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Auto Industry: Pace of Growth Slows, Dangerous Turns Ahead

Thomas Paulson
Sep 22, 2023
Auto Industry: Pace of Growth Slows, Dangerous Turns Ahead

There’s been a lot of news in the auto industry since we last wrote about it. Below we will touch on the United Auto Workers (UAW) strike, Ford’s recent battery electric vehicle (BEV) sales and production levels, and the recent slower pace of new vehicle sales (recall that overall retail sales also slowed in August).

  • We've spoken in the past about how Tesla has a significant cost advantage in BEV, with plans to drop its unit costs by 50% over the next few years. This is in contrast to the legacy original equipment manufacturers (OEMs) that have far higher costs on their legacy fleet and that lose money in their BEV businesses as they try to reach scale efficiencies. Additionally, the shift from internal combustion engine (ICE) to BEV is existential for the legacy OEMs, meaning that a non-successful transition will leave them increasingly marginalized as their product levels fall. For the UAW workers, Ford’s CEO has said that producing EVs takes 40% fewer manhours. (There are manhours that can be redeployed into manufacturing batteries and semiconductors.)
  • Bloomberg (and other outlets) reports that the Detroit Three (Ford, General Motors, and Chrysler-parent Stellantis) have an hourly rate of $64, which is higher than non-union foreign OEMs ($55 per hour) and Tesla ($47 per hour, plus stock options). Per Bloomberg, the UAW’s demands would push GM and Ford’s hourly rate to $150 and the cost per delivered vehicle up by $2,000 or more. Analysts peg the Detroit Three’s labor costs at $3,000-$4,000 per vehicle, which is much higher than Toyota’s hourly labor cost ($3,000 per vehicle) and Tesla (around $2,500 per vehicle). Moreover, the agility to make the transition from ICE to BEV is a factor during a time when agility and speed are imperative. As such, we are concerned that many observers believe that the strike could be a long one (2 months+)
  • Ford’s most celebrated BEV is the F-150 Lightning. However, for August, unit sales of only 1,000 (and 11,000 units sold year-to-date) suggest that production continues to be constrained. The earlier Mustang Mach-E is selling less than 11,000 units per month, which implies that it is now a “niche” vehicle. Given the number of recent high-profile hires at Ford, they are clearly still “building the team” for the Ford Model-e BEV business.  At a recent investor conference, Ford CFO Peter Lawford said, “The curve [of EV adoption] isn't accelerating as quickly as I think a lot of people expected. I think some of that is their willingness to pay less of a premium for the EV. I also think that some of the inconveniences that come with an EV, they're less willing to deal with that. That means to me that the curve is going to push out a little bit, but we'll get there eventually...I mean think about the U.S. this year, EV sales are up 50%. It's coming, it's here. It's just at what rate of pace and change is that going to unfold.” GM’s recent BEV production has had spotty execution, and they are running behind schedule in their ramp this year, again. The company reversed itself on retiring the low-price Chevy Bolt, which is now to continue as part of the company’s portfolio, which is a strange reversal, but given that it is in production, its continuation likely reflects production issues with the new BEV models.
  • August sales were lighter than recent trends, and September looks to be also lighter. Our data suggests weaker dealership visitation trends to the last four weeks on a year-over-year basis (below), trailing the first four weeks of July by a low- to high-single-digit clip despite an increase in dealership inventory levels and incentives ($2,400 per vehicle, up 113% year-over-year). For example, the average Hyundai incentive for August was $2,400 versus $400 last year. The seasonally adjusted annual rate (SAAR) for August auto sales was 15.2M units, or +12% year-over-year, which was softer than June and July. (The SAAR reflects both retail and fleet. The retail SAAR was only 11.6M versus a 13M trend, representing a notable step down.) The Detroit Three lost share (-110 basis points year-over-year to 43.6%) whereas Asian brands gained (+170 basis points to 46%) led by Honda (+220 basis points to 8.4%). Overall, BEV sales were up +55% to 8.3% of vehicle sales with Tesla up +34%. Non-Tesla BEV sales were up +107%.
  • Industry analytics group Cox Automotive in their August sales review stated that: (1) Elevated prices and higher interest rates for auto loans make purchasing new vehicles unrealistic for average shoppers. Many shoppers are pivoting towards used or less expensive vehicles; and (2) More younger shoppers plan to delay purchase and wait for lower prices. Rather than spending on vehicles, more of their share of wallet is going towards housing, utilities and travel. Given the moderating pace of sales--even for Tesla--and the building level of EV supply coming to market, Tesla appears to be moderating is pace of production, which is what Placer shows for both plants, Austin and Fremont.
  • Where does all of this leave the Detroit Three? For the moment, we wouldn’t expect the strike to have an impact on the Detroit Three relative to the competition. However, should the strike persist through October, that would impact their dealership inventory, tailored orders, and their ability to fund incentives. And so, should the strikes last till the second half of October, we will revisit dealership visitation. Additionally, we expect that the OEMs Q3 earnings reports are going to be “highly dynamic.”

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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