The consequences of the pandemic (social distance and self-isolation) are likely to remain in the world for a long time to come. In addition, the increase in the production of electric cars available to the masses could also spur demand. What is more, the sector looks relatively cheap by market multiples.
The markets are choppy and volatile today, and the corrections of the prices are inevitable. In case there is a collapse, the automakers are going to be affected. Although this article will not look at the fundamentals or the cheapness of the multiples, these factors deserve as much attention as the main triggers of today’s car industry we will be looking into below.
Car manufacture stimuli
Like many industries, car manufacture was influenced by the coronavirus pandemic, though in its own way. However, there are other disruptive factors as well.
Pandemic and self-isolation
The introduction and enforcement of new social norms such as social distance and self-isolation is a positive factor for automobile manufacturers. The individual or family does not interact with other people when using a car, which eliminates even the theoretical chance of spreading the virus.
And while there is a possibility that the impact of the pandemic on human life is likely to diminish, the consequences will be with us for a long time to come. The desire to minimize the risk of infection could be a strong trigger for an increase in car sales in 2021-2022.
The increase in the share of electric cars is a new reality
The trend away from internal combustion engines (ICE) and toward electric and hybrid engines is a key moment in the development of the global auto industry. With the Democrats led by Joe Biden coming to power in the U.S., this trend has intensified and accelerated. OPEC estimates that the total global car fleet will increase by 86% to 2.6 billion vehicles between 2019 and 2045. At the same time, the share of electric cars will grow by about 15-16%.
The position of manufacturers such as Tesla or Nio will continue to be strong. However, they are already experiencing growth and very serious competition from major companies such as Volkswagen, BMW, General Motors, or Porsche. In addition, leading IT companies, such as Apple and Google, are looking to enter the electric car market.
The car is not a luxury, but a product of advanced technology
The desire of technological giants to enter the car market, on the one hand, is a risk for classic manufacturers. On the other hand, this factor transforms the car from a means of transportation into a high-tech product. Car giants will have to follow the new reality, and it will most likely be a question of their survival.
Electric cars, next-generation cars with internal combustion engines, and drones will be a symbiosis of the auto industry with digital technologies such as:
- Protection through digital identity
- Artificial Intelligence
- Internet of Things (IoT)
- Big data
There is an opinion that a number of classic car manufacturers are ready to:
- Defend their market share against technology giants.
- Beat them in competition, because they have vast experience in their field and can apply advanced technology in their production.
The big question is still which product will be better for the consumer in the end.
What are the key risks for the automobile industry today?
1. The deficit of semiconductors. The world’s largest automakers face a potentially serious semiconductor shortage as chipmakers reserve supplies for the production of smartphones, tablets, and gaming devices. This risk is something of a cost of the fact that the modern car is increasingly a high-tech product.
2. The entry of technology giants into the car market. Indeed, Apple and Alphabet have long had plans to create and mass produce electric cars and drones.
This is a real threat to traditional producers.
Who are the main beneficiaries?
You can look at a number of traditional manufacturers, such as Volkswagen, Stellantis, or General Motors, for example. This is a kind of top 3. Both fundamental factors play a role in this choice, as well as the desire of the aforementioned companies to focus on new areas (electric cars and drones).
Volkswagen is among the world’s largest car manufacturers. Its main advantages are product availability and high profitability (EBITDA margin at the end of 2021 is expected to be 15%). Additionally, the stock looks undervalued by multiples.
VW has begun mass production of an all-electric ID.3, and the company’s main priority is the affordability of the new car.
Stellantis is a global automaker that includes brands such as Fiat, Chrysler, Dodge, Jeep, Maserati, and others. The stock looks significantly undervalued on market multiples compared to the industry average. The company plans to offer a range of all-electric or hybrid vehicles through 2025, including 10 new models in 2021.
Despite looking promising, GM is still undervalued. With its capitalization being $76 billion (almost 10 times less than Tesla’s) market cap as of February 11, 2021, it had almost 3.5 times Tesla’s sales in Q4 2020.
The company has a plan to launch 30 electric vehicle models globally by 2025.
Key investment risks
The investors concerned about the risks of the electric vehicles industry can always choose ETFs focused on both traditional automakers and electric cars that are available for purchase in the market. Still, they should always be mindful of the key risks of the automaker sector are:
1. Deficit of semiconductors. The world’s largest automakers face a potentially serious semiconductor shortage as chipmakers reserve supplies for the production of smartphones, tablets, and gaming devices. This risk is something of a cost of the fact that the modern car is increasingly a high-tech product.
2. The entry of technology giants into the car market. Indeed, Apple and Alphabet have long been hatching plans to create and mass produce electric cars and drones. This is a real threat to traditional manufacturers.