Will your franchise win in the NEV wars? Part 1: Seven global carmakers compared – The Questions

This entry is part 1 of 9 in the series New Energy Vehicles
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This post is the first of a series reviewing the financial resilience of seven major auto makers and their ability to make profits during the transition from conventional to electric vehicles. The auto-makers reviewed are Daimler, BMW, Volkswagen, PSA, Ford, General Motors and Toyota.

Click on images or tables to enlarge.

(NEV refers to ‘new energy vehicles, those powered by electric or hydrogen energy in comparison to internal combustion engine powered vehicles which are referred to as ICE.)

Despite More Than A Decade of Market Growth….

Sales of both cars and commercials grew on average 3% a year between 2005 and 2018. Global vehicle registrations in 2005 were 66MN units with car registrations of 45MN. By 2018 car registrations were just below 70MN units out of a total of 95MN. By 2018, despite growing political intervention fuelled by environmental lobbyists, global sales of Electric Vehicles (EV’s) were roughly 1.9 and 2.0MN, depending on the fuel/engine types included. Half of those sales were in only one country, China. Meanwhile, since 2018, global consumer awareness of the harmful effects of conventional engine vehicle emissions forced governments around the world to set legal targets to phase out internal combustion engines. The pressing task facing global vehicle makers – and their supply chain – is: how do they transform their existing capacity from conventional internal combustion drivetrains into electric drivetrains? Where will the money be found and what NEV technology should they invest in? Where and when will high NEV volumes be sold?

 

…Few Global Auto-Makers Were A  Good Investment

Getting shareholders to stump up more cash won’t be easy. Most conventional OEM’s share a common weakness: they have all been unattractive to investors since 2014 or even earlier.

Their Total Shareholder Return (TSR) compared to non-automotive investments under-performs the market.  Over the period from 2014 to 2018, only Fiat-Chrysler matched, and only BMW exceeded, the returns from an Exchange Traded Fund (EFT) tracking the S&P 500. In the case of BMW and VW, if the period was extended to 2019, their TSR collapsed to -56%. and -79%, respectively. FCA’s result was based on a high closing share price after the announcement of their merger with PSA, France. They paid out no dividends at all in the period.

A second concern is the auto-makers Return on Invested Capital (ROIC = Net Income Before Interest & Tax as a ratio to their Total Equity and Long Term Debt. If the ROIC is lower than the cost of debt for the firm, shareholders income is reduced, and vice versa). The benchmark cost of capital for industrial products firms suggested by PWC is between 6.0% – 6.7% in Germany and 8.3% – 9.3% in Belgium.  KPMG research suggested a global average of 8.2% for automotive manufacturers for 2018/2019.  Only Toyota’s ROIC consistently exceeded that benchmark and only FCA matched it.

Add into the mix that many investors think that the global cost of debt, already near zero, is unlikely to come down. So, the outlook is for higher finance costs in the years ahead, just when auto-makers might seek to increase borrowings to pay for the transition to EV’s. Shareholders might ask themselves whether any of the traditional auto-makers have sufficient capability – financial and technical – to emerge stronger after the transition. Either way, they’ll take some convincing.

So…If They Need To Transition To New Energy Vehicles…

But that begs the question, how big might the new energy vehicle (NEV) market become, while it’s early stages are driven by policy rather than consumer choice?

PC Global Market Share – Major Markets

To start with, the global NEV market will emerge at different rates as policy drivers are being used differently around the world. While central government is backing the EV transition in  Europe and China, there are piecemeal efforts, with local government backing only, in the US.  Some experts expect that these policy implementation differences may be unimportant in the global adoption of EV’s because the EU and China constitute a ‘critical mass’ of 50% of global sales. Others think that constraints on battery production, the electricity grid and production capacity will slow the pace of sales. However, there is consensus on the direction of travel and the ultimate destination even where the arrival date is imprecise. Adam Whitmore’s forecast tries to show how the NEV adoption timing may be different while the destination, zero emission vehicles by 2050, remains the same.

Both the EU (20.7MN units) and China (28.1MN units) have committed to phasing out the sale of conventional petrol and diesel vehicles and their use in cities between 2040 and 2050. The EU is implementing a policy mix of regulation, purchase incentives and access controls through ever-widening ‘zero-emission zones’ and are also financially committed to battery production. It’s only in the EU domestic markets that EU car-makers have significant EV market share and much of this may be due to the 15% import tariff facing Asian and US brands, rather than inherent product attributes. So far,the EU policy implementation could be described as protectionist as much as environmentalist. That may change as the EU’s January 2020 emissions targets come into force. They seem set to wipe €8.4BN (£7.1BN/$9.3BN) from carmakers’ profits over the next two years as they try to comply with the regulations. In the largest market for electric vehicles China – around 1.2MN units in 2019 out of a total market of 25MN – only three non-Chinese models were in the Top 20 sellers in 2019; one BMW, one VW and Tesla with combined sales of 67,000. China’s EV market is now in the ‘competitive’ phase, where government subsidies are being reduced progressively to allow only the best products to survive, which may slow growth temporarily. In the US, a much smaller EV market – under 350,000 in 2019 – in which Tesla have over 50% of all sales, European car-makers combined have less than 15%. Just as importantly for dealers around the world is Tesla’s direct sales and service organization, pioneering an alternative sales and after-sales model to the traditional franchised dealership or dealer group. If direct sales work for Tesla, might this approach be replicated by other brands? Certainly PSA may think so. They have pioneered an app that allows buyers to select, configure and pay for a new vehicle online in around 30 minutes without visiting a showroom.

…Where Will They Find The Money?

Market Cap. of 7 OEM’s and 1o Digital Giants

Investors and dealers face three pressing questions about every OEM . First,  if regulators force a switch to new energy vehicles – electric or hydrogen powered, does their manufacturer have a sustainable future? Can it deliver compelling product offers in a zero-carbon, zero-emissions, digital business environment? Second, as auto-makers are successful with their leap into new electric, intelligent, connected and, eventually, autonomous vehicles, how will they distribute and service them? Will there be a future for an independent dealer network outside of markets where they are currently legally protected, such as the US? If so, where do independents fit in when direct sales could reduce OEM costs, some say, up to 20%? Third, just as important, who will own the OEM? Is it strong enough to survive as an independent? Was Geely’s 10% stake in Daimler only a commitment to their ride-hailing mobility JV in China? Or, was it a precursor to further  motor industry consolidation?  The late lamented CEO of Fiat Chrysler, Sergio Marchionne made clear in 2015 that FCA did not have an independent future. Could there be vertical integration with Tier 1 suppliers and more horizontal integration, particularly with Chinese car makers. In any event, are conventional auto-makers still the Goliath, who can dictate terms to rivals. Take a look at the market capitalisation of the auto-makers surveyed in this post and their digital counterparts. Microsoft, Google (Alphabet) and Apple could buy any of the auto OEM’s at least ten times over or the entire group three times over. As we move towards greater digital connectedness, artificial intelligence and autonomous vehicles, isn’t it possible that, even if some of these  brands remain, they may disappear as independent producers?

True, only Fiat-Chrysler have thrown in the towel so far, but the financial demands of the next few years may prompt others to re-think their strategy. Now may be the time to determine which OEM to consider, particularly if you’re planning an investment in tomorrow’s motor industry, rather than today’s. Keep in mind that the global auto-industry is a strategic economic asset and  a major employer, so governments are a major stakeholder as well as investors. The US government has bailed out GM, Chrysler and Ford. The French government is or has been a major shareholder of Renault and Peugeot, when re- financing has been needed. The EU frames its laws to minimise external competition for its domestic producers. And major auto-companies in China are state-owned enterprises (SOE’s). Whether firms survive or not will be determined by governments as much as markets.

What’s Next?

Using Adam Whitmore’s timetable three scenarios were developed for the transition to NEV’s – fast, moderate and slow – each linked to the date when the OEM would produce 50% and 80% full electric output. The forecast horizon used is 2020 until 2045. Each scenario changed five factors, such as the  mix of NEV and ICE vehicles produced and the rate of depreciation of existing assets to forecast the cumulative net worth that would be generated under each scenario and compared that to the OEM’s net worth in 2018. Part 2 of this series of posts contains more details about the models used and the summary results.

Part 3  starts a series of posts that assesses the forecast results alongside a financial analysis of each OEM and their published NEV strategy to suggest the possible strengths, weaknesses and risks for each firm, their investors and their dealers.

Read the next post in the series for the Results Summary .

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