Peak Auto (III): Global Margin Compression

A teaser, not yet written, but do see parts I and II below!

Peak Auto (II): Tesla Valuations

Mike Smitka

My previous post looked at frivolous investments by assemblers as evidence that's we're at the peak of the automotive cycle. Of course that doesn't mean that we're heading into a trough, just that there's not much upside. Investors in Tesla ought to take that to heart. The company sold about 80,000 vehicles last year in a 90 million unit global market (order of magnitude) that's growing by over 3% (again, a round number). That translations into 2.7 million incremental units a year, the equivalent of 11 new standard 240,000 unit annual capacity assembly plants. From a global perspective, Tesla isn't even a rounding error. In the $100,000+ performance car market they're more of a player, but Tesla's rivals are all launching their own battery-beefed-up or full-battery performance vehicles. Those rivals have global distribution and service networks in place, too. So if Tesla is to expand it must be in the volume segment end of the business.

Peak Auto (I): Frivolous Investments Rise

Mike Smitka, Prof of Economics
Washington and Lee University
Co-author The Global Auto Industry: Innovation and Dynamics, 2017.

The auto industry is at peak. The best indicator lies not in the sales numbers, but in the behavior of the OEMs. Flush with cash, they are again buying businesses peripheral to their core operations, such as ride sharing services.

...car companies frittering away cash is the best indication of peak auto...

Review: The Bug Movie

Mike Smitka

The Bug Movie: Life and Times of the People's Car Produced and Directed by Damon Ristau, Co-Produced by Jason Willenbrock and Tory Alonzo. Chassy Media, November 2016. $14.99 Downloand/DVD, $17.99 BluRay. Available at https://www.chassymedia.com/product/the-bug/.

Publisher's Description: The Bug Movie is a feature length documentary film about the most recognizable and beloved vehicle on the planet: The Volkswagen Beetle. From its dark past in pre WWII Germany, to the Summer of Love, this car captured the hearts of millions of people worldwide. This film explores not only the history of this automotive icon, but also the intense emotional connection it has with its owners past and present… Including Ewan McGregor and his experience with his first VW Bug as a sixteen year old.

I am not a "car guy." My drives have never had a nickname, and seldom get cleaned. The rusted through body panels on my 1988 pickup truck are going to get more rusted. My son can point out cars of note on the opposite side of the freeway. I'm not sure what a Tesla looks like. I live close enough to Hershey, PA that I could visit the classic car fest come October. Indeed, as a member of the Society of Automotive Historians I receive an invitation to their dinner there. I've yet to make it. For me this documentary was thus an introduction to the culture of car buffs, in this case those in love with the classic VW Beetle. Three sorts are depicted in vignettes that develop over the course of this video. Some grew up with memories of it as the family vehicle; for others their strongest memories came through The Love Bug and the other five Disney Herbie films in which a 1963 Beetle was the star. Some just like fixing up old things. Restoring a Beetle to working order is feasible: so many were made that parts remain readily available.

Productivity and US Growth

In the long run, productivity growth is (almost) all that matters. The contribution of additional capital per worker is modest, because the US already is capital rich. It's that diminishing returns thing. We're also highly educated, so there's little room for improvement there in the aggregate. Yes, lots of our young people are ill-served by their "compulsory" education experience, with low literacy and numeracy, and at best weak background in science and technology.