This Industry Is About To Be Disrupted In A HUGE Way

March 21, 2018

This Industry Is About To Be Disrupted In A HUGE Way

  • There are three trends of huge importance in the car industry: electric drive, autonomous drive, and transport as a service.
  • It’s important how this could impact margins and sales.
  • A trend where everything becomes cheaper isn’t a trend you want to be invested in with a few exceptions.



Introduction

This past weekend, I discussed Ford from a cyclical sector perspective but there is so much going on in the automotive sector making it a much different environment from what it has been in the last 100 years.

Today, we’ll discuss what’s changing in the automotive industry and how that will impact producers over the next 10 years. The secular trends I discuss in this video are the shift from internal combustion engines to electric-powered, the shift from active-drive to autonomous, and the shift from user-owned to drive-for-hire services, think of Uber, Lyft, Didi, etc.

Shift To Electric Drive

This is the current forecast for the electric vehicle secular trend.

Figure 1: The forecast for EV sales. Source: Nasdaq.

Now, I can guarantee you one thing, the actual trend won’t develop as planned by forecasters because nothing is linear in our world. A great example of that is McKinsey’s prediction about mobile phone penetration made for AT&T in the 1980s.

Figure 2: McKinsey missed by just 99%. Source: Digital Stats.

But what does this mean for manufacturers? It means that they will have to adjust their products and production lines to the demand, the technology is being developed quickly and there are no real advantages one can have here.

The point is that the margins will stay the same or will be even lower as manufacturers compete to get a bigger slice of the cake. Further, with only 22 moving parts, there might be much more competition here.

An example is Rimac, the Croatian automaker that has just invested $150 million in another battery factory in China.

Figure 3: Rimac concept 2 supercar. Source: Rimac.

The supercar is nice, but the competition is key to what will happen and how margins will evolve.

Figure 4: Rimac invests in a new factory. Source: Teslarati.

Other manufacturers will find ways to compete, limits costs, etc., as well which will lead to the same margins they see now and the same cyclicality. Let’s see what the game on the autonomous drive field looks like.



Active To Autonomous

Every automaker will boast its autonomous drive technology, but all the big ones are developing it rapidly and it will probably become a standard one day as most things with cars have to be standard for general safety purposes.

Figure 5: 2017 autonomous drive lever reached. Source: Teslarati.

With this technology, it will probably be like what happened with GPS navigation, every car will have it and thus there will be no competitive advantage.

The third trend I want to discuss is a dangerous one for investors.

Transport As A Service

This is a dangerous thing for automakers that’s developing here. The expectations for the automotive sector were of constant long term growth as emerging markets get more and more mobilized. However, as it looks now, we won’t be needing that many cars after all.

The issue is that sharing will lower the need for cars and lower the costs of owning and using one. In addition, autonomous driving will lower the cost of using other people’s cars as you will have autonomous taxis.

Some estimates see costs being just one tenth of current costs. Perhaps that is exaggerated but if costs halve, that would already be a big difference and would have a huge impact on the car industry. So if sharing will be cheaper, the need for cars would also drop significantly.

Figure 6: The number of vehicles in the U.S. could halve by 2030. Source: Rethink.

Here car manufacturers might be cutting the branch they are sitting on. Volkswagen plans to introduce a ride sharing service called Moia by 2018 and further develop it later. This will lower the number of cars needed and even Moia’s CEO hopes to reduce the number of cars by more than a million by 2025. If other manufacturers do the same, there will be little demand and a lot of competition in the sector which isn’t a structural trend I wish to be invested in.

The Social & Investing Impact

The social impact of the changes we are witnessing now will be huge.

Figure 7: Positives and negatives of the new secular trends. Source: Rethink.



So rethink your fat dividend investments in oil companies for the long term. Further, the revenue distribution will shift from oil companies, car manufacturers, insurance, and maintenance to something else as the costs drop and competition increases.

Figure 8: Revenue distribution. Source: Rethink.

The possible disruption might lower car manufacturing revenues by 80%. On the other hand, specialty companies that will clean the cars, provide the technology, the platform, etc., will see an increase in demand which will also be the case for electricity consumption, but that’s another story.



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