In 2017, the future of the global automotive industry is faced with certain challenges that could impact the value of the industry overall. Total shareholder returns and rising costs are proving to create a difficult course for companies to traverse.
At first glance, the global vehicles industry looks strong. Worldwide, sales have hit a record high, with 88 million in the year 2016. This is an increase of nearly 5 percent from the previous year. Moreover, profit margins for both auto manufacturers and suppliers have reached a 10-year high. However, there are two key performance indicators that suggest the global vehicles industry is in distress.
Questionable Share Holder Returns
In the span of the last five years, the yearly rates of return were achieved for investors on the S&P 500 and the Dow Jones Industrial Average were placed at 14.8 and 10.1 percent respectively. In that time period, the total shareholder return for the average auto maker only reached 5.5 percent.
Return on invested capital is also a troubling sign. In 2016, the top 10 Original Equipment Manufacturers (OEMs) returned a frighteningly low 4 percent, which is an estimated half of the cost of capital in the industry. The top 100 suppliers did do a bit better, but they just barely beat the costs of their capital, which resulted in a very miniscule positive return. This was after several years of negative net returns.
These statistics virtually outweigh the positive earnings results and sales that did occur. These numbers illustrate that the sector is much less attractive, or a much less lucrative one to invest in, especially when compared to other industries.
Rates of Return on Investment have Long been an Issue
The rates of return on investment have been an issue in the global vehicle industry for some time. This is one of the leading reasons why so many companies have gone bankrupt, or have hit near liquidations. Those companies that have survived have had to make major adjustments in order to save as much as possible on every facet of the vehicles that they manufacture.
In 2017 and looking even further into the future, the situation appears to be becoming even more ire. The capital cost is very unlikely to come down from the inflation-adjusted levels that they are already sitting at. Furthermore, new capital investments are being pushed toward other sectors, such as autonomous driving vehicles and connected cars.
Changes to Layout and Design could Also Pose Problems
The layout of virtually all vehicles has been relatively stable in regard to engineering and value. However, there is set to be a shift in the layout and design, which could spark even more troubles for the global vehicles market. Several new technologies, including 3D laminated glass, augmented reality heads-up displays that provide alerts for drivers and haptic sensors are all terms that are being tossed around. Moreover, there is an increased interest in changing the overall design of vehicles. The idea is to reposition the front passenger seat so that it can face rear passenger seats.
While these changes are certainly exciting, they pose definite risks for OEMs the suppliers: they will undoubtedly make engineering far trickier and much more costly. Software engineers will be necessary in order to ensure proper implementation and execution of such changes; not to mention, the overall design and build will be trickier. This equates to more materials and more experts that will need to be hired to turn these potential design changes into a reality.
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The Outlook for Vehicle Manufacturers
Given the challenges regarding returns on investments and the constantly rising cost of manufacturing vehicles – especially when taking into consideration the new design ideas that are being suggested – there is no question that many car manufacturers will not be able to keep up with this volatile market. Over the course of the last few years, many companies have gone bankrupt or have reached near liquidation points. Needless to say, the companies that have managed to survive could see serious financial troubles in the very near future. This, of course, could lead to even more bankruptcies or near liquidations.
Paving the Way to Success
In order to avoid catastrophe, there are options available to vehicle manufacturers. Consolidation is one option. Companies can merge together, pool their resources and their ideas, and share the profits. While this may reduce profits for individual companies and shareholders, in the long run, it will actually lead to a better market. Since merging will make more money available to accommodate all of the increasing demands that are placed on automotive makers, OEMs will likely be able to reap more financial rewards when they are combined than they would if they were separate.
Companies that integrate would be able to take advantage of several benefits, including:
- Sharing platforms and manufacturing
- Offloading more development work to technology suppliers
- Redesigning models of distribution
Final Thoughts for the 2017 Global Vehicles Market
While yes, this market may be hitting a rocky road, there are several options available that could make the course much easier to navigate. By taking advantage of collaborations, car manufacturers may be able to see gain instead of loss, which could end up driving the global vehicles market up, instead of pushing it down.
The future sure is an interesting one for an industry that seems solid at first glance. Only time will tell what the future will hold, but one thing is certain: manufacturers and investors alike need to be willing to make changes.
