Is The Automotive Industry’s ‘Golden Era” For Profits Over?
“We will look back on the last few years as a true “golden era” for industry profitability. And possibly for auto sector analysts”
The automotive industry has made stacks of money recently thanks to a combination of unprecedented success in China, easy credit and the accelerating U.S. market, but not only is that about to end, new technology threatens to blind-side the business at the same time.
The combination of eye-watering Chinese profits, capacity shortages and easy credit provided massive and unprecedented profit margins, said Bernstein Research analyst Max Warburton in a report.
Not only is that coming to an end, but the automotive world will be shaken to its roots by regulatory demands for cleaner cars, and new technology like connectivity and autonomous driving threatening the encroachment of new companies who might overturn traditional industry leaders.
Warburton, in a report called “The End of an Era”, said global car sales reached 87 million in 2015 with manufacturers reporting earnings before interest and tax (EBIT) of over $130 billion, both all-time highs. Profits might hold up this year.
“But thereafter, we believe a decline is inevitable. We are at the end of an era of super-normal Chinese pricing, global capacity shortages, cheap money, and at the end of an ear that has seen conventional vehicle technology still prevail,” Warburton said.
Warburton said manufacturers had made margins of over 20 per cent in China, but that has begun to fail.
“The second key factor has been the strong growth in U.S. market profitability in recent years. Volumes have now recovered (after the 2008 recession), financing has been pushed to the limit, new capacity is coming on stream, and there are early signs of deteriorating pricing.”
“With Chinese and U.S. profits set to roll over, it is hard to see what can provide an offset,” he said.
Emerging markets, after promising much, have deteriorated. Europe is a bright spot, but necessary reforms to capacity haven’t taken place, so margins are small.
Multiple new challenges are building, including tough emission standards, investment for new battery, plug-in hybrid and fuel cell motors, connectivity and autonomous driving which might attract new entrants.
Apple, Uber, shared economy
“Do we (analysts) have the right expertise and skills to deal with the new era? We’re not convinced. Investors used to want us to analyze capacity, pricing and costs. Now everyone just wants to talk about Apple iCar, Uber and the sharing economy,” Warburton said.
Warburton said stock prices in the sector look cheap, but that’s because profits will soon take a dive.
“There will be very few (manufacturers) that can out-run these conditions and make money for investors. We will look back on the last few years as a true “golden era” for industry profitability. And possibly for auto sector analysts,” Warburton said.