With its long tradition of being one of Europe’s oldest source of exports and employment the auto industry represents an important part of Europe’s economy. However, with new trends arising, will Europe’s car manufacturers be able to retain their position within the industry?
Setting Some Themes
The European auto industry provides jobs for 13.3m people which represent 6.1% of all EU jobs. Out of those 13.3m, 2.5m are employed in direct manufacturing jobs. When comparing to the total amount of manufacturing jobs in the EU (30.3m people, or 13.9% of total EU employment) the auto industry provides 11.3% of all manufacturing jobs in the EU. Furthermore, with 23m motor vehicles produced in 2017 in total, Europe accounts for 23.3% of the total motor vehicle production in the world.
When it comes to growth, the European automotive industry – with the exception of the recession in the early 1990s and the financial crisis in 2009 – has continuously been growing since 1980. However, it only (fully) recovered from the financial crisis in 2017, and recovery still remains fragile. This growth was enhanced by the development and implementation of technical innovations such as fuel-efficient vehicles and alternative powertrains (e.g., hybrid).
Yet, despite the positive trend seen in the past, the centre of production has moved from the westernmost parts of Europe to Turkey and is further shifting towards Asia. This is primarily due to the increasing importance of the Chinese automotive market, which has grown from an annual production of 87k vehicles in 1970 to 28m in 2018.
Number of New Passenger Cars (Units m, T12M)
Source: ACEA, InterCapital Research
When looking at the latest available ACEA market report it is visible that after a long period of strong growth, the number of new passenger car registrations in Europe has started to decline (observed on a YoY basis for each month). Currently, the number of newly registered cars in the EU has declined for seven months straight. However, before this streak started the EU saw a decrease in new passenger car registrations only six times since September 2013, proving that car manufacturing and consumption is one of EU’s most robust and resilient industries. On the other hand, Russia has been showing a remarkable recovery from a long decrease in number of newly registered passenger cars (also when comparing months on a YoY basis). As a result, the number of newly registered passenger cars has been rising continuously (with only one month as an exception) for more than two years.
New passenger cars in EU (monthly basis)
New passenger cars in Russia (monthly basis)
Source: ACEA, InterCapital Research
The Future is Electrified, Autonomous, Shared & Connected
Technological developments and connectivity are an integral part of our lives now, so it is not surprising that these will continue to be the most important trends for the automobile industry. New developments such as 5G and the connection of traffic infrastructure are cementing this. As a result, we are moving towards an environment in which traditional players in the automobile industry are increasing their cooperation with major players in the technology and telecom sectors, as well as government agencies. However, such development also opens the door for new competitors who now appear in the form of tech players, start-ups, and digital/e-commerce companies. In order to successfully adapt to these new technologies, the automobile industry will have to put a higher emphasis on closing the skill gap when it comes to software and electronics engineering skills.
The sharing economy also plays a significant role in this ecosystem, with the growing popularity of carsharing being just one example.
In order to win over the next generation of customers, car manufacturers will have to adopt a truly customer centric approach which focuses on delivering the highest level of security and satisfaction. According to McKinsey, the number of fatal accidents in Europe has been immensely reduced (by over 40%) since 2005. However, their vision assumes the total removal of accidents by 2050 with the use of Advanced driver-assistance systems (ADAS) and autonomous vehicles. Note that the introduction of autonomous vehicles also holds a strong economic potential. The average EU citizen spends 40 minutes of her/his daily time in a car. 100 million people in cars every day equals roughly 65 million hours spent. Assuming that 50% time could be used for efficient working, the shift in commuting could have a macroeconomic impact of roughly EUR 1bn per day in Europe.
The final trend is the introduction of electric vehicles, which has been present for some time now. While China is clearly leading the market in recent years, there has been a 145% increase in new battery electric vehicle registrations in the EU since 2014.
Car Part Manufacturers Trading Multiples
Note that the Croatian car part manufacturer, AD Plastik, will publish their Q1 2019 results tomorrow. In the meantime, we bring you an overview of trading multiples of selected car part manufacturers.
Source: Bloomberg, InterCapital Research