A longtime client recently asked for our thoughts about the auto industry, a group we’ve followed closely since 1991 on both the buy and sell side. The following is an expanded version of what we wrote but in bite-sized chunks because there is a lot of ground to cover.
#1: You can add 2-3 years (at least) to whatever date you thought autonomous driving would be widely available. When economies slow, auto companies cut costs by reducing R&D expenses. This time will be no different, and even Google will need to reconsider how much cash Waymo burns.
#2: Extremely low crude oil/gasoline prices and economic uncertainty are going to make electric vehicles very hard to sell for several years. Elon Musk may never acknowledge it, but he saved Tesla with that equity offering a few weeks ago.
#3: Developed economies are going to need a “cash for clunkers” program similar to the one in the US in 2009 to jump-start vehicle demand. Producing light vehicles has a strong economic multiplier effect (suppliers, local businesses, etc.), so the quicker the US and other countries can get demand back online the better.
#4: The current COVID-19 Crisis is unlike any other recession ever when it comes to replacement parts demand (things like tires and batteries). In a typical recession, consumers drive their cars on worn tires and get a jump start from a buddy rather than spend a dime on their vehicles. When economic conditions improve, demand for tires/batteries/service parts soars. Not this time… only essential workers are driving.
#5: Will consumers choose to move out of cities and to the suburbs to avoid the next virus (good for light vehicle demand), and/or will work-from-home become more popular (reducing the need for multi-car households and +18,000 miles/year of commutation)? My guess right now: it’s a wash, and suburbanites who work from home will still have 1 car per household driver. Old habits die hard.
#6: Will commuters shift from mass transit to personal vehicles and/or carpools with co-workers/friends? A look at the infection map in the 5 boroughs of NYC and out into Suffolk County points to a connection between long commutes by subway/light rail/bus and COVID-19 cases.
#7: How quickly/will ride sharing (Uber/Lyft) return to popularity, given both depressed economic conditions and lingering concerns about COVID-19? And if drivers decide to give up on these companies as their primary source of income, will they sell their vehicles into the used market and depress prices?
#8: Which car companies will survive, and which will fail in the next 12 months? Every recession since the 1980s sees car companies either fold or sell to another manufacturer. This time around will be no different.
Bottom line: the auto industry always has pride of place on a country’s economic mantle and that fact is never more visible than in a deep recession.