Why the global automobile industry matters for investors


Oct. 29 2019, Updated 9:40 p.m. ET

An outsized role

The global automobile industry is small relative to GDP, estimated to be in the mid-to-low single digits. It represents 3.5% of GDP, according to the Center for Automotive Research.

The automobile industry plays an outsized role in the economy due the industry’s cyclicality and the multiplier effect. The multiplier effect is the incremental impact of each dollar spent as it works its way through the economy. For example, an alternator is purchased from a supplier that must purchase labor, copper, steel, coated wire, and all the related services to support the business. Each of these components is in turn purchased from suppliers with costs to support their businesses. As each supplier purchases what they need, there’s an incremental propensity to invest and consume in the economy.

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The OECD cites the auto industry as having a multiplier of approximately 3x in large developed economies. Impacted industries include steel, chemical, electronic components, and textile industries. In recent years, the automotive industry’s impact on the changes of GDP were one-third to one-half of a percentage point of aggregate GDP changes. So the industry’s importance is amplified throughout global and country-specific economic activity.

In the U.S., the Center for Automotive Research estimates the auto industry employs 1.7 million people and impacts an aggregate 11.5% of U.S. GDP.  Multiplied across the globe, this is a significant industry, employing millions and reflecting trillions in annual economic activity to consider. The most significant companies in this industry are General Motors Corporation (GM), Ford Motor Company (F), Toyota Motor Company (TM), and Volkwagen AG (VOW). An investor can take an overall industry view by buying CARZ, and industry ETF. This industry overview will look at where automobiles are selling, who’s filling the demand, revenue drivers and revenue strategies, the earnings of market participants, and the opportunities and risks of the industry.


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