Learning to drive isn’t easy – and learning to invest in the automobile industry isn’t much simpler. Intricate business relationships, complicated geographical dynamics, and technological change all make for a market more confusing than an eight-way junction. Fortunately, you’ve got Finimize to steer you through; you’ll get your license in no time.
Why should I care about the autos industry? Cars, trucks, tractors: the automobile industry is too big to ignore. Almost 100 million vehicles are produced each year – and in Europe alone, around 12 million people rely on the industry for their livelihood.
All those vehicles mean a lot of money – and if you know how to invest in the industry, that could translate into returns for you. As more people in emerging markets get behind the wheel, car sales are forecast to grow over the coming years. And with new products like electric and autonomous vehicles revving up to hit the road, the autos industry ten years from now could be pretty unrecognizable. All this disruption creates opportunities for some companies to profit – but will probably bring others screeching to a halt.
To make sure you’re on the right side of the road, this Pack will give you a whistle-stop tour of the industry: the big players, the opportunities and challenges, and how to get invested in this twisting and turning market. Jump in – let’s accelerate your finances.
Which countries dominate the autos industry? The world’s top vehicle producer is China, churning out a whopping 27 million cars in 2018. That’s over twice as many as America – the second-biggest producer, closely followed by Japan. Germany and India bring up the top five’s rear. But it wasn’t always that way: China’s acceleration started in the mid-2000s at the expense of America, Japan, and Germany...
Cheap labor and excellent manufacturing capabilities allowed Chinese carmakers to capture the bulk of automobile growth in the past decade – growth that Chinese consumers contributed to as they hit the roads. Since 2000, the number of cars produced globally has skyrocketed from 58 million a year to almost 100 million 📈
But the market might have just hit a pothole. In 2018, production declined for the first time in decades – a drop of two million cars compared to the year before. And April 2019 saw sales declines in both China and India, which doesn’t bode well for manufacturers.
Who are the manufacturers? The biggest car company in the world is Japanese giant Toyota – though it’s about neck-and-neck with German firm Volkswagen (owner of brands ranging from Audi to Bentley). The other big players are South Korea’s Hyundai, all-American General Motors and Ford, and Toyota’s countrymen Nissan and Honda. Hot new kid on the block Tesla might seem to be an autos giant when measured by the value of its shares – but in terms of production, it doesn’t even crack the top 20.
The relationships between these companies are complicated; it’s fairly common for auto companies to own stakes in the competition. Nissan and French firm Renault own parts of each other, and Toyota owns a chunk of Subaru. And consolidation in the sector has been increasing: Volkswagen and Ford announced a global partnership in early 2019, Daimler and Chinese firm Geely have established a joint venture, and Fiat-Chrysler recently tried to merge with Renault – though that deal fell apart.
All these firms are racing on an ever-changing track: the autos market is rapidly evolving. Next, we’ll look at how the gears are shifting.
What’s changing in the autos industry? For one thing, the geography of car sales is shifting. As people in emerging markets – particularly in China – get richer, they’ll probably want cars. According to consultancy firm McKinsey, emerging markets will make up two-thirds of auto firms’ profit by 2020. And as the Chinese car market expands, “aftersales” are forecast to grow too: cars already on the road will need spare parts and servicing.
But eventually today’s cars will break down – and they won’t be replaced by the same gas-guzzlers. Fossil fuel scarcity and climate change is moving the world towards electric cars: researchers at PwC think that over 95% of new car sales in 2030 will be partially electric, with over half fully electric. As consumers feel pressured to swap out their current models, that could be a boon for car manufacturers.
Are there any other technological changes on the horizon? Companies like Tesla talk a big game about autonomous vehicles. While the technology isn’t quite there yet, it is rapidly improving. PwC thinks 40% of European personal mileage could be autonomous by 2030. In China, where the public is more comfortable with the technology, almost half of all miles traveled could be autonomous by then.
That could have a seismic impact on the way we get around. Some analysts think the future of mobility is “shared autonomous driving”: instead of owning cars, people will hail self-driving taxis. And even people that do own cars will likely rent them out, Airbnb-style – why have an empty car sitting in the garage all day when it could be put to use?
What does that mean for the industry? As people replace their cars with taxi trips, the total number of cars in circulation might decrease: in Europe, there could be a 25% drop in cars on the road by 2030, with a similar decline expected in the US. Though that might sound bad for the autos industry, it need not be. Car sharing massively increases the utilization of vehicles – people will still need to travel, they’ll just be traversing the same number of miles in a different way – and more mileage may mean cars will have to be replaced more often. That should keep overall sales ticking upwards: the 25% drop in the number of European cars could come alongside a 34% rise in sales.
But new tech will bring challenges for manufacturers too – on to a peek at the roadblocks ahead.
What challenges are autos firms facing? Advanced technology – like self-driving capabilities and electric cars – doesn’t come cheap. Rather than developing all this tech in house, some autos firms are outsourcing increasingly large chunks of their cars. Though that bodes well for parts manufacturers (more on that in the next session), it means profit margins could decrease for the car companies themselves as there’s somebody else taking a cut along the way.
Government regulation on emissions and efficiency could put those margins under even more pressure. And failure to meet these targets could spell disaster for firms: Volkswagen’s 2015 emission cheating scandal cost the company over $30 billion in fines and payouts.
How about the immediate future? The US-China trade war has been unpleasant for car firms: tariffs on steel and car parts have driven up their costs. Thus far, car companies have chosen to mostly swallow these higher costs rather than pass them onto consumers – but if things worsen, they may be forced to raise prices. That could put drivers off buying and see sales dwindle even more.
The threat of US tariffs on imported cars also has manufacturers worried – as does the prospect of a recession. The autos industry tends to get hit particularly hard during an economic contraction – consumers would rather stick with their existing vehicle than put down thousands on something new (the average US price of a new vehicle is now a record high of $33,319).
Evidence suggests a recession is coming in the next couple of years (check out our Recessions Pack for more on this), and with the autonomous boom still some years away, the immediate road ahead could be bumpy.
All that’s driven credit rating agency Moody’s to issue a warning about the auto industry’s future; it’s forecasting sales growth of just 0.5% in 2019 and 0.8% in 2020. But things could get better over time – and if they do, you could benefit from savvy investing. Last, we’ll look at where you can park your cash.
How can I invest in autos companies? The easiest way to get involved in the autos industry is to invest in a specialized exchange-traded fund (ETF) that owns a collection of automobile stocks. Autos ETFs, like the First Trust NASDAQ Global Autos Index Fund (wordier than a car model, we know), track the value of global autos companies – so if the sector does well overall, you should do too.
Investing in an ETF is a less risky approach than investing in an individual company because you’re not dependent on the fortunes of any one manufacturer. But if you are set on predicting the podium, it’s reasonably easy to buy shares in all the big autos firms (even Japanese ones like Toyota, whose shares you can access on US exchanges).
What else is out there? As we explored earlier, autos companies are increasingly outsourcing big chunks of their manufacturing – mostly to tech suppliers. Investing in these suppliers could be a lucrative strategy, as they’ll hopefully benefit from increased demand across the entire industry.
One such option is Panasonic, which makes batteries for electric cars (it already has partnerships with Tesla and Toyota). Another is Dutch semiconductor firm NXP, which makes the chips that power car computers; about half its revenue comes from autos sales. And German competitor Infineon could also be worth thinking about.
If you’re more interested in autonomous driving tech, Aptiv is a favorite of some investment managers. It makes software and sensors for “driver-assistance systems” and acquired self-driving startup nuTonomy in 2017. And, of course, tech giants like Alphabet and even potentially Apple are getting into the self-driving space.
Whether you choose to invest in it or not, the autos industry is pretty inescapable – and knowing how it works and what’s likely to be around the corner has hopefully given you a better understanding of where the economy’s headed. Who knows, maybe you’ve finally figured out why the chicken crossed the road…
🔹Almost 100 million cars are produced each year, with China in pole position
🔹Emerging markets will drive autos growth in future – and they’ll likely buy electric, autonomous cars
🔹Tariffs and the threat of recession might make the next few years tricky
🔹Autos ETFs are an easy way to invest in the industry – or you could bet on tech suppliers
Now test your knowledge of what you learned in this Pack: take our quiz.
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