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Can new cars drive better returns?

John Redwood, Charles Stanley’s Chief Global Economist, looks at the current difficulties faced by the car industry.

John Redwood


The car market has been very weak around the world this autumn. Car sales plunged in the EU, fell away from the highs in the US and suffered a retreat in China. In the US, China and the UK higher interest rates and credit restrictions played a part. The EU mainly fell following the introduction of the new worldwide emissions test procedures.

The new tests are tougher than the old EU tests and this led to delays in modifying vehicles to comply. VW had to stop production of their Golf GTI, Jaguar had to withdraw their XJR 575 and BMW pulled out of making its petrol 7 series cars. It was a sign of the times that regulation can have a direct negative impact on a large industry, as it struggles to catch up with more exacting demands to improve air quality. The old EU strategy of concentrating more on the output of CO2 saw the diesel engine as a friend, capable of better fuel economy figures which in turn lowered CO2 output per mile driven. EU Commissioners have now changed to being more concerned about dirt and smoke in the air they breathe, forcing the setting of higher standards for particulates, NOx and SOx from the exhaust. The old EU tests turned out to be easy to pass, with some companies arranging their engines in ways which passed the tests without necessarily delivering good performance when the vehicle was driven normally.

The results have been poor for the companies and their share prices, and have dented the strength of the German economy. VW, Porsche and Audi were particularly badly hit in their September sales. The main German car-maker shares are down between 37% and 48% from their highs. In the US, the Ford share price has been badly hit by changes in the car market, and Fiat Chrysler has also suffered. There has been quite a bear market in this once leading industry sector. The switch of consumer preferences – from sedans or saloons to SUVs – has also affected the pattern of demand between leading companies.

It is an interesting story of the impact of huge change on traditional businesses. Time was when it was a rite of passage to adulthood to pass a driving test and then to find a way of buying your first car. The main business model was based on most adults or couples owning a car to have complete control over its use, at the cost of leaving it idle for most of the time when you are not travelling. This meant the world needed a very large number of vehicles, and plenty of space for parking and garages. Car sales, service, maintenance of finance flourished on the back of this one person one car model.

Today the digital revolution and young people’s attitude to cars is changing some of this. Many now recommend rental models, where people hire in a car when they want one. This can morph into a kind of taxi model, where you only rent the car when you have a specific journey in mind. Leasing is preferred to buying outright for most customers. A site like Drivy allows people who do own a car to rent it out to earn additional income when they are not using it. More young people in cities delay passing a driving test and rely on public transport. Some are waiting for the big game changer, the self-driving car. Then we could envisage fleets of vehicles available to call up and to take us to where we want to go on a journey by journey basis. Such a development would cause a major reduction in the numbers of vehicles the world needed to get around.

At the same time as technology is hacking away at the car-ownership society, governments and technology are also working away at changing dependence on petrol and diesel propulsion. Switching to all electric cars is throwing up new designers and manufacturers of vehicles. Whilst early electric cars still look much like petrol cars, it is quite possible future electric vehicles will look very different as alternative engine and drive technology could allow very different external styling. Adoption of electric cars so far has been quite slow, as this is a top down idea rather than something customers are pressing for. It will take lower electric car prices, longer ranges and a more-extensive network of rapid charger points to make these cars more universally wanted.

The biggest revolution will come when fully automatic cars are allowed in the main countries on public roads. Cars like Waymo, Uber, Zoox and GM Cruise are being extensively tested. Lawmakers and regulators will want much higher standards of safety from self-drive cars than from people driven cars. A bad accident in Tempe Arizona involving a self-drive vehicle was a tragic misfortune which set back development a bit. Given the amount of money and work being put in, it is a matter of time before automatic cars are allowed out without a person supervising them in the vehicle. A fleet of such cars could well be supervised from their base by people as well as by computer.

These uncertainties may end up with a very different industry producing very different products. The logic is fewer cars, with more cars designed and made by different companies that have been established to exploit the rush of change being unleashed. The 2018 petrol car is similar to the 1938 car in many respects. 80 years brought more pace, more refinement, more interior comfort and more supporting technology, but the basic vehicle has similarities of external appearance, with similar engines and drive technology. Many of the big manufacturers have remained with the same names and a long tradition of car building, which they play on. The 2028 vehicles may look very different, and may have very different engines, drive mechanisms and makers. It’s a timely reminder that equity selection is difficult, as analysts need to predict not just the size of the future car market, but who the new winners will be. Meanwhile the large car maker share prices have fallen a long way to reflect these uncertainties. Some of them will chart a profitable way through this challenging environment.

Garry White looks at the structural issues facing the industry here.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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