3 reasons why I liquidated all my automotive stocks
Does anyone here own automotive stocks? I used to own some but I liquidated all my positions a few months ago. I am concerned with the prospect of the industry for several reasons:
- Recall risk
We hear about auto recalls at least a few times per year from pretty much every major brand: Toyota, Honda, Volkswagen, Ford, Audi... you name it. It is understandable why recall happens so frequently. A car is comprised of parts manufactured by different companies. That means the risk of a car having problem is the sum of the risks of all the companies involved. If one of the companies or the automaker itself screws up, that's all it takes to go downhill (Takata airbag and Volkswagen, for instance). Each recall costs automakers at least hundreds of millions of dollars on average. It's not only the money but also the customer loyalty that's gone after each recall.
Earlier this week Mercedes-Benz announced that almost every one of its cars sold in Britain will have to have their diesel engines adjusted to reduce pollution levels.
Audi has issued a similar ‘voluntary recall’ of up to 850,000 cars fitted with six-cylinder and eight-cylinder diesel engines, mainly sold in Europe.
Toyota, Mazda, BMW, Subaru, Nissan, Honda, Mitsubishi, FCA (Chrysler, Dodge, Jeep), Lexus, and Ford all have vehicles impacted by the recall
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The competitive landscape is constantly changing
The automotive industry is extremely competitive. Companies spend as much as 10% of their revenues on R&D annually to stay ahead of competition. They need to come up with new vehicles/models every year, in the same way as Apple and its Iphones. However, manufacturing new vehicle models is totally a different level from simply modifying phone features. Think about assembly lines, prototypes, vehicle testing, resources planning, and so on. In addition, when we consider disruptive forces like new technology (electric, hydrogen) and political influence (Trump imposing border tax, etc.), the level of uncertainty is very high at every step of the way. -
There is not much room for value creation in traditional automakers
Since Henry Ford ran the first assembly line in 1913, automakers have followed the same model until now. Although automation has been gaining attention in the past few years, the automotive industry has adopted it for a century. That simply means there is not a lot more room for cost cutting. Although advances in technology will certainly set new highs for optimization, I think the improvement will be modest.
Crunched margins, high uncertainty, and cloudy future are the reasons I stay away from automotive stocks. If I must choose, maybe it makes the most sense to invest in Tesla or Ferrari as these two stocks have unique competitive advantages. However, I think Tesla stock is overvalued right now while Ferrari business model may not be sustainable in the future (although it currently has fantastic financial results).
What do you guys think? Is there any value in this sector that I don't see yet?
