•The US auto market could decline, but the fall won’t be devastating.
•The industry is heading into a predictable cyclical downturn.
•Analysts are overstating the potential damage to fuel a thesis about high-tech disruption.
Barring a sales surge through the second half of 2017, it looks now as if the US market will only match, not beat, its record sales pace from the past two record years.
That means something like 17 million-17.5 million new cars and trucks could roll off dealer lots. The final tally could be higher, and it could be lower. But in any case, when the year is in the books, it will have been yet another very good year.
Don’t tell that to a lot of analysts, however, both professional and amateur. After missing the sales boom on the past two years and serially downgrading their expectations for traditionally automaker stocks while sending speculative investments on profitless Tesla in the stratosphere, they’ve now lined up to foretell the vast disruption that ride-sharing will bring the business.
At Seeking Alpha, Max Greve offers this point of view, keying off a bearish research note from Morgan Stanley analyst Adam Jonas concerning the outlook for US car sales:
[A]ccording to Jonas … [t]he 2018 numbers were slashed 2.5 million units to 16.4 million. And Jonas is projecting 2019 and 2020 to be at just 15 million units per year, a shockingly low number that represents a nearly 20% contraction of the market. Jonas cut price targets on 15 automotive companies, including Ford which saw its price target cut by double-digit percentage points.
As the final burst of chill wind, Jonas also warns that his 15 million figure will only be maintained in future years if the government creates new incentives to encourage car purchases, a tactic last used during the depths of the Great Recession.
The jury is out on whether there’s political will to undertake a new “cash for clunkers” program. But Greve’s take on a sales downturn is comically inexperienced. If it takes two-to-three years for the US market to decline from a 17-million-plus pace to a “replacement rate” of 15 million, that would be a very slow and soft landing. It’s also worth noting that after the financial crisis, the US auto industry rejiggered itself to be able to break even in a market that drops to 10 million to 11 million in annual sales.
A replacement-rate pace isn’t a shockingly low number. It would be a relatively normal adjustment, and probably somewhat overdue by 2020, after almost a decade of robustly elevated sales.
Supporting a tech investment thesis
All this talk about catastrophe and the future of US car sales is being offered by necessity to support an investment thesis around Uber and Lyft. Greve calls these companies a “fundamental threat” to the traditional auto industry, but it’s unclear why that threat would be fundamental, or even really a threat.
The analysis presumes lower vehicle sales because of a rising de-ownership trend, and to that Greve adds the idea that people who don’t own cars will be willing to pool their ridership, essentially sharing Uber/Lyft as taxis. Of course, nobody does that now, and few people have ever been willing to go gladly into pooled ridership. When you want to go from point A to point B, you don’t want to make extra stops at points C and D, and you’re willing to pay for the privilege of a single ride.
Beyond that, it’s worth noting that Uber and Lyft need somebody to build cars for their drivers.
The US auto market has been hot for a while and is about ready to flatten ahead of a typical, cyclical downturn. That’s business as usual, regardless of the effect that ride-hailing startups will ultimately have. It’s certainly fair to call this “peak auto,” as plenty of analysts have.
No structural change
But it doesn’t make much sense to start addressing it as a fundamental structural change in the market. Auto sales go up. Auto sales go down. This has been the pattern for decades. The entire industry has seen this movie many times and isn’t even remotely panicking, especially because of the prevailing sales mix of pickups and SUVs, which are very profitable.
What’s actually happening here is a sort of infection. Prior to the financial crisis, and after the dot-com bust, the US market bounced around a 15 million-17 million annual sales pace for about a decade, with periodic spikes well above that. Automakers gained and lost market share and piled up cash when sales were good. In some cases they took on too much debt and at times they paid out dividends on their shares.
The whole concept of “disruption” was quite sluggish back then, as only mainline computer and software companies made it through the dot-com meltdown and newer firms such as Amazon and Google hadn’t yet exploded. Facebook didn’t exist for most of it.
Investing in those companies was a magnificent growth opportunity, but it’s possible that the wind has gone out of that storm. A new wave of high-growth tech investing needs to come along, as the transportation sector has been identified as appealing, due to its size (trillions of dollars globally) and relatively boring narrative: make cars, sell cars, repeat.
Shoving aside tradition
The traditional industry needs to be shoved aside for this story to work, hence the idea that a completely predictable, run-of-the-mill downturn would be the end of the car business as we know it. But for General Motors and Chrysler to enter bankruptcy in 2009, the US market had to tank to 10 million, with a credit implosion to go along with it.
A slide to 15 million would have been no problem. It’s also useful to consider that the displacement of the old reliable auto business model, with a fleet of over 250 million vehicles on US roads alone, would be asking for major trouble. It would be difficult for any single automaker, much less a new entrant from the tech sector, to add enough manufacturing capacity to fully service demand, even at lower levels.
To be honest, we should be more worried about the sketchy prospects of some or the more vaunted transportation disruptors. Tesla, for example, doesn’t have enough cash to ride out a year, given its ambitions. And Uber is undergoing a major management crisis that has sent CEO Travis Kalanick on an unplanned vacation, placing doubt in the company’s $70-billion valuation.
Lyft could be in pretty good shape largely because it has GM as an investor — insulation from a traditional carmaker with a solid balance sheet.
The bottom line is that the peak auto gloom-and-doom is being overstated because analysts lack a sensible historic framework for the difference between a booming US market and a merely stable one. Their real fear isn’t that the GMs and Fords and Toyotas won’t make it — it’s that their exciting new investment ideas will prove to be unfounded.