Wall Street Issues “Peak Car” Warning

The production and sale of automobiles has been one of the bedrock industries of the global economy for generations, but sadly nothing lasts forever. Recently, a number of Wall Street cognoscenti have begun warning that the world has reached “peak car.” The implications for national economies are staggering.

“The pain is just beginning,” Masataka Kunugimoto, an analyst for Nomura, “We now expect global auto demand to be down 3%,” YOY in 2019 he told clients recently, according to a report by Business Insider. He has plenty of company among his peers in the world of finance.

“The industry is right now staring down the barrel of what we think is going to be a significant downturn,” John Murphy from Bank of America told a conference last week. The decline of sales in China “is a real surprise,” he added.

Michelle Meyer and Anna Zhou, also from Bank of America, agree. “In our view, the peak in auto sales is clear. A core view of John Murphy, our auto equity analyst, is that the auto cycle has peaked. And he expects further slowdown. He sees new auto sales heading lower largely due to a tidal wave of used vehicles which “depresses the prices of used vehicles.”

Their colleague Ethan Harris feels the same way. “There is a negative narrative developing in the auto sector as inventories climb amid softening demand. Inventory for light trucks and SUVs has been climbing to uncomfortably high levels.” Uh oh. Those are the very vehicles US manufacturers rely on to maintain their profitability. You think Tesla is in trouble? Look around. The situation in the broader industry is much worse.

For instance, the Society of Motor Manufacturers & Traders in the UK reported recently that total car production in the UK was down 45% compared to last year in April. Commercial vehicle exports collapsed a staggering 89%. Part of that is attributable to the financial turmoil created by the Brexit brouhaha and part can be traced to a surge in new car sales in advance of new rules for measuring auto emissions. But no matter what reasons are trotted out to explain the decline, the news is bad and getting worse.

The Death Of Diesel, The Rise Of TaaS

Analysts are warning clients that diesel sales will collapse into a small niche as their polluting exhausts are regulated out of existence. Petrol/gasoline vehicles will be next, as governments in Europe and the United States set dates for manufacturers to switch their models to electric. (Well, not in the US so much so long as the Trumpies are in power and wielding their sledgehammer against government regulations.)

Furthermore, as transportation as a service, on-demand services like Uber and Lyft grow, more people will decide they no longer need to own a car of their own. Why would they when it’s cheaper to ride around in someone else’s car than buy or lease one of your own?

Less Cars, Less Jobs

The decline in auto manufacturing is having an effect on employment. Honda is closing its factory in Swindon, England, resulting in the loss of 3,500 jobs. Automakers cut 38,000 jobs globally in the past six months, according to Bloomberg. Ford announced recently it is eliminating 7,000 workers, most of them salaried employees.

Bank of America has published a research note recently which warns the auto industry is “shifting from second gear to reverse.” It says, “A weakening in the auto cycle will serve as a drag to the economy. There are a few channels by which the decline in autos will impact GDP. Autos influence GDP through consumer spending and production, with inventories serving as the residual between what is produced and sold.”

BoA continues, “When sales weaken, it will lead to weaker consumer spending. Motor vehicle production is already on course to be a drag this year, slicing 0.14pp [percentage points] from 1Q GDP growth. We expect it to cut nearly 0.2pp to annual growth this year. Relative to last year, that is a reversal of 0.4pp.”

The decline won’t be total. Cars won’t go the way of the horse and cart, claims Business Insider. More likely the aftermath of “peak car” will look like the television business — a long, slow decline that takes years to play out. “It doesn’t feel great but it is manageable,” Bank of America’s research team says.

What does “manageable” mean? Already we are seeing the signs of consolidation within the industry, with automakers seeking strategic partnerships to lower product development and manufacturing costs. Ford and Volkswagen are talking about electric trucks. FCA and Renault are considering a merger, one that may or may not include Nissan. Rumors are rampant about a Ford/GM merger.

New technologies over the past decade have made car companies less about manufacturing and more about assembling components sourced from suppliers around the world. For every job in manufacturing, there are 2 to 3 more in supporting industries such as supply, sales, banking, and marketing.

“Manageable” probably means company executives will concentrate on preserving their enormous compensation packages instead of addressing the structural issue that are leading to the slow down in auto sales. One thing we can be sure of is the industry 10 years from now will look a lot different than it does today, with a lot of companies in business today gone, joining the ranks of Plymouth and Pontiac as car companies that used to be but are no more.

The only constant in life is change despite the fervent wishes of many that things should stay the same forever. Kodak, Nokia, Xerox, and IBM are four companies who never saw the changes coming. Which car companies will be next to experience the process of “creative destruction” that forms the basis of capitalism as we know it?