Insight & Analysis

Car industry finds its way back on track

Published: Jun 2023

Supply chains and margins might be under pressure, but positive consumer spending trends are giving treasurers at major auto manufacturers cause for cautious optimism.

At the beginning of this year there were serious concerns around the health of the car manufacturing industry. Many economists were predicting a downturn and Tesla CEO Elon Musk spoke about a ‘serious recession’ that encouraged him to cut the price of his company’s vehicles.

The lower profitability of electric vehicles has forced some of the biggest names in the automotive sector to instigate cost cutting programmes that have already seen thousands of job losses. Ford CEO, Jim Farley said last month it could be another seven years before the cost of producing an electric vehicle reaches parity with its combustion engine equivalent.

Earlier this month, the Chief Financial Officer of Volkswagen’s passenger car business said it would cut its costs by more than US$10bn over the next three years after seeing a fall in returns in the first three months of the year. “The Volkswagen Group is focusing even more strongly on profitability and cash flow,” said Arno Antlitz.

In May, Ford admitted it needed to remove US$7bn in costs to remain competitive. The company’s Chief Financial Officer, John Lawler, admitted it would be challenging to convince markets this could be achieved.

“You are not going to believe us until we start delivering it because we have told you this before,” he told an investor day presentation. “That is the truth. We have and we haven’t delivered. We can talk about it, but we have to prove it.”

Suppliers have also felt the pain of abnormally high-cost inflation that has led to difficult pricing conversations with manufacturers at a time when car makers are looking to remove billions of dollars from their cost base.

In its most recent quarter, parts supplier BorgWarner posted lower-than-expected adjusted earnings as it continued to grapple with supply chain constraints, while car accessories retailer AutoZone also missed its target for quarterly sales.

At the end of last month, aftermarket parts provider Advance Auto Parts lowered its full-year sales forecast and quarterly cash dividend and cut its full-year profit outlook due to rising costs of materials, shipping and labour. “We expect the competitive dynamics we faced in the first quarter to continue, resulting in a shortfall to our 2023 expectations,” said Chief Executive Officer Tom Greco.

The squeeze was also being felt on the forecourt. Car dealership Carvana saw its share price fall 11% despite posting better-than-expected figures with analysts putting this down to gains from the sale of outstanding invoices.

However, the outlook has brightened somewhat in recent weeks. Retail sales in the US unexpectedly rose 0.3% in May – beating forecasts of a 0.1% decline on the back of a 1.4% increase in motor sales – and the prices of raw materials and availability of key components such as semiconductors have improved.

A report by JD Power and LMC Automotive suggested new vehicle sales were up 15.6% in May compared to the same month last year.

“If the consumer remains at this strength, we could significantly outperform what we said about full-year performance,” General Motors’ Chief Financial Officer Paul Jacobson told a Deutsche Bank investor conference last week.

Despite increased investment in electric vehicles, Lawler said Ford would see growth in combustion engine vehicles for at least the next few years. Meanwhile, analysts reckon General Motors will make tens of billions of dollars of additional profits by continuing to manufacture combustion engine trucks and SUVs until the middle of the next decade.

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