From the CFA Institute's Enterprising Investor blog, September 22:
Three investment return trends related to the green transition concern me. These apply across all sectors but to automotive in particular.
Here is how I see it.
1. Pricing is challenging.
The strong automotive demand during the COVID-19 pandemic was fueled largely by wealthier customers and is on the wane, especially for electric vehicles (EVs), which are often second vehicles priced as premium products. Until recently, automakers experienced bottlenecks with their finely tuned production systems. The mismatch between supply and demand adjusted pricing upward to reestablish equilibrium. Cheap financing and a shortage of used vehicles exacerbated this trend.
According to Kelley’s Blue Book, US EVs cost US$58,940 on average in March 2023, around $11,000 more than their counterparts with internal combustion engines (ICEs). Despite the 30% increase in new vehicle prices during the pandemic, the monthly lease payments and consumer end cost was lower. This “goldilocks” scenario is now unwinding, with interest rates climbing, residual values falling, and supply chain bottlenecks dissipating.
Incentives have sent new car prices lower, especially for EVs. As additional supply hits the market, we can expect a broader mix of lower priced vehicles. And that is before Chinese EV manufacturers with spare capacity more fully enter global EV markets.
Historically, the first sign of automotive market weakness tends to manifest in the much larger used vehicle market. Despite the limited supply of prime off-lease vehicles during the pandemic, used vehicle values in the United States have clearly headed south after a period of extraordinary strength.
Source: Cox Automotive Manheim
Tesla was the first automaker to recognize that the COVID-19 auto bubble had burst. Despite government incentives — the US government’s Inflation Reduction Act (IRA) offers up to US$7,500 to entice consumers — EV pricing is still a constraint for many purchasers.
China is now by far the largest EV market and is also globally dominant in related industries. A recently launched BYD Seagull EV with a range of 300 kilometers and base price of US$11,300 demonstrates this. Pricing pressure in the Chinese market is intense, making exports an attractive outlet. According to Automotive News China, Ford’s Mach-E electric crossover’s starting price in China is US$30,500. That is now a third cheaper than the Mach-E’s price tag in the United States....
....MUCH MORE
