This is an old article I wrote in 2010. The VW story just reminds us that we can see excesses, but we can't time when systems will rebalance and reboot.
The auto sector's exponential growth suggests that it’s time to rethink for auto manufacturers and investors alike.
The modern city I knew as a child keeps changing. There used to be more roads and fewer cars, now there are only cars. If you want to see roads and have driving pleasure you have to skip two-thirds of the day. Ok, this may be more valid coming from an emerging market like India or China, but the emerging market outlook for auto has been assumed to be significant globally.
The conventional thought may see auto growth as economic growth, signs of prosperity. The auto sector would do well then it is a sign of continued growth. How good is this indicator? Have we not come a long way from assuming that auto is the leading indicator that powers the economic cycle up?
Indicator failure is a reality and ‘the car story’ also stands challenged, at least in the form that we know today. The old saying “what's good for GM is good for America” did not have a happy ending. Do the investors have the courage to say “What’s good for auto is good for the world economy”? Before we answer the question let’s understand the auto sector and drivers built around it.
First, auto is a discretionary sector. It’s more entertainment and pleasure for us than a need. We can do without it, but we don't. Second; the crisis may have affected the housing credit, but many emerging economies are thriving on personal credit. And if you are talking about the smallest and cheapest car, auto credit has been made to look like microfinance. Third: Advertising makes economic sense because it boosts credit growth. What better way to grow the economy than to promote cars. Advertise them like soaps, import the F1 circuit, excite the masses, make films on speeding cars, transporters, transformers, a love story around cars. Connect consumption with aspirations. Fourth: The auto sector has led business innovation, go green, go driverless, go solar. Keep innovating, keep selling and keep growing.
Fifth: Ricardo’s comparative advantage is an old theory that is not valid for cars. Everyone needs it, so manufacture it everywhere. Sixth: the fuel that drives us today is at Aug 2005 levels and stagnating. For the time being, Oil is not holding down the auto sector. Seventh: Play the statistics. If the developed market average is 700 cars per 1000 people and some emerging markets have 12 cars per 1000, extrapolation is easy.
The conventional thinking that cars are utility and not discretionary is flawed thinking. Apart from the benefits which the auto sector accrues, there is a cost that comes with it like maintaining roads, land use, pollution, public health, healthcare and disposing of the vehicle at the end of its life. And we should not forget that transportation is the major contributor of the air pollution.
Society is about extremities like any other natural system. In our quest to deliver performance in just another economic sector, we ended up giving it much more importance than what it deserved. Pushing cars into the system was never a visionary strategy. A lot of auto sales effort is focused on short-term sales than long-term innovation. How to sell more becomes the more important question than how should the society travel tomorrow?
The best part of all these extremities is that inefficiencies it creates sort out themselves. Markets have its own approach to making businesses feel that they are in charge till the inefficiency scale becomes larger and out of reach. This is when market forces take over. One may call it the order through time. To explore the order, we compiled various statistics from region to models, from the rate of penetrations to the number of globally produced cars. The data of 50 countries that manufacture automobiles starting from Nigeria (11 in 2009) to China (13 million in 2009) and EU (15 million in 2009), motor vehicles statistics from 1 per 1000 in Afghanistan to 765 per 1000 in United States, least produced car (Maxwell) to largest produced car in the US (Chevrolet) was compiled. All the data series showcased exponentiality, a rising steep curve.
The rate of produced cars regionally, globally, the rate of penetration everything showcased a similar order pointing to brewing auto mania and all-time high prosperity for auto manufacturers. It is tough to call for an auto revolution when the sector is euphoric. But the discretionary auto sector cannot become the late economic utility sector. The food we need can never be replaced by a car. There is always a time when auto outperforms and auto underperforms, as markets move from early economic to mid economic (when industrial majors do well) and then to the late economic sector (when oil, utilities, food, materials, and pharma). It’s an illusionary thinking that increased consumption can take us out of all crisis. Businesses learn hard and human beings never learn.
The auto sector is witnessing peak prosperity and getting ahead of itself. It may take a few years before the efficiency of today will be labeled as extreme inefficiency when we will have to think where to dump our cars. A great society understands that after mobility and productivity comes quality of life and time efficiency. It's time car manufacturers understood their societal role and investors rethink the auto sectors immortality.
First published in 2010