Crisis in auto industry; so is now a good time to buy?

A good time to buy is often at the moment of optimal crisis. The auto industry has been having its troubles of late; does that mean now is a good time to buy?

Article updated: 26 February 2019 12:00pm Author: Michael Baxter

Good time invest in auto

Strengths and weaknesses are often pretty close. Take Elon Musk, I would describe myself as a qualified fan. But really! A few weeks ago, behaving a tad like a giggly school boy he was interviewed saying that he has no respect for the SEC — the US Securities and Exchange Commission. He admitted that tweets he composes are not vetted. Then he acknowledged that the only tweets that might need censoring are those that might cause movement in the Tesla share price, but that he was the only one to read them. Then, he giggled: “Everyone makes a mistake.”

Well, he made the mistake — he forgot to say annualised. Tesla’s car production will be 500,000 units in 2019 he tweeted, then later tweeted again saying words to the effect: “Err, I meant 500,000 annualised by the end of 2019.”

And yet, 500,000 annualised would still constitute an immense achievement. That’s what I mean by strengths and weaknesses. What he has achieved at Tesla is near miraculous, proving doubters wrong over and over again. Then he practically commits career suicide by slating the SEC and handing the regulator its chance to take revenge on a plate.

Rest of the car industry

Tesla illustrates the car industry’s biggest threat. Elon Musk’s habit of sending out tweets that risk the ire of the SEC, illustrates the industry’s hope. Competition seems to lack any semblance of maturity.

Innovators Dilemma

The Harvard professor, Clayton Christensen, has outlined the conditions that describe the threat to the car industry perfectly. His theory, innovators dilemma, describes how market dominant players can be reduced to nobodies, by being too slow to adopt new technology. Christensen took the disc drive industry as an example, but Blockbusters and the mobile phone divisions of what was once called RIM, now Blackberry and also Nokia are also good examples.

Often, the companies which are ultimately disrupted appear to dismiss burgeoning technology as little more than a toy, and laugh at the very idea of a rival business plan — “not fining customers for late return of videos” giggle, giggle: “a smart phone without a proper keyboard:” fits of laughter. Microsoft’s then CEO Steve Ballmer illustrated this perfectly with his reaction to the iPhone.

Maybe that is Musk’s cunning plan, fool competitors into a false sense of security with his apparent Twitter tomfoolery.

The electric car

But just as millions of potential customers dismissed the idea of a touchscreen phone, the electric car was dismissed as no hope technology.

One of the lessons of innovators dilemma is that customers are not always the best judge of what they will want in the future. A view, by the way, that Jeff Bezos, holds. Or as Henry Ford supposedly said: “If you ask people what they want, they say faster horses.”

The car industry, cheered on by the Jeremy Clarkson brigade, was caught napping by the electric car. While it threw big bucks at mastering diesel cars, little Tesla got on with the business of mastering electric cars.

The big question now is whether Tesla can master the art of mass production, before the rest of the industry can gain sufficient expertise in making electric cars — oh yes, and master AI, too. I would say that Tesla is in the lead, but then sometimes Elon Musk makes me wonder!

Share prices static

Look at the share prices. With the odd exception, such as Ferrari, at best share prices have been as flat as a road in Norfolk, in some cases they have fallen as sharply as a road down the side of a mountain.

In some cases this has exposed some nice dividends — Daimler dividends are currently over six per cent.

Big change

But the big change is yet to come. The emergence of autonomous cars and convergence with the Uber economy will change the car industry.

Car ownership is close to irreversibly changing.

Who will survive? It will be the companies that are already applying the lessons of innovators dilemma. At least GM is pushing substantial resources into developing a self driving car — full marks for that.

Of course, car companies which are late to the AI/autonomous car party can always buy themselves an AI company.

But is it too late? Nvidia would make a good target, if it wasn’t for the fact that its market cap is $96 billion. Only Toyota is bigger than that.

Amazon, Microsoft, Alphabet and the likes of Salesforce have embraced the data centre as a service model by offering businesses computer capacity they can turn up or down with need, via the cloud.

Spotify has mastered the art of providing music as a service.

Transport as a service is coming too — we order a car to drive us to the station, a campervan for a holiday, a people carrier for a long drive with the family.

The winners will be those that embrace the ‘as a service’ model, or will be the ones that provide the technology to help make it happen.

It seems to me that the players to watch are Nvidia itself, Alphabet, Uber and maybe Lyft, Tesla (not withstanding Musk’s unpredictability) and a smattering of other players. I doubt many of the existing crop of car companies can survive, without massive government help.


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Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.