On the road (again)
The road ahead seemed clear, but plans are notoriously unpredictable. In 2021, the auto industry looked confidently forward to a year of uninterrupted recovery as cash-rich consumers and companies rushed to the showrooms to make up for lost time… But as it turned out, production rose by just 2% to 76 million light vehicles, lagging sales for the third year running with a corresponding erosion of inventories. The Geneva auto show fared no better, cancelled for the third year in a row.
Much of this was due to pressure on logistics chains, hampered by the frantic quest for semi-conductors. While the pandemic has been widely blamed for this, more sceptical commentators see it as indicative of a deeper need, for the industry to reinvent itself as it picks its way toward ecological transition. The increase in the value added by electronic components and the shift toward electric vehicles are pushing automakers toward a world where they are at increased risk of shortages and have weaker negotiating power.
New strategies will be needed to bring skills in-house, strike long-term contracts to guarantee supply of critical components, pare down intermediaries, improve traceability and refine their knowledge of the electronic components and software in their vehicles. Those pioneering these industry changes are already winning market share: Toyota ended General Motor’s 90-year reign as US market leader, and, strikingly, in December 2021, Tesla sold more Model 3s in Germany than Volkswagen sold Golfs.
The pandemic also brought the environmental emergency to the forefront: 21st century mobility will be zero-emission and digital. This will require colossal investment in digitisation and electrification of vehicles: €60 billion for Mercedes, €90 billion for Volkswagen by 2026, more than 50% of these groups’ total R&D and investment budgets. This brave new world will foster the emergence of new partnerships, such as Stellantis and Foxconn, and hitherto obscure manufacturers, like Wuxi Lead to supply battery and e-vehicle production lines.
To fund the ecological transition, automakers may well turn to “green” or “brown” inflation. “Green” inflation, the higher cost of electrical vehicles, may be exacerbated as carmakers shift vehicles upmarket, notably by upgrading technology, to increase returns on investment. “Brown” inflation emerged in 2021 as a rise in the price of new fossil-fuel vehicles, a trend that could lock in as production falls faster than demand and carmakers focus supply on their most profitable models.
One thing is sure, the auto sector remains an unforgiving business where tomorrow’s winners may well be unexpected names. Users and investors will need to pick their way carefully among undervalued stocks (BMW), turnaround stories (Renault) and growth bets (Tesla). We would wager that this time, more than a century after the invention of the electric vehicle and the record speed set by the Jamais-Contente, increasing environmental awareness and technological development will finally put the auto industry on the road to sustainability.
Monthly Editorial by Olivier de Berranger, CIO, La Financière de l’Echiquier and Aurélien Jacquot, CFA Senior Analyst
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