2019: a year of fundamental decisions for carmakers

Disruptive profit strategy : could Detroit mix oil and vinegar ?

The weekly column of Bernard Jullien , former director of Gerpisa, lecturer in economics (University of Bordeaux) and scientific advisor to the Essca Group's Chair of Network Management.

The season of financial results is on this February and most of the world's major automakers are indicating, one after the other, that 2019, as we reckon the years to come, will disappoint shareholders.
 
Only a handful of automakers, such as FCA or GM, have succeeded in improving their results over the year 2018.
FCA nevertheless expects a less promising 2019 financial year. GM has already undertaken a plan to maintain its profit rate in the United States in November, cutting 11,000 jobs. Most of the car manufacturers, like Daimler or Ford, have already seen their results drop in 2018. Ford hopes to do better in 2019 thanks to a fairly drastic restructuring plan for all its activities.
Daimler announced this week that achieving a margin target in the 8 to 10% bracket could not be expected until 2021.
 
The headwinds experienced by the industry in the second half of last year and at the beginning of this year are quite well identified. Some are cyclical. Others are more structural.
 
In terms of short term economic factors, in Europe, the costs associated with bringing vehicles and their engines into compliance with the WLTP standards (Worldwide harmonized Light vehicles Test Procedures) and the unavailability of certain products that this may have generated have weighed on the results of many manufacturers such as Ford or Fiat.
Daimler also suffered greatly in its automotive division and, even more so, for its LCVs. And now, at the end of 2018 and, even more so, at the beginning of 2019, a slow market turnaround is taking shape, as in the United States.
 
On the other side of the Atlantic, 2018 proved to be a more promising year than expected, instead of the feared drop from the 17.2 million registrations in 2017, the figures revealed a slight growth in the market (to 17.3 million). As the market continued to shift from cars to expensive and profitable light trucks and SUVs, the Big Threes continued to make considerable profits home.
GM expects to improve its profitability by assuming that the market will be around 17 million and will continue to favour vehicles such as the Ford F-Series, Chevrolet Silverado and Ram Pickup, which were the top 3 in the 2018 hit-parade.
 
GM has got rid of the European hurdle. Ford is in the red in Europe despite a rather promising 2018. FCA owes its results to RAM and Jeep and suffers in Europe.
If, therefore, the market were really to weaken in the United States and become a little more "reasonable" in terms of GHG emissions and if, at the same time, the signs of weakness were confirmed in Europe, the three manufacturers would be struggling. Toyota would suffer as well but has not bet as much on pick-ups and is stronger in Europe although weakened by Brexit.
 
They would be all the more so since the growth driver and source of profit that China has been able to build - for GM in particular - is not looking very promising. Growth is no longer there and the regulatory requirements on "new energy vehicles" are designed to "sinicise" the Chinese automotive industry - not without success.
The "trade war" initiated by Trump makes it almost impossible to import vehicles assembled in the United States into China. It weighs on raw material costs and manufacturers with high exposure to the "Chinese risk" are likely to be at risk in the coming years.
 
Thus, regarding economic situation, China, the US and Europe provide little reason for optimism for most global carmakers and it is easy to understand why the profit forecasts for 2019 are either pessimistic, as at Daimler, or optimistic by making market forecasts that are likely to be contradicted by the facts.
 
These problems do not currently arise in terms of the survival of manufacturers who generate profits which, even if they are not as high, remain very high compared to what we observed ten or twelve years ago.
Nevertheless, they are of concern because they come at a time when significant investments must be funded to make the shift.
Insofar as the two races in question involve manufacturers between themselves on the one hand and these car manufacturers and these players in the face of "new entrants" in the automotive world, who are often much more profitable and much less subject to the economic uncertainties mentioned above, these drops in profitability and - above all - the choices made to deal with them will be of crucial importance.
 
In 2019, the question of the financial pressure of the automotive industry will be raised quite clearly.
Indeed, if the shareholder demands in terms of shareholder value and payout prevail, the cyclical fluctuations will not imply downward variations in dividends and/or downward revisions of share buyback plans. So, it will almost inevitably be necessary to reduce R&D spending and/or acquisitions intended to acquire technologies and know-how.
Those manufacturers who will make these choices will seek to hide their weaknesses by announcing numerous alliances and partnerships. They will run the risk of losing both races: they will lose out to manufacturers who can protect themselves against these excessive claims; they will have to let an increasing part of the value chain currently controlled by them go in the hands of others.
Conversely, if we consider that the "future value" of the company can only be preserved by maintaining very heavy investments in new technologies and relying only on hypothetical returns on investments, then we must take the risk of asking shareholders - and analysts - to consider that it is normal and desirable for shareholders payouts to be the adjustment variable - rather than those in R&D. We will then see a drop in Earning Per Share (EPS) and dividends without necessarily reducing the enterprise value and company share prices.
 
In a way, the opposition between GM and Daimler can illustrate these two ways of seeing and doing. GM claims to improve its profitability in 2019 and Daimler accepts that it will fall. To save its profitability, GM chooses to bet everything on huge and polluting vehicles, to quit Europe and to try to negotiate in China - GM has also decided to increase dividends for 2018 and 2019.
Daimler maintains its very proactive policy of electrifying its ranges of passenger cars, light commercial vehicles, trucks and buses, maintains its commitment to car-sharing with BMW and Geely and develops its range of connected and autonomous vehicles. Daimler has decided to cut dividends from 3.65 to 3.25 euros.
 
Companies like Tesla or Uber experience insane market capitalisations whilst losing money. Daimler's share price fell by a mere 2% following the announcement of this very reasonable adjustment of its shareholder remuneration policy, necessary to maintain its investment capabilities.
Market assessments of each other's ability to drive or adapt to changes in the automotive industry and mobility seem to be an uncertain compass. Protecting against them rather than submitting to them may well become the key to sustainable success in the years to come.
 
*          *          *
Translated with www.DeepL.com/Translator, corrections by Géry Deffontaines

La chronique de Bernard Jullien est aussi sur www.autoactu.com.

GIS Gerpisa / gerpisa.org
61 avenue du Président Wilson - 94230 CACHAN
+33(0)1 47 40 59 50

Copyright© Gerpisa
Concéption Tommaso Pardi
Administration Géry Deffontaines

Powered by Drupal, an open source content management system