How to Invest in the Automotive Industry

23 Nov 2022

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Red truck parked in a rocky and rugged landscape.

As giants like Toyota continue their dominance in the automotive industry, disruptors surface new opportunities for investors, from electric mobility and driverless cars to cutting-edge automation technology to the rise of ridesharing.

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Investing in the automotive industry

As a market, the automotive industry serves as an economic bellwether, with stocks fluctuating with oil prices, the cost of raw materials, and consumer confidence. During the pandemic, the automotive industry and its global supply chain ground to a halt, but sales are expected to accelerate, with manufacturers focusing on high-profit models, filling customer demand for smaller-size vehicles, and electric vehicles (EVs). As giants like Toyota continue their dominance in the automotive industry, disruptors surface new opportunities for investors, from electric mobility and driverless cars to cutting-edge automation technology to the rise of ridesharing.

What is the automotive industry?

Dominant names in the industry from Toyota and Volkswagen to Tesla and Nissan drive light vehicles, trucks and buses, electric cars and hybrids, and autonomous vehicles onto roads around the world. However, the automotive industry includes automakers, auto parts retailers and suppliers, and auto dealer groups in a global value chain that drives design, manufacturing, selling, repairing, and servicing of vehicles and their components—and puts consumers behind the wheel.

At the industry’s height in 2017, about 80 million automobiles were sold globally. Materials and component shortages and higher interest rates–-not to mention changes in consumer spending—caused sales to decline, but 2021 saw the industry pulling itself out of the pandemic slump, to about 67 million sales. China, the world’s largest market, saw new vehicle sales increasing nearly 4% to 26 million units, with sales in 2022 expected to grow (1). In the US, the forecast for 2022 had been upbeat, about 15.3 million vehicles sold. However, microchip shortages, recession fears, and global conflicts shook supply chains, and this was dialed down to 14.4 million sales before the end of the year (2). Nevertheless, built-up demand could serve to balance increased raw materials and labor costs.

Automakers don’t make every piece of a car or truck. Instead, they buy them from original equipment manufacturers (OEMs), who focus on rubber production for items like tires and belts, for example. On any one car, there are tens of thousands of parts. Before a car is ever assembled, the making of all of those parts takes a lot of hands and a lot of work. In the U.S., the automotive industry employs more than 91,000 workers in all fifty states, making it a powerful engine driving the U.S. economy (3).

The automotive industry extends to an additional market for aftermarket parts, a market for individual and fleet vehicle sales, a market for vehicle rentals, repairs, and more. Collectively, these subsets of the industry help the automotive industry to create jobs across sectors.

These days, as cars get smarter, their parts are becoming more complicated. Electric cars for instance, require a range of new, component parts, including lithium batteries, chargers, and controllers.

The global supply chain that keeps finished cars moving off the line is crucial to the manufacture of finished vehicles. The global semiconductor shortage during the pandemic stalled production to the tune of eleven million fewer vehicles. Ford Motor Co., for one, slashed its vehicle output (4). The increasing need for new, smarter parts will no doubt power increased demand across the supply chain. Investors interested in the automotive industry are keeping an eye to the future: new technologies and sustainability policies, as well as the disruptors of digitization, connectivity, and automation.

Why invest in the automotive industry?

Investors looking to invest in the auto industry have a number of reasons to greenlight their investments. Inventory ran short and manufacturing engines are powering up to meet new demand. As with many other industries, the pandemic accelerated existing trends in the auto industry, including the growth of online traffic and a “greater willingness of OEMs to cooperate with partners—automotive and otherwise—to address challenges,” according to McKinsey (5).

Just as OEMs are expanding production, car makers are hiring more workers and investing in their facilities, including conversion to manufacturing electric cars. From an industry and consumer standpoint, the pause of the pandemic ushered in new excitement for electric cars, which are key to reducing emissions. As emissions regulations tighten in global markets, the pace of vehicle electrification is increasing. In 2021, 130,000 electric cars were sold worldwide—now that number is sold just each week. In 2021, electric car sales were 9% of the global car market, triple the share from just three years previously (6).

That said, the electric vehicle market is not without hurdles. Namely, EV companies are still up against the familiarity and affordability of standard vehicles in the face of near-term uncertainty, according to the 2021 Deloitte Global Automotive Consumer Study (7).

E-commerce has also allowed for inroads into traditional sales business models. Auto dealers and car makers alike are stressing customer experience, especially online. Although most customers still like to see their car before buying, more are making their buying decisions online. So, while cars are getting smarter, car shopping is too, as car makers build data platforms to enhance the consumer experience.

Autonomous vehicles are also in the works, although they aren’t expected for large-scale rollout just yet. In 2019, the global autonomous vehicle processor market reached $5.07 billion.That number is expected to grow to $42.20 billion by 2030 (8). According to one estimate by UBS Group AG analysts, the global robo-taxi market could be worth as much as $2 trillion a year by 2030 (9). That does not even include the impact that the mass adoption of driverless vehicles could have on other industries who employ the technology.

Connectivity is unlocking more opportunities for investors than just autonomous vehicles. All types of vehicles are incorporating as much software as hardware, with smart driver capabilities, vehicle tracking, personalized infotainment on the road, and automated functionality. By some estimates, a fully 60 to 70 percent of new vehicles sold in North America and Europe by 2030 will be connected (10), which could mean a smoother road ahead for the industry.

How to invest in the automotive industry

The automotive industry will continue to be a key economic driver, especially as innovations like electric power, autonomous driving, and connectivity take hold. While it is still coming back from the impacts of COVID-19, investors shouldn’t shy away from this powerhouse industry. On Magnifi, investors can explore individual companies or search for funds that leverage the innovative technologies that hold promise:

References:

  1. “2021 Chinese market: New vehicle sales up 3.8% to 26,275,000 units, NEV sales 3,521,000 units,” February 16, 2022, MarkLines, https://www.marklines.com/en/report/rep2267_202202.
  2. Lassa, Todd, “Still a Sellers’ Market, Even as New Vehicle Sales Fall in the First Half of ‘22,” July 4, 2022, Autoweek, https://www.autoweek.com/news/industry-news/a40499617/new-vehicle-sales-fall-first-half-2022 (https://www.autoweek.com/news/industry-news/a40499617/new-vehicle-sales-fall-first-half-2022).
  3. “Car & Automobile Manufacturing in the US - Employment Statistics 2005–2028,” September 24, 2022, IBISWorld, https://www.ibisworld.com/industry-statistics/employment/car-automobile-manufacturing-united-states/#:~:text=There%20are%2091%2C097%20people%20employed,the%20US%20as%20of%202022.
  4. Walsh, Dylan, “How auto companies are adapting to the global chip shortage,” June 21, 2022, MIT Management Sloane School, https://mitsloan.mit.edu/ideas-made-to-matter/how-auto-companies-are-adapting-to-global-chip-shortage.
  5. Hofstätter, Thomas, and Melanie Krawina, Bernhard Mühlreiter, Stefan Pöhler, and Andreas Tschiesner, “Reimaging the auto industry’s future: It’s now or never,” October 27, 2020, McKinsey & Company, https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/reimagining-the-auto-industrys-future-its-now-or-never.
  6. Paoli, Leonardo and Timur Gül, “Electric cars fend off supply challenges to more than double global sales,” January 30, 2022, IEA, https://www.iea.org/commentaries/electric-cars-fend-off-supply-challenges-to-more-than-double-global-sales (https://www.iea.org/commentaries/electric-cars-fend-off-supply-challenges-to-more-than-double-global-sales).
  7. 2021 Global Automotive Consumer Study: Global Focus Countries, 2021, Deloitte, https://www2.deloitte.com/content/dam/Deloitte/us/Documents/manufacturing/us-2021-global-automotive-consumer-study-global-focus-countries.pdf
  8. “Outlook on the Autonomous Vehicle Processor Global Market to 2030 - Featuring Intel Corporation, NXP Semiconductors & Tesla Among Others,” February 11, 2021, https://www.globenewswire.com/news-release/2021/02/11/2173911/0/en/Outlook-on-the-Autonomous-Vehicle-Processor-Global-Market-to-2030-Featuring-Intel-Corporation-NXP-Semiconductors-Tesla-Among-Others.html
  9. Unstead, Sam, “Robo-Taxi Industry Could Be Worth $2 Trillion by 2030, UBS Says,” May 23, 2019, https://www.bloomberg.com/news/articles/2019-05-23/robo-taxi-industry-could-be-worth-2-trillion-by-2030-ubs-says?leadSource=uverify%20wall
  10. Bertoncello, Michele, and Christopher Martens, Timo Möller, and Tobias Schneiderbauer, “Unlocking the full life-cycle value from connected-car data,” February 11, 2021, McKinsey & Company, https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/unlocking-the-full-life-cycle-value-from-connected-car-data
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