Business Maverick

Business Maverick

After the Bell: The car industry will drive you nuts

After the Bell: The car industry will drive you nuts
Illustrative image | WeBuyCars in Richmond Park on 31 January 2024 in Cape Town, South Africa. (Photo: Gallo Images/Misha Jordaan)

The listing of WeBuyCars on the JSE this morning made me wonder a bit about the global car industry. It was great to see a nice big listing on the JSE — something we haven’t seen very often. But of course, the listing is really, as far as I can see, an attempt to ensure that Transaction Capital’s problems don’t drag down the profitable side of the business, so WeBuyCars has been spun out. 

There are few manufacturing subjects more intriguing and complex than the car industry. The industry itself is just so huge; each individual vehicle is a masterclass in design, manufacturing technique and complexity; it’s so tied up with national fortunes. What a feast of a topic for engineers, designers, even politicians and journalists.  

To my mind, there have been three major trends in the car business over the past few decades; the arrival of electric vehicles as a viable alternative to internal combustion engine cars; the explosion of Chinese production, and the increasing reliability and longevity of cars. 

Just to start on the second point, I don’t think there is a general realisation of just how the Chinese industry has exploded. The International Organization of Motor Vehicle Manufacturers (OICA) keeps more or less up to date information of motor vehicle production and sales around the world, and it pans out roughly like this: about 93 million cars were produced last year, including commercial vehicles (which by the way is a very big market; about a third of the total). There was a big dip in 2020 and 2021 because of Covid, but numbers are not above 2019. The industry as a whole is still in expansion mode; it’s growing globally by about 4% a year, which doesn’t seem like much but when you are talking about such a big industry, that’s quite a lot of cars.

There are 40 countries around the world where cars are built, including of course SA. In 2000, the biggest global producer was the US, followed by Japan and Germany, producing 12 million vehicles, 10 million and 5 million respectively. It is just incredible how things have changed. China was at that stage producing about two million cars a year, about a third less than Canada. This was roughly five times what SA was producing at the time.

Jump to 2010, China is now in the lead, producing 18 million cars that year, Japan has held its position, still selling about 10 million cars, and the US is now third, selling a little less than eight million. SA, by the way, produced 470,000 cars that year. India is also by now seriously on the scene, building 3.5-million cars that year.

Jump again to more or less the present day, and in 2023, Chinese production is now producing 30 million cars a year, a third of the global total. I am not making this up. The US, Germany, South Korea — all serious players in this market, are more or less holding their own, but their production markets are static or declining. The point is that although the industry has been growing, the vast majority of that growth has happened in China and has been absorbed by Chinese producers. 

SA, by the way, has actually recorded a respectable increase in production, if you look at it in a decade-to-decade way: SA produced 630,000 cars in 2023, although it should be noted this is roughly the 2019 level. This is not to be sneezed at: the UK only produced about a million cars a year in 2023.

Of course, these cars are produced by car makers based in a variety of different countries. Volkswagen, for example, produced about nine million cars around the world in 2023, roughly equal to all the cars built in Germany that year. But for all this size, the key characteristic of the car industry is that margins are just absurdly tight. Just take the Chinese company BYD for example: in 2023, it made a $4-billion pre-tax profit off a revenue of $80-billion. Toyota made a $31-billion profit off a $285-billion revenue. This is respectable, but by no means outstanding.

In a way, this brings us to the third point and that is about improving build quality. Cars are just lasting much longer than they did, which is partly the result of the huge competitive pressure in the industry,  improving manufacturing techniques, and more standardised production. There is this joke that the reason Apple decided to dump its car programme was that they couldn’t think of a way to make customers buy a new one every year. Anyway, the result is that there are more cars in use around the world, and that this number is increasing faster than cars being built every year. There are around 1.6-billion cars in use around the world, up from 1.3-billion in 2015, Oica tells us. Cars are now almost part of the family, except without the arguments about what music to play. 

For the industry, it really is hard to escape this trap, and you can see it in the valuation of car companies. Renault, for example, is trading at a 3.3 price to earnings ratio; that’s incredible. All the car manufacturers are trading in “screaming buy” territory, but nobody is buying — except of course for Tesla.

Which brings us to the fourth point, electric cars. There are now about 26-million electric cars on the world’s roads, which means the global auto industry has made a $1-trillion commitment to carbon neutrality.  This is a tiny proportion of the total cars in use, but it is a five-fold increase since 2018. What is more, the country variations are enormous; some countries have really pushed the idea; about 90% of the new cars sold in Norway are electric. But others, like SA, are only just starting to think about it now. 

How does SA fit into all of this? The short answer is badly: SA has a great and longstanding industry. But it is built on some very significant tariff rebates and tax breaks. If those didn’t exist, it’s somewhat doubtful whether we would have an industry at all. 

SA has to find a way to move with the times, make cars cheaper, and adopt electrification; it’s just better for the consumer and better for the environment.  My colleague Don Pinnock has just done a great set of stories about SA’s attempt to build an electric car called the Joule. 

The car project was killed by some extremely short-sighted people at the IDC. Honestly, isn’t this exactly the kind of thing they are supposed to do? A colleague  of mine actually drove the car, and said the build quality wasn’t great, but the drive-train of the car was just superb. This was in 2008, when the only manufacturer internationally thinking about an electric car for mass production was Nissan, with its Leaf.   

SA once again missed a trick, but you know, it’s not too late. Come on IDC, this is a $4-trillion market, develop some gonads and throw some money at a project. It can’t be more wasteful than spending R50-billion not saving SAA.

Good investing,

Tim Cohen

Gallery

Comments - Please in order to comment.

  • William Kelly says:

    Policy. Our auto industry is subsidised no more or less than I think you’ll find anywhere else. Our industry exists on the back of work done decades ago. It will cease to exist on the back of zero work done to sustain it and future proof it. Whilst the muppet Patel continues to do nothing, in abundance, EV manufacturing plants have gone up everywhere else. It is now too late for SA to play EV EV. Those decisions were made 5 years ago by the OEMs. Those factories are commissioned and operating. We still have no policy. At best we will import some mild hybrid fillers to run out the manufacturing for as long as we can but actual new meaningful tech, and the development around it, will not be coming here.

  • Hari Seldon says:

    So classic – this is spot on:

    “Come on IDC, this is a $4-trillion market, develop some gonads and throw some money at a project. It can’t be more wasteful than spending R50-billion not saving SAA.”

    Imagine we now had a 2 million car pa EV production capacity or more in SA if the IDC has just properly supported the Joule. And knock on high tech ability in battery design, beneficiation of raw materials used in batteries etc

    We canned the project because it would have cost 9 billion to get 50k a year production capacity – terrible short-sighted decision by the ANC once again

  • Byron Pieters says:

    “it’s just better for the consumer and better for the environment” really??? based on what? When you make a statement like that you should really be able to provide facts to back it up. Can you imagine if we went all electric cars?

  • John Patson says:

    You forget Renault, put in €5billion for production electric cars from 2004. Produced the Zoe, in 2010 from memory, just now coming to the end of its run…
    Two comments/ questions on the analyse — how trustworthy are BYD’s books? And while pre tax profits which used to be knows as operating profit are interesting, for investors it is usually net profit which counts.
    And net profit margins on individual cars are some times negative for years, in other words the manufacturers make a loss on every car sold, until, eventually they stagger over the line. Like the Zoe. Don’t think the Leaf is there yet.
    Companies rely on long running best sellers to balance the books. And so far most long running best sellers still come from the old players.

  • Shaun Slayer says:

    Fires in electric vehicles powered by high-voltage lithium-ion batteries pose the risk of electric shock to emergency responders from exposure to the high-voltage components of a damaged lithium-ion battery. A further risk is that damaged cells in the battery can experience uncontrolled increases in temperature and pressure (thermal runaway), which can lead to hazards such as battery re-ignition/fire. The risks of electric shock and battery re-ignition/fire arise from the “stranded” energy that remains in a damaged battery. I Know these responders are not equipped or trained to deal with this.

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