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Industry Analysis: Automotive
The Automotive Industry is comprised primarily of the world’s largest passenger automobile and light truck manufacturers. Through broad dealership networks, most members of the industry sell vehicles in the global market, covering developed and emerging countries. Automotive manufacturers offer a variety of makes and models, though there tends to be limited brand integration at the marketing, advertising, and dealership levels. The bulk of these companies operate production facilities in multiple geographic regions.
Automobile manufacturers are subject to the demands of a vast international pool of customers. Economic conditions affect overall industry sales. Car lot traffic perks up during a boom period, and empty showrooms are commonplace during a downturn. Driving habits can change according to the economic cycle, and therefore, product lineups are always shifting, with new models, innovations, and technologies being developed to meet these demands. As a result, dealerships try to showcase a wide range of offerings, from small compact cars to sedans to light trucks and sport-utility vehicles (SUVs). Drivers’ tastes and finances are varied and often change. Thus, showrooms will often have sports, economy, family, and luxury cars on hand to meet customers’ desires. Luxury brands, with their high quality standards and advanced features, sell at premium prices and carry rich margins.
The price of gasoline (and diesel fuel) is an important factor influencing customer demand. Indeed, the rise and fall of gas prices since the 1970s has caused buyers to place varying degrees of emphasis on vehicle fuel efficiency, durability, engine power, and quality. Accordingly, market categories and product lineups evolve to meet customer preferences. Examples are crossovers, which combine the features of an SUV and the traditional car, and hybrids, utilizing the benefits of gasoline and alternative power (electric) sources. In order to stay profitable, manufacturers and dealers must properly gauge demand and carry the optimal mix of autos for each period in the business cycle.
To assist customers with purchases, and support sales, many companies offer low-rate financing programs and attractive incentives, such as discounts and cash back. Warranties, covering defects and repairs, are another means to lure drivers into showrooms. Another way to generate revenue is to provide vehicle leasing. A company can benefit from leasing via recurring payments over the life of one or more contracts and the eventual sale of the vehicle. Another good source of revenue is the sale of new or used cars to the government and to private fleet owners (e.g., rental companies).
Costs & Expenses
The auto industry is both capital and labor-intensive. These companies have to manage numerous costs and expenses associated with facilities, materials, parts, equipment, product development, and employment. At times, the prices of key raw materials, such as steel, can surge to record levels, requiring a nimble hedging strategy. Research & development and marketing and advertising expenses will have a discernable impact on the cost budget, as well. Too, given the seasonal nature of demand and new product launches, effective working capital management is crucial in supporting sales and controlling costs and expenses.
The cost of labor has a big impact on competitiveness and profitability. North American and European manufacturers are heavily unionized. Though their power and influence has been waning for a number of years, members of the United Auto Workers, for instance, still make up a good portion of the U.S. and Canadian work forces and have an effect on the industry’s health. Medical and pension benefits are substantial and can be a competitive disadvantage, especially compared to car makers based in Asia, where wage costs are lower. Domestic union salary and benefit concessions, and import tariffs, help to narrow the price advantage of foreign competitors.
Over its history, the American automotive industry has built up considerable scale and, at the same time, weighty pension and healthcare obligations. U.S. manufacturers have had to rely on debt to maintain operations and pay out benefits. Interest expense is significant. Production plant and dealer network consolidations have become common in an effort to protect net profits. Domestic companies have suffered market share losses over the longer term.
The Automotive Industry is an important segment of the global economy, and its performance often tracks that of the broader business cycle. Investors seeking above-average price appreciation need to accurately time that cycle when taking a stake in this industry. Some of the group’s stocks offer a modest dividend to support investor loyalty. We caution that many of these equities carry low marks for Stock Price Stability and Earnings Predictability.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.