, compared to the same period last year, the increase was due to low-profit sales supported by rebates and subsidized leases. In fact, retail sales would be down if it weren’t for these rising incentives.
Meanwhile, rising U.S. interest rates means the monthly payments on car loans will also go up, which could disincentive some buyers and contribute to slower sales.
Mobility services create another drag. More consumers are embracing ride-hailing and ride-sharing services around the world to the extent that traditional automakers anticipate a major erosion of their core business in the years to come. Per KPMG, 59% of auto executives agree that half of today’s car owners will no longer want to own a vehicle by 2025.
In response to this new threat, the largest manufacturers are creating mobility units within their organizations and launching their own car-sharing services. These include Volvo’s M, Daimler’s Car2Go, BMW’s Drive Now, GM’s Maven and VW’s all-electric car-sharing platform WE, which will launch next year. The rise of mobility services not only threatens the classic business model of Big Auto, it is also especially bad for traditional car rental companies such as Avis, Hertz, Enterprise, and Alamo.
Then there is the big X factor of China/US and EU/US tariffs to consider. The EU currently imposes a 10% tariff on all car imports, while the U.S. imposes a 2.5% duty. Unless the EU is able to strike a deal that reduces or removes its tariff on imported U.S. vehicles, President Trump may increase America’s border tax on European cars from 2.5% to 20-25% as he has been threatening to do.
But, securing a European deal on U.S. autos is complicated because WTO rules forbid countries from signing bilateral deals covering only specific sectors. If the EU circumvents this rule by removing its tariffs on all car and component imports, regardless of the country of origin, the region risks getting flooded with cheap Chinese car parts.
Hiking U.S. tariffs tenfold would hurt German car brands like BMW, Mercedes-Benz, Audi and Porsche which have enjoyed great popularity among Americans and helped Germany run a large trade surplus with the U.S. Germany’s automakers have long wanted to eliminate EU/US car tariffs.
Smaller European manufacturers are particularly exposed to higher U.S. tariffs because they typically don’t have factories in America, a huge market for luxury cars. Larger European luxury manufacturers such as BMW and Daimler have U.S. factories, but still rely on open borders. Typically, they make SUVs in the U.S. and sedans in Europe, and ship them back and forth as demand requires. Although BMW makes more cars than it sells in the U.S., it will still suffer in a trade war because they are largely not the same cars.
Further East, China announced in May that it would reduce tariffs on imported cars from 25% to 15%. But cars originating from the U.S. won’t be among the beneficiaries because Beijing just imposed an additional 25% tariff on U.S. auto imports this Friday in retaliation to U.S tariffs on billions worth of multi-sector Chinese goods. So while car companies that import vehicles from Europe or Japan will have to pay a 15% tax, those that import from the U.S. now face a stiff 40% tariff if they want to sell in China, the world’s largest car market. Ford Motor (F), Tesla (TSLA), BMW (BMW) and Mercedes-Benz maker Daimler (DMLRY)—which build premium sport-utility vehicles in the U.S. and ship them to China—stand to suffer the most. They will be forced to charge consumers more, or absorb the added costs, as their rivals take advantage of the reduced tariffs to lower prices. One beneficiary of the lower tariff rate for example would Audi (NSU), which only exports cars built in Europe.
Tariffs aren’t the only problem for U.S. car makers in China.They could soon find their new product models at the bottom of China’s regulatory pile for things like safety approvals, or their state-owned Chinese partners might shift resources toward European joint ventures instead.There’s a precedent for this sort of maneuver by China. During a dispute with Japan over contested islands in 2012, Japanese car makers experienced a 10% drop in their Chinese market share within a few months. A similar shadow strategy this time around could be a big problem for companies like General Motors, which now sells more vehicles through its China joint ventures than in the U.S.
All the factors above point to a tough environment for the auto industry going forward. MRP is therefore reaffirming its Short Autos theme. Investors can gain exposure to the theme via the First Trust NASDAQ Global Auto ETF (CARZ). In the nine months since we launched the theme on October 12, 2017, CARZ has dropped 10.5% while the S&P 500 (SPY) has risen 8%.
Here are links to reports MRP has previously published on the industry:
- 3D PRINTING Strikes Another Blow to Traditional Auto Suppliers (June 12, 2018)
- Slumping Sales and Growing Delinquencies Spell More Trouble for Autos (May 3, 2018)
- These Disruptive Business Models Are Changing the Auto Industry as We Know It (Mar 14, 2018)
- Auto Suppliers Must go Beyond the Battery in EVs (Feb 27, 2018)
- MRP Adds Short Autos as a New Investment Theme (Oct 12, 2017)
We’ve also summarized the following articles related to this topic…
Autos: Car sales set to plummet to 60-year low
Car sales are on pace to hit a 60-year low, Automotive News reports, thanks to the huge growth coming from the light-truck sector, which includes both pickups and SUVs. 5.3 million cars might sound like a lot, but it would actually be the slowest year for car sales since 1958.
AN points out that the split was pretty much 50/50 five years ago, showing just how hard and fast this trend hit the market. But through May in 2018, light trucks outsold cars by more than double. And it’s not just long-time buyers holding strong — AN pointed out Edmunds data that shows only 52 percent of car buyers in 2018 bought another car. Everyone else went to light trucks.
It’s unlikely that a big shift in gas prices will change this trend, either. As more automakers embrace electrification, especially on thirstier models, buyers can still enjoy more space and a bigger physical footprint without having to worry as much about gas prices. CNET
Autos: Auto Sales Rise in 1st Half, but Analysts Warn of Turbulence
U.S. auto sales during the first half of the year rose 1.8 percent during the first half of the year, while June sales were up about 5 percent compared with a year ago.
But analysts at Cox Automotive, which includes Kelley Blue Book, issued a cautionary note on the numbers, saying that much of the increase was due to low-profit sales to fleet buyers such as rental car companies, and retail sales to individual buyers were propped up by rising incentives such as rebates and subsidized leases. Sales are “defying gravity” said Jonathan Smoke, chief economist for Cox. “Retail sales have been flat, and even those sales have been supported by incentives being up 6 percent.”
Cox analysts also said rising interest rates and a possible trade war due to tariff threats from President Donald Trump could raise new-vehicle prices and payments and cut into auto sales in the second half. Gas prices rose 63 cents per gallon over a year ago to an average price for regular of $2.86, according to AAA, taking a bigger bite out of household budgets. MNet
Autos: Natural gas engines could have a very big role to play in the future of transport
Reliable, quick transport is crucial to the smooth running of the global economy, but its significance is not without cost. In 2016, for example, the transportation sector was responsible for 28 percent of greenhouse gas emissions in the U.S.
According to the International Energy Agency natural gas is a “versatile fuel” that supplies 22 percent of the energy used globally.
Natural gas-powered commercial transportation engines developed by Cummins Westport range from 5.9 to 11.9 liters and 195 to 400 horsepower. The engines have also been designed to produce something called stoichiometric-cooled exhaust recirculation.
“That is actually where we have the right amount of oxygen to have complete combustion, which means we don’t have any excess oxygen or excess methane,” Yemane Gessesse, Cummins Westport’s director of engineering, said. “The advantage of that is you’re running your cylinders relatively cool, so the likelihood of forming oxides of nitrogen is reduced significantly,” he added. Engines also have an electric control module (ECM). The ECM controls the combustion process and other factors that help to reduce emissions. CNBC
Autos: The EU Has No Easy Answers to Trump’s Car Tariff Threats
The EU currently imposes a 10% tariff on car imports, while the U.S. imposes a 2.5% one. President Donald Trump has repeatedly threatened to increase the U.S. tax to 20% or 25%, sending automotive stocks tumbling in recent weeks. The latest reports suggest there could be a way out of the angst. The problem is that any deal would need to be agreed at the European level—a challenge when it would mainly benefit Germany.
Among European nations, Germany runs the largest trade surplus with the U.S., thanks to the popularity among Americans for car brands like BMW, Mercedes, Audi and Porsche. France runs a surplus, too, but cars are one product it doesn’t ship across the Atlantic. This will make a trade deal specifically focused on cars hard to sell in Paris—and, by extension, in Brussels. Another problem: The EU is unlikely to deviate from World Trade Organization rules. These explicitly bar countries from signing bilateral deals covering only specific sectors.
It is hard to imagine a swift outcome. The EU started negotiating its “cars-for-cheese” trade deal with Japan—likely to come into effect next year—as far back as 2013. It will remove tariffs on Japanese car imports to Europe over a period of seven years.
Alternatively, the European Union could cut its tariff on car and component imports—but not for the U.S. alone. Under the WTO’s “most-favored nation” principle, every country would normally gain the same right to tariff-free access to the huge European market. Not only could this open Europe up to cheap Chinese car parts; it also would involve giving up a key bargaining chip in other trade talks. WSJ
Autos: Volvo has launched a mobility company for on-demand car access
Volvo is launching a stand-alone mobility company, dubbed M, that will provide on-demand access to cars and services through an app. M will use Stockholm, Sweden, where the company is already conducting extensive testing, as its base of development. M is expected to launch a broader beta test this fall, before debuting in Sweden and the US in the spring of 2019.
The rise of ride-hailing and ride-sharing companies is putting pressure on traditional automakers. Consumers continue to embrace ride-hailing and ride-sharing services. As a result, traditional automakers expect to experience major losses to their core business in the years to come — 59% of auto executives agree that, by 2025, half of today’s car owners will no longer want to own a vehicle.
In March, it was announced that BMW and Daimler were forming a joint venture company to merge their respective mobility services. As part of the deal, Daimler’s Car2Go car-sharing service, which has a fleet of 14,000 vehicles, and BMW’s DriveNow combined to reach 4 million users. The venture also incorporated MyTaxi, Daimler’s on-demand taxi app, which boasted 11.1 million users at the end of 2017.
GM launched its Maven car-sharing service in 2016 and has continued to add to the service’s capabilities. GM announced it would start to pilot a new peer-to-peer (P2P) car-sharing service this summer that would enable GM car owners to rent out their vehicles on the Maven platform when they’re not using them. BI
Autos: Jaguar Land Rover says hard Brexit will cost it £1.2bn a year
Britain’s biggest carmaker, Jaguar Land Rover, has warned that a hard Brexit will cost £1.2bn a year in trade tariffs and make it unprofitable to remain in the UK.
JLR says it needs certainty before investing £80bn over five years, including into new and electric cars. The company has already spent £10m on Brexit contingency plans, and is struggling to attract international talent to UK.
Ralf Speth, JLR chief executive, said “We have to decide whether we bring additional vehicles, and electric vehicles with new technology with batteries and motors into the UK… We have other options. If I do it here and Brexit goes in the wrong direction, then what is going to happen to the company?”
JLR employs 40,000 people in the UK and exports £18bn of goods a year. The company has recently moved the entire production of its Discovery sport utility vehicle to Slovakia, a new plant that has the capacity to build several hundred thousand vehicles a year.
He estimates that JLR also supports more than 300,000 UK jobs through a network of British suppliers that are dependent on the carmaker. FT