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Today’s Featured Topic BIG AUTO Faces New Headwinds, Reinforcing MRP’s Short Autos Theme Summary: The world’s largest economies are engaged in a trade war, and auto makers are getting caught in the crossfire. The industry also faces a slew of other problems which will be hard to overcome. The auto industry’s headwinds are getting stiffer by the day, reinforcing MRP’s Short Autos theme. A confluence of factors including shifts in consumer preferences, rising interest rates, the proliferation of mobility services, and an escalating global trade war that could push car prices higher. Consequently, we expect vehicle sales to slow this year and over the next several years. The sedan segment appears to be the weakest within the broader industry. This year, car sales are on pace to be the slowest since 1958 as more Americans flock to light-trucks, a category that includes SUVs, pickups and minivans. Just five years ago, U.S. vehicle sales were evenly split between cars and light trucks. Now, the sales ratio is more than 2:1 in favor of light trucks. That shift puts manufacturers with car-heavy sales mixes at a big disadvantage. Light trucks will account for 75-80% of U.S. vehicle sales by 2025, as even upscale auto buyers are feeling the lure. Indeed, at least half of all full-size pickups are now being sold as luxury-oriented models. The resulting rapid growth of the luxury truck and SUV segment has substantially increased U.S. carmakers’ share of domestic sales of models with an average price of $60,000 or more, at the expense of companies like Mercedes-Benz, BMW, Lexus, and Porsche. Still, although total vehicle sales in the U.S. were up 1.8% during the first half of 2018, compared to the same period last year, the increase was due to low-profit sales supported by rebates and subsidized leases. In fact, retail sales would be down if it weren’t for these rising incentives. Meanwhile, rising U.S. interest rates means the monthly payments on car loans will also go up, which could disincentive some buyers and contribute to slower sales. Mobility services create another drag. More consumers are embracing ride-hailing and ride-sharing services around the world to the extent that traditional automakers anticipate a major erosion of their core business in the years to come. Per KPMG, 59% of auto executives agree that half of today’s car owners will no longer want to own a vehicle by 2025. In response to this new threat, the largest manufacturers are creating mobility units within their organizations and launching their own car-sharing services. These include Volvo’s M, Daimler’s Car2Go, BMW’s Drive Now, GM’s Maven and VW’s all-electric car-sharing platform WE, which will launch next year. The rise of mobility services not only threatens the classic business model of Big Auto, it is also especially bad for traditional car rental companies such as Avis, Hertz, Enterprise, and Alamo. Then there is the big X factor of China/US and EU/US tariffs to consider. The EU currently imposes a 10% tariff on all car imports, while the U.S. imposes a 2.5% duty. Unless the EU is able to strike a deal that reduces or removes its tariff on imported U.S. vehicles, President Trump may increase America’s border tax on European cars from 2.5% to 20-25% as he has been threatening to do. But, securing a European deal on U.S. autos is complicated because WTO rules forbid countries from signing bilateral deals covering only specific sectors. If the EU circumvents this rule by removing its tariffs on all car and component imports, regardless of the country of origin, the region risks getting flooded with cheap Chinese car parts. Hiking U.S. tariffs tenfold would hurt German car brands like BMW, Mercedes-Benz, Audi and Porsche which have enjoyed great popularity among Americans and helped Germany run a large trade surplus with the U.S. Germany’s automakers have long wanted to eliminate EU/US car tariffs. Smaller European manufacturers are particularly exposed to higher U.S. tariffs because they typically don’t have factories in America, a huge market for luxury cars. Larger European luxury manufacturers such as BMW and Daimler have U.S. factories, but still rely on open borders. Typically, they make SUVs in the U.S. and sedans in Europe, and ship them back and forth as demand requires. Although BMW makes more cars than it sells in the U.S., it will still suffer in a trade war because they are largely not the same cars. Further East, China announced in May that it would reduce tariffs on imported cars from 25% to 15%. But cars originating from the U.S. won’t be among the beneficiaries because Beijing just imposed an additional 25% tariff on U.S. auto imports this Friday in retaliation to U.S tariffs on billions worth of multi-sector Chinese goods. So while car companies that import vehicles from Europe or Japan will have to pay a 15% tax, those that import from the U.S. now face a stiff 40% tariff if they want to sell in China, the world’s largest car market. Ford Motor (F), Tesla (TSLA), BMW (BMW) and Mercedes-Benz maker Daimler (DMLRY)—which build premium sport-utility vehicles in the U.S. and ship them to China—stand to suffer the most. They will be forced to charge consumers more, or absorb the added costs, as their rivals take advantage of the reduced tariffs to lower prices. One beneficiary of the lower tariff rate for example would Audi (NSU), which only exports cars built in Europe. Tariffs aren’t the only problem for U.S. car makers in China.They could soon find their new product models at the bottom of China’s regulatory pile for things like safety approvals, or their state-owned Chinese partners might shift resources toward European joint ventures instead.There’s a precedent for this sort of maneuver by China. During a dispute with Japan over contested islands in 2012, Japanese car makers experienced a 10% drop in their Chinese market share within a few months. A similar shadow strategy this time around could be a big problem for companies like General Motors, which now sells more vehicles through its China joint ventures than in the U.S. All the factors above point to a tough environment for the auto industry going forward. MRP is therefore reaffirming its Short Autos theme. Investors can gain exposure to the theme via the First Trust NASDAQ Global Auto ETF (CARZ). In the nine months since we launched the theme on October 12, 2017, CARZ has dropped 10.5% while the S&P 500 (SPY) has risen 8%. Here are links to reports MRP has previously published on the industry:
We’ve also summarized the following articles related to this topic in the Transportation section of today’s report.
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Chart: Automobiles (CARZ) vs S&P 500 (SPY) |
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Other Disruptive Change
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Joe Mac’s Market Viewpoint |
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The Federal Reserve has said for years that it wants to get inflation in the U.S. back to 2% per year. Some indicators are already showing inflation rates higher than that. But, the Fed persists with its fixation on the core personal consumption expenditures (“PCE”) deflator as a superior measure. That number has been stuck below 2% since May 2012. The trend of the inflation data, however, may be changing soon. Joe Mac’s Market Viewpoint: CAPEX Booms! →
Other Viewpoint Reports Joe Mac’s Market Viewpoint: The Inflation Complication → Joe Mac’s Market Viewpoint: A Review of MRP Themes → |
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Current MRP Themes |
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Major Data Points |
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US Stocks Close Higher on Friday Wall Street closed in the green of Friday 6 July 2018, as US non-farm payrolls climbed by 213 thousand in June of 2018, following an upwardly revised 244 thousand in May and well above market expectations of 195 thousand, with the jobless rate rising to 4 percent from 3.8 percent in the previous month. TE |
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US Trade: Imports Rise 0.4%; Exports Hit Record High; Trade Deficit Smallest in 1-1/2 Years Imports of goods and services to the US increased USD 1.1 billion from a month earlier, or 0.4 percent, to USD 258.4 billion in May 2018. Goods imports rose USD 1.1 billion to USD 210.7 billion. Imports of services decreased USD 0.1 billion to USD 47.7 billion. On a non-seasonally adjusted basis, imports grew from China (14.6 percent), Canada (6.9 percent) and Mexico (4.8 percent), but fell from Japan (-3.7 percent) and the EU (-0.2 percent). TE Exports of goods and services from the US rose USD 4.1 billion from the previous month, or 1.9 percent, to a record USD 215.3 billion in May 2018. Goods exports increased USD 3.7 billion to USD 144.9 billion. Exports of services increased USD 0.4 billion to USD 70.4 billion in May. On a non-seasonally adjusted basis, exports rose to Japan (5.9 percent), Canada (4.4 percent), the EU (4.3 percent), China (3.3 percent) and Mexico (1.2 percent). TE The US trade deficit narrowed sharply to USD 43.1 billion in May 2018 from a revised USD 46.1 billion in the previous month and below market expectations of USD 43.7 billion. It was the smallest trade gap since October 2016. TE |
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US Jobs: Jobless Rate Rises to 4%; Wages Rise Less than Expected; US Economy Adds More Jobs than Expected The US unemployment rate rose to 4 percent in June 2018 from 3.8 percent in the previous month, which was the lowest since April 2000 and above market expectations of 3.8 percent. The number of unemployed persons increased by 499,000 to 6.6 million. TE US average hourly earnings for all employees on private nonfarm payrolls rose by 5 cents to USD 26.98, or 0.2 percent, in June 2018, following an unrevised 0.3 percent gain in May and slightly below market expectations of a 0.3 percent rise. TE Non farm payrolls in the United States increased by 213 thousand in June of 2018, following an upwardly revised 244 thousand in May and well above market expectations of 195 thousand. Job gains occurred in professional and business services, manufacturing, and health care, while employment in retail trade declined. TE |
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Soybeans Prices Surge Soybeans increased by 2% to 850.66 USd/Bu. TE |
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Coffee Prices Surge Coffee increased by 2% to 109.2 USd/Lbs. TE |
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Other Disruptive Change |
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