Opportunities and risks in the auto industry
Right now, product recalls like those faced by GM and TM are the biggest risk to automobile manufacturers. The regulatory regimes in the US and Europe increased reporting requirements, making it easier to uncover troubled products. Technology also allows individuals and law firms to search others with perceived product failures. As manufacturers shift to global platforms, a potential problem may be designed into products sold around the world whereas in decades past, each car was designed for a narrow market. So how do we anticipate these problems? Quality surveys would seem a good place to start. This train of thought got a slow start when I searched and came upon the headline “GM surpasses Toyota to win J.D. Power Quality Survey dated June 2013.” TM and GM are each facing recalls in the millions. Mitigating a recall risk is a track record of recalls and free cash flow to deal with recalls when they crop up.
Global automobile manufacturers each have their form of globalizing their manufacturing, prompted by changes in the market. For GM and TM, the benefits of these programs will be delayed due to the cost of the recalls, but in three years, they’ll be able to provide competitive products tweaked for the local market and increasingly manufactured in the market. This brings about the other side of the coin, in that the global capacity for manufacturing cars exceeds industry demand. This is particularly true in Europe, where the market has shrunk in the past seven years and capacity was designed to grow around 17 million vehicles—not the current 15 million sold in the market. This is before considering imports, which are playing an increasing role in the European market. Acute overcapacity impacts GM and F and VOW particularly.
The rise of China as a market is astounding, growing from 6 million cars sold in 2005 to 21 million vehicles sold in 2013. As we reported earlier in this series, the U.S. has an annual market of 15.5 million units in 2013, with a peak of 16.1 million vehicles sold in 2007. Brazil also saw impressive growth, from 1.2 million units in 2003 to 3.6 million in 2004. While smaller than the developed markets, when this growth is considered throughout the developing world, there’s optimism for industry growth even as the mature economies are seeing flat-to-negative growth. So we’ll be looking for companies expanding in the higher growth markets of China and Latin America. Currently, GM and VOW are market leaders in China, with TM lagging. The CARZ ETF comprises global leaders and should benefit as the China and Latin American markets expand, regardless of which company is the market leader.
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