When deployed to this analysis gleefully making predictions about the future and consumer preferences. It included more than 5000 consumer responses across 20 global markets. It’s a very well made report, while it was accurate just a few months ago. The world has changed so much that it’s relevant now it’s surprising how quickly the auto industry is deteriorating. I know many commentators in the media space are trying to be as positive as possible about the future, but as of now, the immediate future for the auto industry looks pretty bleak. I’ve explained in previous article why Tesla is in a good financial position, better than before. But today, let’s talk about the industry as a whole, and why it is that EBS could be the biggest winner out of this crisis. Tesla Taking over the world
Last year was a bad year for the auto industry and we have a cyclical downturn and the demand for cars dropped sharply in many consumer markets, including that of the United States, China, Japan and EU from a total of 79 million in 2018 to 75 million at the end of last year. But of course, that picture looks almost too good to be true now COVID-19 sweeping through the globe has put the entire market to a halt. Most people are staying at home, resulting in a shortage of both demand and supply for cars on paper, as long as auto companies have enough cash for the next three months consensus among scientists is that we will be able to contain COVID-19 in most developed countries, and we will resume our production sometimes in June, not going back to the levels before the crisis, but a significant level of production should be possible. Here’s the problem though. Tesla Taking over the world
Many auto companies are dead. Do not for example is the largest auto company by market capitalization, its long term debt has just crossed 100 billion as of last year, General Motors is a smaller company than Toyota into market capitalization, but it is also around 100 billion dollars in that by the end of last year since 2015 GM has announced a stock buyback programme that’s worth 14 billion. And right now, it is $10.6 billion deep into it. This is a greedy move and not completely unjustified because GM has done well in the past decade after the 2008 financial crisis, thanks to the explosion of the car ownership in China.
Nevertheless, buyback is always a tool to make shareholders and investors happy and is never good for the company. On top of that, most of GM remaining debt is used for buying valuable long term assets, as shown in this chart so GM is careful this time and most money is spent in the right way, but money spent on expansion will be risky regardless in a huge financial downturns such as this, those might be the right decisions, but at a really poor timing on a more fundamental level this is the demand and supply problem for the next three months, both demand and supply will be down drastically unlike the 79 to 75 million sales drop last year.
This time, sales will be cut in half. We’re already seeing worse numbers in various markets. Last month, Bloomberg reported an estimated, 80% drop in auto sales in China and just a few days ago, Forbes projected an 80% dip in auto sales in EU and around a 60% dip in the United States. This shows that the demand for cars in the EU and the United States is more inelastic than that of China, but when 60% of sales are gone. So must 60% of productive materials components workers machines and factory plants.
This is an unfortunate situation for the industry, but it’s not within anyone’s control now, perhaps the worst prospects right now is with long term uncertainty, if the situation is that we stop everything for three months, and it guarantees normalcy afterwards. Our economy is robust enough for that. It is now many experts views that COVID-19 will not go away for at least two years until the vaccine is ready. This means our economy is not going back to 100% before crisis, from a production capability perspective and from a demand perspective, this is going to be worse, especially for the transportation when as requested in the demand will be down throughout this period until we know for sure that COVID-19 is gone, perhaps, the closest example we have right now is China, despite accusations of faking their numbers. Tesla Taking over the world
The country is lifting restrictions and is trying hard to live with this new reality, but even for China, where the infection cases are weighed down the current return to work rules is still focused on strategic industries such as auto manufacturing most entertainment venues are still closed, such as movie theatres and bars. This means that auto industry post COVID-19 will recover better than many other industries. It’s good news. The early number coming out of China are promising its manufacturing PMI index rebound in March, after China contain the virus is a good indicator and a promising hope for the future. It shows that once the situation is under control. We could see expansions in our economy again.