Driving change in the automotive industry
By Mark Brighouse, Chief Investment Officer
08 May, 2017
We are at a significant point of change in the role of automobiles in our lives. After 120 years of steady development, centred on an internal combustion engine and a skilled human driver, we are on the verge of sweeping change in both these aspects. Plug-in electric vehicles will replace petrol power and autonomous driving technology (cars that drive themselves — please also read Ashley's article on this) will render the human driver superfluous.
The first is with us now, and while the latter may take longer to arrive, many of the driver aids that improve safety are already available. The potential benefits to society are enormous and include greater use of renewable energy sources, not to mention a reduction in the 1.25 million global road traffic deaths each year.
Share market investors have recognised this sea change and have largely chosen to invest in this theme via listed US electric car company Tesla. Buying interest has this month driven (no pun intended) the market value of Tesla above those of traditional car makers like Ford and prompted fresh comparisons of new versus old.
The financial comparisons are very much one sided:
|Ford Motor Company||Tesla, Inc|
|Market Capitalisation||$45 billion||$52 billion|
|Years in Business||113 years||13 years|
|Number of vehicles sold in past year||6,633,000||86,000|
|Revenue||$151 billion||$7 billion|
|Pre-tax profit||$4.6 billion||-$674 million|
Tesla has lost money for every one of the past five years while Ford has been steadily profitable over that time. Clearly, when investors buy a share in Ford they are doing so on the basis of the company's track record, established capabilities, assets and profits. In the case of Tesla they can only be buying based on the hopes and dreams promoted by the company.
It might well turn out that traditional car companies are unable to adapt but even then, it can't be guaranteed that Tesla will be the one dominating the new world. It is hard to be objective because new gadgets are exciting. Tesla makes sure customers know about their amazing features via frequent software updates that tell drivers what is new each time they turn their key!
At Fisher Funds we try to look beyond the excitement and look at second order effects to consider what these trends mean for other industries surrounding innovation. The scope of those affected, either positively or negatively, by changes in the auto industry is wide: electricity utilities, service station chains, toll road operators, rural pubs, insurance companies, emergency services, spare part suppliers, parking providers and public transport infrastructure to name just a few.
In any event, it is an exciting time of change, but the investment considerations go way beyond just whether to buy into the hottest new trend or development.