Even the most ardent glass-half full defenders of the automotive industry might be getting a bit nervous as more existential surprises spring out of left-field.
Automotive industry investors braved the coronavirus-inspired sales slump in 2020 hoping for a sharp “V” shaped recovery. The virus returned and the “V” was flattened, but long-range forecasts still promised sunlit uplands, soon. Now the industry has been blind-sided by another crippling, unscripted guest, a shortage of microchips. This seemed at first like maybe a month-long problem, but it could last until 2023, according to industry analysts at Fitch Solutions.
At least these problems look solvable and promise a return to profitable business as usual.
Except for this new bombshell from investment bank Morgan Stanley
Morgan Stanley analyst Adam Jonas put it this way in a recent research note, describing a talk with an Environmental, Social, and Corporate Governance (ESG) client.
“Adam, the legacy (manufacturers) trying to launch their own EVs is like trying to plant a delicate orchid in a radioactive forest,” Jonas said.
Jonas said in a report after a conversation about General Motors
This would presumably apply across the board to all ICE makers.
“We are just now beginning to engage with a new class of investors who believe that the value of the ICE business may actually be quite negative – potentially to the tune of a negative value that exceeds the market cap of the entire legacy auto company today,” Jonas said.
Jonas adds this to his report.
“We believe the chances of legacy (manufacturers) to successfully transition to EVs while being attached to the same company that continues to manufacture ICE vehicles may be remote,” Jonas said.
Other experts take a similarly jaundiced view of the prospects for traditional automakers, assuming they will be swept away by upstart and well-funded high-technology companies like Apple
Not Bernstein Research analyst Arndt Ellinghorst, who expects great things from some traditional automakers in 2021.
“We obviously object to this view and, interestingly, we receive an increasing number of calls where well-respected investors are questioning this (negative) narrative. Our conviction is that the autos multiple should improve in 2021,” Ellinghorst said.
Ellinghorst believes auto shares are undervalued and prospects are good, and said this in a report.
1) On the back of our changed lifestyles, we all experience that “the car” is the personal mobility winner from the pandemic.
2) We also remain convinced that some traditional (manufacturers) will play a leading role in electric and connected mobility.
3) Industry self-help from improved pricing, cost management and capital allocation will support earnings and cash flows.
Ellinghorst expects some traditional manufacturers will be able to handle the switch to electric vehicles and connected mobility when momentum hits full stride.
But this might be derailed if the current chip shortage continues. Many big carmakers have announced month long slowdowns or stoppages in production. Investment bank UBS expects all major manufacturers will be hit in the first quarter of 2021.
Fitch Solutions reckons it could be much more serious, and last for a couple of years.
“It is difficult to say exactly how long the semiconductor shortage will last, however, by our estimates we believe the shortage could continue until the beginning of 2023,” Fitch Solutions said in a report.
Fitch said the industry has failed to update its supply chains from the so-called “just-in time” model to a more diversified system, while next-generation vehicles demand more semiconductors and this could lead to a shortage of supply of vehicles posing a risk to sales growth, certainly in 2021. The shortage is hitting all the big auto makers in the U.S., Europe, China and Japan.
“We currently forecast that global vehicle production will rebound just 5% in 2021, from an estimated contraction of 19.3% in 2020,” Fitch said.
Meanwhile there are plenty of positive sales forecasts out there, despite these negative noises.
Investment researcher Evercore ISI
“Global growth is rebounding faster than expected after bottoming at a stronger-than-feared level. Unprecedented fiscal and monetary support coupled with human ingenuity in the form of vaccines, treatments, and personal safety measures mitigated the economic and market impacts of a once-in-a-century shock,” Evercore ISI said in a report.
“Vaccine rollouts, a continuation of fiscal and monetary support and the general decline in uncertainty will contribute to economic momentum and strengthening fundamentals,” it said.
French consultants Inovev expects European sales to increase about 9% in 2021 to 15.1 million, by 3% in 2022 to 15.5 million and hit 16.5 million in 2025.
“We will not return to 2019 levels before 2030 in Europe. Globally, we will return to 2019 levels as early as 2024,” Inovev said in a report.