One of the themes in the latest raft of corporate earnings is that the automotive sector’s engine is starting to rev again.
The driver of the recovery is China, with the horrors of lockdown seemingly long forgotten.
Western nations are dealing with renewed pandemic issues, as countries like the UK get locked down again. The purchase of a new car is one of the easiest decisions to simply delay (drive your existing car for longer) or amend (buy a cheaper 2nd hand car instead).
This makes the automotive giants of the world vulnerable when things go badly wrong in the economy.
Of course, lower interest rates help by making car finance packages more affordable. That’s only applicable in structurally higher interest rate markets though, like South Africa. Remember that in many important markets, interest rates are structurally low or even zero.
Let’s take a look at some of the biggest players in the market and how they performed in the most recent quarter.
BMW posted a Q3 profit increase of 10%. The real winners were the top-end models, like the 8 series and X7 in China.
However, BMW made it clear to shareholders that the resurgence of the pandemic poses a considerable risk to BMW’s business.
Sales in China were up 31% while sales in the US fell 15.7%, averaging out to an 8.6% increase in volumes for BMW and Mini vehicles worldwide. China now accounts for a third of BMW’s sales, followed by Germany (13%) and the US (12%).
BMW is preparing for the future, aiming to introduce a new vehicle architecture in 2025 that will be focused on vehicles that probably behave more like smartphones than like the cars we know today.
Volkswagen bounced back from a Q2 loss to report a profit in Q3, aided by…wait for it…China.
Volkswagen is further down the electric road than many other established manufacturers, with the ID.3 already doing well and the pending electric SUV (the ID.4) critical to success.
Interestingly, the VW brand itself has been loss-making for the first nine months of this year, hurt by lower sales volumes and high costs related to the diesel-emissions scandal that has plagued the brand. Things are better at Porsche, Skoda, Seat and Audi, although sales were under pressure in several of these units.
The niche brands in the portfolio may get the chop, potentially sold off to other niche players or investment groups. Bugatti, Bentley and Ducati may all have new owners in the near future, but nothing is confirmed yet.
Mercedes-Benz’s holding company beat estimates for the third quarter, marking a strong turnaround from the losses incurred between April and June.
In a strategic move that echoes the current sales experience of BMW, Daimler will concentrate on its luxury branding, including the AMG, Maybach and G marques. The company also aims to cut costs by 20% by 2025 as it prepares for an electric future.
This cost cutting will mean significant job cuts, hopefully achieved mainly through natural attrition (not replacing people who leave) and early retirements. Before the pandemic, Daimler already planned to reduce the workforce by 10,000 heads by 2022.
In contrast to Volkswagen that may exit some of its niche brands, Formula 1 World Champions Mercedes-Benz will lift its stake in Aston Martin to 20% by 2023, cementing a tie-up between the luxury brands. Aston Martin is struggling financially at the moment, but a motorsport-led recovery could be on the cards for the British marque.
The new CEO Jim Farley is an unashamed petrolhead who has taken some criticism from shareholders for his dangerous hobby of racing his classic GT40 in historic racing events. Sounds like my kind of CEO!
Ford is struggling. Ironically, it’s the best performing share in my US portfolio, because I bought it right at the worst of the pandemic. The company will make an annual loss this year for the first time in a decade, so Farley has a lot to do.
There’s a new CFO too, so the company has a fresh team in the driving seat.
The strategy is to focus on the strongest businesses and most popular models, while gearing up to compete in an electric world. Purists feel nauseous at the thought of an electric SUV with the Mustang badge, but the company has to do what is necessary to survive.
Tesla posted a record Q3 result, delivering 139,300 cars and beating analyst estimates for deliveries. Tesla still hopes to sell 500,000 units by the end of this year but it’s a tall order.
China was a strong source of growth for Tesla alongside the established manufacturers. Certain European markets also showed interest in the electric movement, which is great news for Tesla as the leading electric vehicle manufacturer in the world.
The Model 3 does particularly well although competition is heating up. I wrote a detailed piece on Tesla when the Q3 results were released, which you can find here.
The industry finds itself in a difficult period where top executives will need to make strategically astute decisions to protect market share in internal combustion cars (petrol and diesel), while achieving meaningful participation and technological progress in the electric vehicle market.
This will require great skill in allocation of capital. If I was investing in this space, I would look for the companies that demonstrate the most effective use of cash flow. There’s no margin for error over the next 5 years.