For more than 100 years the automotive sector has been one of the most important industries
in the world. For decades it has meant strength, wealth and industrial power.
Companies like General Motors, Volkswagen or Toyota were largely responsible for spreading
the tentacles of the great industrial powers around the world.
Folks, we are talking about amazing numbers:
Every year, nearly 100 million vehicles are sold worldwide;
This industry employs tens of millions of workers.
This is just in the United States and Europe, and to more than 20 million people.
And every year, these companies invest about 100 billion dollars in R&D.
It may be hard to believe, but companies like Volkswagen, Daimler or Toyota invest in Research
and Development almost as much as some of the best-known companies in Silicon Valley.
Check this out.
In fact, with more than 15 billion dollars, the German group Volkswagen is none other
than the third company in the world that allocates the most resources each year to investment
and development. It stands just behind Amazon and Alphabet.
However, folks, just a second, because the automotive industry isn’t going through
its best moments... At least where popularity is concerned.
In the last 2 years many questions have arisen, so many that, recently, it has led to the
main question: Are we seeing the decline of the automobile industry as we know it today?
Could this sector’s good years be over?
But... Now, do you want to know exactly what we’re talking about?
Listen up.
(GIANTS WITH MUD FEET?)
Lately, car manufacturers are criticized constantly.
There’s constant talk of the electric car, the autonomous car, car sharing, trend changes,
changes in habits among the youngest or, simply, a world of megacities where cars would supposedly
become obsolete - At least private cars.
All this is fueling the Peak Car concept, according to which the automotive industry
would be on the verge of reaching its historical sales maximum, if it hasn’t already reached
it.
This means that from now on, or at least shortly, we’d see fewer cars being sold each year.
Not more cars, fewer cars.
“When you put all these trends together, you’re going to see a cap on personal vehicle
ownership start to emerge. “We are near peak car.” Mike Ramsey, an automotive consultant
with researcher Gartner Inc.)
As if this weren’t enough, governments and the growing social conscience are exerting
increasing pressure so that manufacturers produce more environmentally-respectful cars.
And this is all very good, but it presents a slight inconvenience for producers:
Developing an entire technology and adapting all processes to it costs a fortune.
Volkswagen said it will spend 44 billion euros on electric cars, digitalization, autonomous
driving and new mobility services by 2023. REUTERS)
German automakers will spend $45 billion on electric vehicles over the next three years.
Business Insider)
But, we could of course think… Sure, so what? In the end they’ll still be rich from
car sales.
And that’s precisely where the Peak Car concept comes into play.
Allow me to explain: if costs grow as a result of the new technologies that cars have to
incorporate and of all the investments that companies have to make – for example in
R & D or to adapt their production methods – and then, sales drop...
Well... it would soon lead to the collapse of these companies’ margin or profit. Higher
costs and lower income.
Not to mention the risk that some will fail in the transition and get kicked out of the
market.
In other words, we could say, folks, that car manufacturers are facing a kind of perfect
storm.
A reflection of what all these concerns involve can be found in the automobile companies’
stocks; that is, in the price of their shares.
In general, these companies are quoted at a price/earnings per share ratio that is much
lower than the market average.
Of course, given the circumstances many professional investors won’t hesitate to consider them
as value traps:
They look like cheap stocks, yes, but as their margins and profits are going to drop, well...
They really aren’t.
Now, at this point, before continuing, there’s a question we need to ask ourselves... Why
or how was the Peak Car concept reached?
Listen up.
(AN INDUSTRY IN DECLINE?)
Friends, the Peak Car concept rose from an idea:
technological changes, trends and the world’s increasing urbanization are going to lead
to fewer care sales.
See, one the one hand, our planet is increasingly becoming a world of cities, especially megacities.
The percentage of the world population that lives in cities won’t stop growing. In 2050,
70% of the entire world population is expected to live in urban areas
And, logically, in these spaces, a car can sometimes be more of a nuisance than a solution.
Traffic, pollution... Many large cities have begun to restrict the use of vehicles in urban
centers.
For example, in Shanghai, Shenzhen or Beijing, license plates for cars with combustion engines
are auctioned. That is, there is an annual limit of new enrollments and if you want to
get one you have to really dig into your pocket... If you can or it’s worth it.
Then, this process is reinforced even more due to the growing environmental concerns
that exist in society, that have led to new car sharing formulas and an extension of services
such as UBER or LYFT.
That way, following the reasoning of the Peak Car defenders, if the average time of use
of the vehicles grows, fewer vehicles will be needed, and if hiring a car can be comfortably
done at any time with your mobile phone, well... you won’t be as encouraged to buy one.
Why spend money on a car that will spend most of its time in a garage?
And let's not even talk about when autonomous cars arrive.
The result? Among other things, there will be fewer cars sales.
And not only that.
Meanwhile, as the costs for motor companies increase, and predictably so does the competition
as new Chinese brands and who knows if companies like Google or Microsoft delve fully into
the business... the prospects for the industry’s giants aren’t precisely good.
Folks, these are the reasons why the big car companies aren’t in style (in the stock
market).
However, lets pause for a moment before condemning the entire industry to hell.
Let's ask ourselves a question, what if things weren’t so bad?
Can we find signs to think that the golden years of the powerful automobile industry
haven’t ended yet?
Well, folks, we can.
Listen up.
(WHAT IS TO COME)
China moved from the bicycle to the car in just 20 years. Until 1994 the typical images
of the country included streets crowded with bicycles.
To give you an idea, in 1985 there were fewer cars throughout China than in London city.
And to top it all, almost all those cars were from the government. Less than 3% of the country’s
passenger cars were privately owned.
However, from 1994 everything changed. In just 15 years, China surpassed even the United
States as the world's largest automobile market.
Do you know how many cars are currently sold in China each year? No less than 28 million
cars, 11 million more than in the United States.
To give you an idea of ​​what this entails, General Motors itself, one of the great icons
of the American industry, today sells more cars in China than in the United States.
The evolution, folks, was spectacular and there was a reason: the enormous growth of
the Chinese middle class, of which we already talked about here in VisualPolitik.
However, despite all this growth, the rate of cars in China is still very low. It’s
5 times smaller than in the United States.
In other words, there’s still a lot of room to grow.
But okay, you may be thinking, but Simon... Now, with the changes we’ve seen, the Chinese
won’t need as many cars.
And, also, in many of its cities they’re just annoying.
Well yes... and no.
We tend to forget it but the Chinese middle class and the families’ purchasing power
continues to grow strongly.... And even though the percentage may be somewhat lower than
in the past, families still want to have their own car.
And if they have money, then they could get an AUDI, a BMW, a Mercedes... something typical.
Folks, it’d be a good idea to take a look at Japan’s experience.
See, Japan has one of the largest urban populations on the planet.
94% of Japanese live in urban areas and the country also has the world's most populated
city, Tokyo, with 38 million people living in its metropolitan area.
Well, despite this, the aging population and having public transport systems that range
among the best in the world, the rate of vehicles per capita is not only 4 times higher than
in China but new cars sales remain stable.
In other words, if we talk about probabilities, I think we can expect the Chinese market to
continue to rise for quite some time.
But, the good news doesn’t end here folks.
In the United States, sales are at record levels, even if vehicles’ average age has
risen to a stunning and record-breaking number of 12 years.
That is, if we consider that the US economy has full employment, wages are growing and
the way of life hasn’t changed – the cities haven’t changed – it doesn’t seem probable
that sales will fall permanently. Don’t you think?
Because together, China and the United States, with nearly 50 million cars sold each year,
account for more than 50% of world sales.
“Right now, everyone still hopes to sell more cars. I haven’t come across a single
company that forecasts a decline,” Philipp Kampshoff, a McKinsey partner who specializes
in transportation.)
But that’s not all. The big manufacturers could still receive some great news: INDIA.
A country with more than 1.3 billion inhabitants, that even though had lagged behind China,
is now beginning to wake up...
The Indian government is building more than 20,000 km of new roads in a country where
the vehicle rate is very low.
Little by little, that is beginning to change. In 2018 vehicle sales in India grew by almost
9% to 3,270,000 vehicles, overtaking the United Kingdom as the fifth largest market in the
world.
By the way, the company that sells the most cars in India is Japanese. Suzuki controls
almost 50% of the Indian market.
However, folks, that's nothing.
Just to reach China’s vehicles rate, India would have to sell more than 100 million cars.
And the strange thing wouldn’t be to think that it will happen, but that it won’t.
Due to status, freedom or comfort, families, when they can afford it, want to have their
own car.
Just 20 years ago, we would’ve never thought that China would sell more than 28 million
cars a year.
Of course, behind India there are also Vietnam, Indonesia and many African countries.
So, saying that fewer cars will be sold… at least I think it’s fair to say that it
isn’t that clear that it will happen.
And regarding carpooling services, at the moment the data tells us that what they do
is increase the number of kilometers traveled, not decrease them.
That is, they make people use cars more as a means of transport. Yes, UBER’s cars,
or those from different Car Sharing platforms, move for more time, yes, but they also cover
more kilometers, so their average life is lower than that of private vehicles.
In addition, car companies themselves have delved strongly into the car sharing-market
in cities. They see a potentially huge business, a new source of income.
Daimler and BMW Plan $1.1 Billion Uber Battle. Daimler and BMW are pouring more than 1 billion
euros into their joint car-sharing and ride-hailing businesses to take on the likes of Uber Technologies
Inc. and Lyft Inc.The German venture is estimated to become the world’s largest car-sharing
operator. Bloomber)
But okay, at this point, you may have some concerns, but Simon, what will happen to the
environment? Is all this sustainable?
Well, sorry, but the question shouldn’t be whether it’s sustainable or not, but
how we’re going to achieve sustainability: either with more efficient engines, the hydrogen
engine or with the electric car.
For example, along this line, in just 5 or 6 years the Chinese government wants more
than 6 million electric cars to be sold in the country each year. Cars that, by the way,
aren’t subject to limitations in large cities.
That explains news like this:
“Tesla Plant Key to Musk's Future Ambitions Takes Shape in China. Three months after groundbreaking,
Tesla Inc. is rushing to complete its multibillion-dollar factory on the outskirts
of Shanghai to capitalize on growing demand in the world’s largest electric-car market”.
Bloomberg)
Anyway, folks, now you see. The automobile market will change a lot in the coming years,
but... Thinking that car sales will fall year after year?
Only time will tell, but beyond conjunctural, short-term situations, it isn’t clear whether
the automotive industry’s best times are behind them.
So I really hope you enjoyed this video, please hit like if you did, and don’t forget to
subscribe for brand new videos. Don’t forget to check out our friends at the Reconsider
Media Podcast - they provided the vocals in this episode that were not mine. Also, this
channel is possible because of Patreon, and our patrons on that platform. Please consider
joining them and supporting our mission of providing independent political coverage.
And as always, I’ll see you in the next video.