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Self-driving and electric cars have been “the car of the future” for decades. It’s only now they’re becoming a reality.
It’s one of the biggest changes to the automotive sector in living memory. Will every family have a car on the drive (or even two) when you can simply summon a self-piloting one at a moment’s notice? Will car makers crack the electric car first or will battery makers emerge on top? (A modern day chicken-or-egg).
Both questions have the potential to remake the sector.
More lorry than Lamborghini
The automotive sector is dominated by a handful of giant car companies. Renault-Nissan-Mitsubishi was the world’s largest automotive manufacturer last year, selling 10.6m cars or one in nine of all cars worldwide. Other titans in the sector include Volkswagon (Volkswagen, Audi, SEAT, ŠKODA, Bentley, Bugatti, Lamborghini, Porsche), Toyota, General Motors (Chevrolet, Cadillac) and Ford.
But the fact that a handful of car makers control the market shows how tough the sector is. Scale is key to maintaining profits – and the result has been a string of mega-mergers.
That’s perhaps no surprise, since in an increasingly global industry, there’s little to choose between most mass market brands. Does anyone really care whether they’re driving a Toyota, Citroen or Hyundai, the standard five door versions of which are all priced within £200 of each other?
The sector isn’t helped by the fact that manufacturing cars is, as you might expect, hugely capital intensive.
General Motors had assets worth $217.1bn last year, and generated profits of $7.6bn. That’s a return on total assets of just 3.5%. By comparison Apple made a return on total assets of 13.9%.
It’s partly because car manufacturing ties up so much cash, that it’s not the most flexible industry in the world. New car plants are expensive, require huge workforces and incur massive one-off costs.
Car plants do move – just look at the Mid-Western rust-belt or some of the industrial cities in the Midlands, but it’s a slow process that takes decades. Car manufacturers are more like a lorry than a Lamborghini when it comes to manoeuvrability.
An inability to change quickly and rapid technological advances leaves the sector ripe for disruption. And it looks like it’s well underway.
When big and brawny meets small and smart, is anyone a winner?
The flag carrier for disruption is Elon Musk’s Tesla – although for all headlines, Tesla’s total annual production isn’t all that different to the number of electric vehicles made by more established names like Renault-Nissan-Mitsubishi. The big tech groups are also getting in on the act, with Alphabet and Amazon among those working on technology for self-driving cars.
Still, it’s Tesla that’s the upstart of the automotive world. The electric car specialist has a market value of $48.7bn, making it 30% more valuable than Ford, and unlike the tech groups it’s building its own cars from scratch.
So far Tesla has struggled to be sustainably profitable, and in the early part of this year was burning through almost $1bn of cash a quarter. Its sky-high share price depends on the ability to rapidly grow sales in years ahead.
A steadily increasing market share in the US means the brand seems to be delivering results. With production rising and reservations turning into sales, Tesla has promised profits and cash will turn a corner but of course there are no guarantees.
The problem is that Tesla’s current size doesn’t come near to justifying its current valuation.
As we’ve already seen, expanding a car manufacturing facility is expensive. Our real issue with Tesla is that while it might have a great brand, it doesn’t have a distribution network, fuelling infrastructure or sufficient manufacturing facilities to grow at the pace its lofty valuation requires.
Elon Musk has repeatedly insisted that cash generation will improve such that his company won’t need to raise new capital from shareholders or borrowers. But it’s hard to see how he can avoid it.
By comparison established car makers have all the infrastructure they need. Many already have a presence in the electric vehicle market, and switching cars to electric engines, while expensive, is far less dramatic a project than building an entirely new manufacturing network from scratch.
Tesla might be a headache for established players, but that doesn’t mean it’s a long term winner for investors. When big and brawny VW meets small and smart Tesla, it’s possible costs will motor and margins will crash for both companies. Then no-one emerges a winner.
Once a Ferrari, always a Ferrari
Fortunately, we think there’s another road.
Tesla’s prospects rely on the strength of its brand. Customers are prepared to be on waiting lists for months, even years, for a Tesla to roll-off the production line and fill their order. That shows it has a powerful brand, and the bulls will say there are hundreds of thousands more drivers out there who want a slice of the action.
Brands are valuable assets. Rolex and Louis Vuitton make more than watches and handbags, they make status symbols. No-one in their right mind would pay thousands of pounds for just ‘a watch’ or ‘a handbag’, but stick the coveted trademark in place and the same product commands mind boggling prices.
Tesla isn’t the only killer brand in the automotive marketplace.
Many luxury car brands are owned by larger groups, but a handful (including Ferrari and soon Aston Martin) stand alone.
The entry level Ferrari Portofino, costs something in the region of €196,000, and more expensive models can cost millions. The Portofino is some 12 times the price of a basic Ford Fiesta. But the cost of manufacturing, marketing and distributing one Ferrari doesn’t come close to the cost of 12 Fiestas. As a result Ferrari delivered a return on total assets last year of 13.3% - four and a half times that of Ford.
Of course the premium product is not only reflected in the price of the cars but also in the price of the shares – Ferrari trades on a PE Ratio of 32.2 times compared to Ford’s 6.8.
But we think the strength of the brand means it’s really well placed to weather changes in the industry. While Tesla and the big auto makers slog it out, Ferrari will still be calmly selling its luxury cars to the super rich. Whether electric or petrol, a Ferrari is still a Ferrari.
Comment from the Travel Lady on Radio Two today.
I love a car thats different, the problem is all the new cars are built to the same price / segment so end up looking the same.
Self-driving and electric cars have been “the car of the future” for decades. It’s only now they’re becoming a reality.
It’s one of the biggest changes to the automotive sector in living memory. Will every family have a car on the drive (or even two) when you can simply summon a self-piloting one at a moment’s notice? Will car makers crack the electric car first or will battery makers emerge on top? (A modern day chicken-or-egg).
Both questions have the potential to remake the sector.
More lorry than Lamborghini
The automotive sector is dominated by a handful of giant car companies. Renault-Nissan-Mitsubishi was the world’s largest automotive manufacturer last year, selling 10.6m cars or one in nine of all cars worldwide. Other titans in the sector include Volkswagon (Volkswagen, Audi, SEAT, ŠKODA, Bentley, Bugatti, Lamborghini, Porsche), Toyota, General Motors (Chevrolet, Cadillac) and Ford.
But the fact that a handful of car makers control the market shows how tough the sector is. Scale is key to maintaining profits – and the result has been a string of mega-mergers.
That’s perhaps no surprise, since in an increasingly global industry, there’s little to choose between most mass market brands. Does anyone really care whether they’re driving a Toyota, Citroen or Hyundai, the standard five door versions of which are all priced within £200 of each other?
The sector isn’t helped by the fact that manufacturing cars is, as you might expect, hugely capital intensive.
General Motors had assets worth $217.1bn last year, and generated profits of $7.6bn. That’s a return on total assets of just 3.5%. By comparison Apple made a return on total assets of 13.9%.
It’s partly because car manufacturing ties up so much cash, that it’s not the most flexible industry in the world. New car plants are expensive, require huge workforces and incur massive one-off costs.
Car plants do move – just look at the Mid-Western rust-belt or some of the industrial cities in the Midlands, but it’s a slow process that takes decades. Car manufacturers are more like a lorry than a Lamborghini when it comes to manoeuvrability.
An inability to change quickly and rapid technological advances leaves the sector ripe for disruption. And it looks like it’s well underway.
When big and brawny meets small and smart, is anyone a winner?
The flag carrier for disruption is Elon Musk’s Tesla – although for all headlines, Tesla’s total annual production isn’t all that different to the number of electric vehicles made by more established names like Renault-Nissan-Mitsubishi. The big tech groups are also getting in on the act, with Alphabet and Amazon among those working on technology for self-driving cars.
Still, it’s Tesla that’s the upstart of the automotive world. The electric car specialist has a market value of $48.7bn, making it 30% more valuable than Ford, and unlike the tech groups it’s building its own cars from scratch.
So far Tesla has struggled to be sustainably profitable, and in the early part of this year was burning through almost $1bn of cash a quarter. Its sky-high share price depends on the ability to rapidly grow sales in years ahead.
A steadily increasing market share in the US means the brand seems to be delivering results. With production rising and reservations turning into sales, Tesla has promised profits and cash will turn a corner but of course there are no guarantees.
The problem is that Tesla’s current size doesn’t come near to justifying its current valuation.
As we’ve already seen, expanding a car manufacturing facility is expensive. Our real issue with Tesla is that while it might have a great brand, it doesn’t have a distribution network, fuelling infrastructure or sufficient manufacturing facilities to grow at the pace its lofty valuation requires.
Elon Musk has repeatedly insisted that cash generation will improve such that his company won’t need to raise new capital from shareholders or borrowers. But it’s hard to see how he can avoid it.
By comparison established car makers have all the infrastructure they need. Many already have a presence in the electric vehicle market, and switching cars to electric engines, while expensive, is far less dramatic a project than building an entirely new manufacturing network from scratch.
Tesla might be a headache for established players, but that doesn’t mean it’s a long term winner for investors. When big and brawny VW meets small and smart Tesla, it’s possible costs will motor and margins will crash for both companies. Then no-one emerges a winner.
Once a Ferrari, always a Ferrari
Fortunately, we think there’s another road.
Tesla’s prospects rely on the strength of its brand. Customers are prepared to be on waiting lists for months, even years, for a Tesla to roll-off the production line and fill their order. That shows it has a powerful brand, and the bulls will say there are hundreds of thousands more drivers out there who want a slice of the action.
Brands are valuable assets. Rolex and Louis Vuitton make more than watches and handbags, they make status symbols. No-one in their right mind would pay thousands of pounds for just ‘a watch’ or ‘a handbag’, but stick the coveted trademark in place and the same product commands mind boggling prices.
Tesla isn’t the only killer brand in the automotive marketplace.
Many luxury car brands are owned by larger groups, but a handful (including Ferrari and soon Aston Martin) stand alone.
The entry level Ferrari Portofino, costs something in the region of €196,000, and more expensive models can cost millions. The Portofino is some 12 times the price of a basic Ford Fiesta. But the cost of manufacturing, marketing and distributing one Ferrari doesn’t come close to the cost of 12 Fiestas. As a result Ferrari delivered a return on total assets last year of 13.3% - four and a half times that of Ford.
Of course the premium product is not only reflected in the price of the cars but also in the price of the shares – Ferrari trades on a PE Ratio of 32.2 times compared to Ford’s 6.8.
But we think the strength of the brand means it’s really well placed to weather changes in the industry. While Tesla and the big auto makers slog it out, Ferrari will still be calmly selling its luxury cars to the super rich. Whether electric or petrol, a Ferrari is still a Ferrari.
Comment from the Travel Lady on Radio Two today.
I love a car thats different, the problem is all the new cars are built to the same price / segment so end up looking the same.
