Global Recession 2022: The Old Auto Industry’s Decline
The idea for this article came while analyzing the emergence of new-mobility, including ride-hailing, car-sharing, micro-mobility, autonomy and many other new transportation phenomena.
I was trying to reconcile these new-mobility phenomena with Tesla’s impact on the auto industry, which I discuss in another article from 2016.
After some initial analysis, it became clear that the combined strain from new-mobility and electrification of cars would be too much for the incumbent auto industry to handle. This is primarily because the incumbents are currently underestimating the force and speed of the upcoming disruption.
If there is one thing I am an expert on, considering my exceptional track record of investing in large-cap, disruptive tech companies, it is disruption. The auto industry’s disruption will be pretty big.
And since the leadership at these incumbent organizations is underestimating the “force of the wave”, central banks and governments are also likely to underestimate it.
Germany and Europe broadly will be heavily affected by this auto industry disruption. Japan will also suffer.
This strain will also be exacerbated by the“gold-rush” structure of the new-mobility marketplace. Over time significant funding will chase after the emerging transportation modes. This will heat up the market. Yet many of these new ventures will not survive, since the transportation market has several, natural limits. So eventually there will be significant consolidation.
Hence these phenomena, together with the incumbent auto industry’s geographic concentration and the timing of a late-cycle economy, could trigger a global economic recession.
Therefore, I began publishing on LinkedIn a chain-format, systemic analysis of these phenomena, to discuss them in more detail.
Below is the 16-piece chain, published on LinkedIn starting Feb 2019. Since these were all individual posts, they contain some content repetition.
1.Recessions are notoriously difficult to predict and even more difficult to time (especially 3 years in advance). So there is some maybe here. But there is a high likelihood that the next global recession will be triggered by the decline of the incumbent Car-Industry and its value chain. The Car-Industry is currently being disrupted from all directions. Tesla is disrupting the high end, which is highly concentrated in Germany (Europe’s powerhouse). Ride hailing and micro-mobility are disrupting the low end, which is concentrated in US, Japan and China (important global economies). Transportation electrification broadly is disrupting the existing value chain of part suppliers, gasoline refining and supply, dealerships and the ICE servicing industry (which are distributed).
And there is autonomous, which will interact with it as well. All these are occurring somewhat simultaneously (within the next 3–4 years) and the incumbents will not have enough time to react. Also since the innovators are more efficient and more automated, and the incumbents are old and inefficient industries, most of the lost jobs will not be absorbed by the disruptors. There are several other simultaneously occurring phenomena that will strengthen this thesis. We will discuss them in more detail in future posts.
2. The reason the incumbent car industry’s decline could trigger a global recession is because of the industry’s structure: 1. The way it is geographically concentrated and 2. The length of its value chain with suppliers, dealers, financing, servicing, gas refining, gas stations, oil extraction… The high end car industry is so concentrated in Germany, that it is probably Germany’s most important industry. If the high end goes through a significant decline because of Tesla, Germany will surely experience a recession, which could spread to Europe. Similarly in Japan the car industry is the most important industry, so if the high end and low end experience decline because of new-mobility, Japan could also experience a recession. In the US the car industry is pretty significant although not as much as in the other two nations. Also the nature of the ride hailing and micro mobility marketplaces is very interesting. Both are likely to experience over-investment, because of prolonged attrition battles that will be fought to capture the large, global, transportation market. This will lead to a “gold-rush” phenomenon. But in the end there will be significant consolidation, which will also lead to job losses and financial losses. Next we will systematically discuss the scenarios.
3. Just starting with Tesla’s impact on the high-end car market, but the system has no linear starting point and is circular, with many phenomena interacting. Tesla wants to start Model Y production early 2020 and volume production late 2020. By mid to late 2021 both the Model Y and Model 3 could reach close to demand level capacity. This ramp up will be sudden, since it will have somewhat of an exponential growth to plateau, because the China factory will go online and Tesla can start serving China’s large and growing car market. By mid 2021 the German car makers will have invested heavily into electric cars and with their first electric car fleets out. But the first generation of German electric cars will not be competitive against Tesla, also because of yet lacking charging infrastructure coverage (and inferior self-driving tech). Neither will be the German gasoline cars at that point. So Mercedes, BMW, Audi (VW) will lose sales and will be in dire strain. They will heavily cut cost and jobs. This could throw Germany into a recession also affected by Europe’s unstable economy late in an economic cycle, strained by Brexit and also affected by France and UK having to deal with declining car industries of their own. So the recession could spread into Europe.
4. Jaguar and Land Rover brands (UK) will also feel the impact of Tesla’s assault on the high-end car market. France has mainly a low-end market with Renault and Peugeot. These will be more impacted by the rise of ride-hailing and micro-mobility. This we will discuss later. But the overall system’s dynamics could amplify the German/European recession. In Japan we have another dominant and concentrated car industry with Toyota, Nissan and Honda. All three have their high-end brands with Lexus, Infiniti and Acura. These three will also feel the impact of Tesla’s ramp up by 2021. Their electric or gasoline fleets also won’t be able to compete with Tesla at that time. They will lose sales and cut cost. Also the low-end of Toyota, Nissan and Honda, which is a much bigger part of their business, will feel a strain from ride-hailing and micro-mobility. So if Toyota, Nissan and Honda feel a strain both on the high and low end, they will cut cost and jobs. This could throw Japan into a recession, also affected by a late cycle global economy. South Korea has a low-end car industry and South Korea’s economy could feel a strain, also as it interacts closely with that of Japan. Next we will discuss the phenomena at the low-end of the car market.
5. The low-end of the car market is going through a creative destruction as well. Ride hailing, Micro Mobility, Electrification, Autonomous are all creating new transportation modes. The incumbents, sensing the times, are probably internally very worried. So there is a slew of investment into electrification and their plants, into other transportation modes, i.e. ride hailing and micro-mobility. The incumbents are creating partnerships and alliances with Uber, Lyft, Google’s Waymo, Didi, Grab, Ola and all the other big players. Unfortunately, the incumbents don’t have much leverage in these partnerships, because with the new modes the hardware is becoming more commoditized. Their strain will not be alleviated much, as cars are being commoditized. Soon many will realize Micro-Mobility’s impact and will create Micro-Mobility plays to hedge, i.e. Ford buying Spin, Mercedes investing in European scooter startups and GM building electric bikes. The timing and evolution would be easier to describe if Uber, Lyft and Didi were public and there was more public information. Initially there could be few years of investment, euphoria, some over-investment, but it all will come to destructive consolidation of the car industry and its value chain.
6. As the low-end is disrupted by ride-hailing, micro-mobility, electrification and autonomous, the car is becoming commoditized and unbundled. — With sharing models the hardware is less significant and loses psychological value, lowering profit for the hardware makers. — Also Millennials are delaying/reducing car ownership with many new transportation modes available now. — In addition many use cases will be served by other modes and will not require a car, as is the case with the emergence of delivery robots (Nuro raising $1B) and booming micro-mobility. All these phenomena will strain the sales and profits of low-end car makers. The emergence of electric-car manufacturers (Rivian) or the booming Chinese electric car industry, will also increase pressure on the incumbent car makers. If we fast forward by 3 years to give all these phenomena time to play out, then while Tesla is disrupting the high-end incumbents in Europe, the low-end will be in dire strain from new-mobility phenomena. The low-end will also cut cost and reduce headcount. Being concentrated in Japan and US, this will pressure these economies and with Europe in a crisis, the crisis could go global… especially with the ICE value chain also in simultaneous decline.
7. Let’s discuss pickup trucks briefly. Trucks are one of the highest margin vehicles for US manufacturers. Trucks generate a large portion of profits for GM, Ford and FCA, and are important for their survival. Tesla intends to unveil its truck in 2019. So it is possible that it could reach volume production by 2021. Similarly, Rivian has announced that it wants to reach volume production for its truck by 2021. Rivian should be taken more seriously now after raising a large round led by Amazon. Amazon wants to enter the automotive market and its tech infrastructure and resources could be very valuable for Rivian. So how much better will Tesla’s and Rivian’s electric trucks be in 2021 compared to those of Ford, GM or FCA? If the answer is much better, which is likely because of better tech, than this spells more trouble for US automakers. This could cut off a significant profit stream and push Ford, GM and FCA into more trouble. It could lead to more layoffs and plant closures. Trucks are just another example of how the incumbent auto industry is in simultaneous attack from all directions. And many of these threats are converging around 2022. (as a side note, Honda announced today that it will close a large UK plant in 2021).
8. Let’s discuss China’s car market and its nascent, electric car industry. China has the largest car market in the world. The incumbents for years have tailored their operations to serve that large, emerging market. But now China has a nascent and growing electric car industry with brands like Nio and Kandi taking lead and competing head-on with the incumbents in the low-end market. Going forward it will become more challenging for any foreign company to compete head-on with Chinese electric car makers considering regulatory and tariff frictions. Also Tesla just broke ground on its China factory (with government support) and in 2021 will compete in the high-end market against the incumbent car makers. So the anticipated demand, which for years guided the planning and operations of the incumbent car companies will not materialize, given potent, additional competition in China. This increased competition could affect margins or lead to production cuts, therefore more job cuts for the incumbents. In addition China has a tradition in electric micro-mobility products and given the growing traffic in large Chinese cities, micro-mobility sharing services could have a significant impact on car usage, hence create another headwind for the incumbents.
9. Let’s discuss the ICE value chain. Recent data has shown that in 2018 ICE car sales declined YoY in US, Europe and China for the first time in a while. This is just the beginning of a larger trend that will accelerate as the ICE fleet is replaced by electric cars. Soon the public will realized that electric is the future and people will delay car purchases while waiting for new electric models to launch. This will slow down ICE sales even more and it will become more drastic once every car manufacturer launches an electric fleet and abandons ICE research. The ICE value chain is pretty long and it includes servicing, refining, gas stations and many other industries. It is clear that in the long-term the ICE value chain will disappear as the gasoline car will disappear. In the near-term this phenomenon will continuously put pressure on these industries and create more headwind for the global economy. It will pressure the oil extraction and refining industries, which are pretty significant. Also as the old interaction models evolve, dealerships and car financing institutions will have to restructure and adjust to the new models. So the decline of the ICE value chain is another significant, economic headwind that will emerge by 2022.
10. Let’s discuss the creation part of the phenomenon. There will be significant creation as well, which will extend the current economic cycle. The global mobility revolution is creating many new opportunities. Money is flowing into new ventures in ride hailing, micro-mobility, delivery businesses, electric cars, batteries and many other modes of mobility. There is abundant risk capital in the market and Softbank’s Vision Fund in particular is using a shotgun-VC approach on anything that moves. Softbank’s LPs largely come from oil producing countries, including Saudi Arabia, and in a sense Softbank is a hedge against the decline of the oil industry. Public markets also seem to have appetite for the transportation revolution (will have to await Lyft’s and Uber’s IPOs). This euphoria for the mobility revolution will extend the current economic cycle. Yet there is a geographic mismatch in the phenomenon, as most of the creation is happening in the US and China, most of the destruction is happening in Europe/Germany and Japan. This over time will strain the global economy. Also the mobility marketplace structure is very interesting and could cause a delayed strain on the global economy. We will discuss this phenomenon next.
11. A very interesting aspect of the new-mobility marketplace is that it has a “gold-rush” structure. What do I mean by that? The global new-mobility market is pretty big. It is difficult to size such emerging markets, since not all interaction modes have yet emerged and there is more to come. But at the same time everyone is rushing for it. There are hundreds of scooter startups, dozens of ride-sharing companies, hundreds of electric car startups, dozens autonomous driving startups. Also the incumbents sensing the times and trying to survive are investing in different modes. The incumbents will initiate micro-mobility plays, car sharing and ride sharing plays, on-demand microbus plays, electric bike plays (GM making a $3000 electric bike like everyone was waiting for it…haha). Money will be thrown at every type of mobility from every corner, since the incumbents have decent cash and are trying to survive, and also there is abundant VC and oil money chasing a big market (also lots of dumb money). This will create lots of euphoria, lots of innovation, new modes but eventually there will be significant consolidation. Not all of these modes and companies can be economically viable at the same time. There will be big winners and big losers!
12. There will be big winners and big losers in new-mobility, just as the dot-com era had big losers but also created big winners like Amazon, Netflix, Google, Paypal. The race in new-mobility has begun as piles of money are thrown at mobility. It is important to remember that money is not what will differentiate the winners from the losers! Money By Itself Does Not Buy Innovation! Headlines like VW to invest $50B in electric, autonomous and services, Hyundai to invest $40B in electric, autonomous and services, Ford to invest $11B in electrification, BMW and Mercedes to invest $1B in ride hailing and charging, and many similar headlines will not guarantee the future. If anything, easy cash will heat up the market even more, create more competitors and more services in addition to all the newcomers like Uber, Didi, Waymo, Tesla, Rivian, Nio and others. The important question is when will the money stop? When will the investors realize that the losers have lost? Timing these types of “gold-rush” phenomena is really difficult, since they can extend for some time. Yet likely many winners will come from US and China and many losers will come from Europe and Japan. Overall there will be lots of losers everywhere, which will strain the global economy!
13. On a positive note, recessions are not that bad. They clear out the old, to create room for the new. Once the marketplace is cleared from less efficient operators and weaker business models, the emerging modes can thrive even more. Post-recovery, we could even see an acceleration of new-mobility innovation. This is when the top public investors can come in to pick the best innovators. The most interesting part is the timeline leading to it. Europe is already seeing early signs of this strain in the car industry, which is affecting the German economy. But this is just the beginning! These early strains will be masked by the large investments from the incumbents, and Europe and Japan may muddle along for a while. Also the “gold-rush”, which will initially mask the macro-strain, will unwind as a late shock and is hardest to time. Some other shocks are easier to time. When Model 3, Y and Nio’s models reach demand-level capacity in China (around 2021), it will be a heavy shock for the luxury car industry. When Tesla’s and Rivian’s pickup trucks enter the US market (also around 2021), it will be a heavy shock for the US auto industry. The other shocks will evolve according to progress from the other disruptors (many converging around 2022).
14. Shocks from ride-hailing and micro-mobility will be easier to time when Uber, Lyft, Didi are public. Autonomous is a wild card for now. But it is clear that the future is about smart-electric units and will entail real competition on technology, which in the past lacked in the car industry. I want to discuss one reason why many winners will come from US, China and losers from Europe, Japan. As the internet revolution started in the 90’s there were concerns about privacy and security. The US embraced this revolution by being more lax, China mostly embraced it by creating a state-controlled firewall, yet letting entrepreneurs thrive. Europe and Japan as more conservative societies were more skeptical and restrictive, and stifled the revolution. In the process entrepreneurial cultures and expertise developed in US and China, while in Europe and Japan the old industries resting on their dominance were complacent. US and China now have more cultural expertise in innovation, also by having participated in the smart-phone revolution. The smart-car revolution will involve both hardware and software interactions and innovations. This story is an interesting example of tech innovation interacting with sociological and macro-economic phenomena.
15. The recession’s duration and severity is difficult to gauge at this point. A lot will depend on global central banks’ reactions, especially the ECB and BOJ, and the effectiveness of their monetary policies. Also the stability of the global economic system around 2022 will play a role in cascading effects. Important is also the balance between creation and destruction, since there will be significant creation and new use-cases, which will expand the overall mobility market. Yet many new modes and creators will be more resource efficient and leaner. Manufacturing and using micro-mobility is more resource efficient than producing and driving cars. Ride-hailing allows for much higher utilization rates than taxis or traditional car usage. Electric cars use less energy/mile than gasoline cars. Also the existing car value chain is very old and therefore very inefficient in its operation (and had 10 years of growing car sales and expansion, which made it even more inefficient). It will be replaced by more efficient operators, leading to prolonged contractions of different parts of the current value chain. This dismantling will create prolonged headwinds for the global economy and also a skills mismatch from the transition.
16. Thanks for tuning in! This concludes the chain on the next global recession, triggered by the decline of the incumbent auto industry and its value chain. As mentioned at the beginning, recessions are really difficult to predict and even more difficult to time (especially 3 years in advance). So we will wait and see what happens to the auto industry as it approaches 2022. Since the incumbents seem highly unprepared for the upcoming changes, there is a high chance that the shocks from dismantling the old value chain will strain the global economy, enough to trigger a global recession. It could start in the weak economies of Europe and Japan, spread to China, US and beyond. But hopefully after these dismantling strains are processed and the economy recovers again, there will be a time period of innovation in mobility with new, convenient, fast, affordable and cleaner transportation modes, that will connect the world even more. And hopefully the emergence of new-mobility will serve as a trigger for the next revolution in energy. Hope you enjoyed this chain!
I briefly discuss some aspects of the next energy revolution in an incomplete article, titled Electrification.
Disclaimer:
Since I am a dyslexic, I am prone to spelling and grammar mistakes. Hopefully it does not distract from the substance of the article.
Thank you for reading this article :)
