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An investor's key guide to the global automobile industry

Part 2
An investor's key guide to the global automobile industry (Part 2 of 9)

Must-know growth drivers for the global automobile industry

What drives the automobile market?

Now that we’ve seen how important the automobile industry is for the economy, let’s look at what drives the industry and thereby Ford (F), General Motors (GM), Volkswagen (VOW), Toyota (TM), and CARZ, an automobile industry ETF. The global automobile market is impacted by global GDP, consumer confidence, employment, the availability of credit, the price of fuel, and consumer confidence. Basically any economic statistic that reflects increased disposable income in any significant market will impact auto sales. Disposable income is gross income minus taxes. This increases as the number of jobs and the number of hours increase in an economy. We get a view into this by looking at the change in gross domestic product, GDP, in an economy. The logic of this is as the economy is able to produce more, more people will be hired and wages will increase. This will increase the disposable income in the economy.

AUTO VEHICLE SALES GDP CONSUMER CONFIDENCEEnlarge Graph

As the chart above shows, disposable income is only part of the demand function. The other part is if a consumer is willing to part with a portion of the increased disposable income for a new vehicle. We can get a view into this by looking at the University of Michigan Survey of Consumer Confidence. If you aren’t feeling good about the economy and your job, you probably aren’t going to purchase a new automobile. The data in the chart is for global vehicle sales, world GDP, and the U.S. consumer confidence survey. As consumers’ confidence in the economy declined, fewer cars were purchased in the following quarters. As consumer confidence improved, vehicle sales improved. The U.S. market is only 15 million of a nearly 80 million global market. As economic statistics are reported at a national level and aggregated and reported with a lag on the global level, we have to look at other significant markets’ economic indicators.

global auto indicatorsEnlarge Graph

The chart above is indexed to March 1, 2007, as the beginning and reflects continued strength of Asian consumers as their importance on the global market increased over the past five years. As you can see from the chart above, global sales increased due to Asian demand, as the Asian business climate remained strong. This contrasts with the decline in the European market and the dip in the North American market between 2007 to 2013.

The availability of credit is also an important factor in global car sales, as approximately 25% of vehicles are purchased with cash, 50% with loans, and 25% leased. So it’s the availability and the terms of the loans and leases, which represent 75% of U.S. automobile sales, that drive changes in vehicle sales. The locking-up of the credit markets in 2008 and 2009 severely reduced vehicle sales in the 2008 to 2010 timeframe.

The price of fuel has also been shown to impact vehicle sales. Higher fuel prices reduce overall vehicle sales. A recent paper by from the Energy Institute at Haas, revised in February 2013, showed that consumers shifted their purchases from less energy-efficient vehicles to more energy-efficient vehicles. Yet overall demand was lower. Intuitively, this makes sense in a macro perspective in that more of the disposable income is going into the gas tank, leaving less for purchasing.

Now that we’ve reviewed industry drivers of growth, we’ll look at the current global market share by geography.

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