Our analysis suggests that the current version (v1.0) of Mobility on Demand (MOD) is more concentrated than investors think—8 cities account for more than 50% of all US revenue. Expanding beyond these areas requires the cost of MOD to become much more competitive (with private vehicle ownership) than it is today. We illustrate how difficult this will be… at least under the current, human operated model.
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U.S. sales have gotten off to a slow start—with 16.6 MM SAARs in both Jan and Feb (Note: 2018 was 17.2 MM). While this is consistent with our forecast (16.7 MM SAAR for this year), this prompted a flurry of calls regarding the state of industry inventories (which ended Feb at 77 days, 7% above “normal”), and potential risks to production (impacting OEMs/suppliers) and/or pricing (incentives from OEMs). We revisited our production assumptions and concluded that inventories can easily be brought back in-line with historical levels based on a normal seasonal uptick in sales, and very modest (100k) adjustments to production.
General Motors disclosures should remind investors that GM has an interesting SOTP angle. While the 10K dropped language related to timing of Cruise Commercialization (we still expect this w/in the next 12-months), the company is clearly preparing for bigger things. Cruise employees and management are receiving Stock Options and RSUs that vest upon an IPO. On the negative side, GM also continues to disclose potential residual risks related to the bankruptcy of old GM (Plaintiffs want 30 MM additional shares for the GUC trust; GM will fight this at a March 11 hearing); The Takata recall could cost $1.2 bn (though GM is still seeking to avoid a recall).
We expect the US Dept of Commerce to release a report this weekend asserting that automotive-related imports are a national security threat, thus authorizing the Executive branch to enact tariffs without Congressional approval under the Section 232 statute. We think actual tariff enaction is unlikely given widespread opposition from U.S. constituencies (Auto Dealers are politically powerful; even the UAW has not offered its endorsement). Nevertheless, general uncertainty during the 90-day post-report evaluation period could have stock implications: Slightly negative for U.S. Suppliers, negative for U.S. Dealers and Aftermarket Retailers, negative for non-U.S. OEMs, and neutral for U.S. OEMs.
Ford’s Q4 earnings release and conference call(s), which took place after the close on Wednesday (1/23/2019), should be perceived as somewhat better than expected. Of course, the high-level numbers were identical to those provided in Detroit on 1/16. But management’s tone seemed much more confident. We had the following takeaways:
1) Financial benefits from the VW collaboration are not expected until 2023... an eternity by Wall Street standards; 2) No specific net cost reduction targets, despite annual cost increases averaging $1.7 bn/yr over the past 5-years, and; 3) Ford’s (1/16) guidance for “Potential” improvement in 2019 seemed non-committal at best.
There were numerous interesting takeaways from the Wolfe Research Auto Conference in Detroit, including revealing insights into recent shifts amongst U.S. New Vehicle Buyers (there may be less risk to industry mix than we perceived), the trajectory of battery costs, insights into Powertrain plans being made by Auto OEMs, and revelations on the Ride-Share business model. All of these have long term implications.
No surprise, Ford announced the beginning of what is likely to become a major restructuring plan for its underperforming European business. Details are sparse. Ford did not provide any info on the cost (restructuring in Europe can cost $350k/head) or timing of benefits (we would not expect achievement of Ford’s 6% margin target until 2021, at the earliest). Per Ford’s release, they are “accelerating key fitness actions and reducing structural costs. In parallel, the fundamental redesign will include changes to Ford’s vehicle portfolio, expanding offerings and volumes in its most profitable growth vehicle segments, while ... addressing underperforming markets.”
The Market is bracing for challenges as we transition to 2019, including lower Auto Production (particularly in China and Europe during 1H19), higher Rates (which raise concerns about Mix, Pricing), the strong U.S. Dollar, Regulatory Content, unpredictable Government Policy/Tariffs, the burden of increased Spending on Technology with uncertain returns, and in some cases discontinued passenger car products.
Most major U. S. OEMs and Suppliers will provide 2019 guidance in mid- to late-January… at our Detroit Auto Show Conference (Jan 15-16), or when they deliver Q4 earnings late January/early February. Management teams are pulling these forecasts together now. And they are doing so amid an unusually large number of market uncertainties (i.e. China, Europe, and NA production; company specific concerns for Ford (China, UK), JLR (China, UK), GM (discontinuing models), and local Chinese OEMs (declining at a double-digit rate in their domestic market). Based on our discussions with Industry Management teams we suspect that most will incorporate an extra dose of conservatism into their 2019 Guides. We are fine-tuning our estimates for Lear, Visteon, and Autoliv as we intend to take the same tack (e.g. today, we are fine-tuning our 2019 net new business backlog estimates, initially provided in early 2018, to reflect updated market and FX assumptions). See pages 3-6 for more details.
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