Legacy automakers’ transition to EVs has not gone well, and one Tesla, Inc. TSLA bull expressed worries concerning the state of the auto industry heading into 2024.
Future Tense: “We are concerned over the future of the US auto industry — even more so than during
the Great Financial Crisis of 2008/2009,” said Morgan Stanley analyst Adam Jonas in a note released on Friday.
The relatively strong performance seen by the industry over the past few years was due to strong U.S. GDP growth, a low interest rate environment, firmer new and used car prices and inventory scarcity post COVID-19 that pushed up auto margins, Jonas said. In response to the buoyancy, automaker’s bumped up capex and R&D investment in “unfamiliar” areas, ranging from battery cell development to fully-autonomous robotaxis, he added.
“For years, investors largely supported Detroit's pivot to Auto 2.0 with a ‘glass half full’ view of a legacy car company's ability to emulate the strategy that rewarded Tesla with a trillion $ valuation,” Jonas said.
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Execution Issues: Investments made by General Motors Corp. GM and Ford Motor Co. F have proven to be difficult to execute, Jonas said. A host of factors such as slowing macro, rising rates and price/mix mean reversion have all served to impact stock prices, he added.
“However, we believe rising capital expenditure and R&D spend on EV and AV projects stand as the greatest manifestation of investor concern for the US auto industry,” the analyst said.
“As we look ahead to 2024, the industry stands at a crossroads with investors wondering: what actions will management teams be willing to take to adjust their strategies to a changing economic and competitive landscape?” he added.
Detroit’s capex and R&D spending have to decline, the analyst said, adding that since 2010, capex and R&D spend of GM and Ford have increased by 167% and 126%, respectively, on a per-unit basis. In comparison, Toyota Corp.‘s TM per unit spend fell 7%, he added.
What’s Next: The year 2024 will likely determine the long-term relevance of the U.S. auto industry, Jonas said.
“We believe even modest changes in capex and R&D spending (accompanied by a pivot in EV strategy) can yield potentially strong rewards for shareholders,” he said.
With the ICE business of Ford and GM likely to generate strong free cash flows for materially longer than the market anticipates, the two can participate in the EV theme at some scale through a more measured
and collaborative approach while returning capital to shareholders, the analyst said.
GM ended Friday’s session down 1.43% at $35.73 and Ford slipped back 0.50% to $12.02, according to Benzinga Pro data.
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