By Alex Pollak, CIO Loftus Peak
- Even small European cities are imposing bans on the use of many diesel cars
- Disruption started in newspapers and music, but it is now in industries as core as transport and energy
- The massive shift that is taking place globally into disruptive companies may be pushing up their prices, however, simply throwing money at oil, traditional retailers or TV stations is not a viable alternative.
- For exposure to disruptive companies in an investment, see the Loftus Peak Global Disruption Fund
50% chance German car companies remain in global elite – VW chief
Earlier this month, VW CEO Dr Herbert Diess said “The chances are perhaps 50-50 that the German auto industry will still belong among the global elite in 10 years’ time,” referring to Volkswagen Group, BMW and Daimler Benz.
The VW chief executive was quoted in the newspaper Süddeutsche Zeitung, saying the shift from combustion engines to electric cars would lead to the loss of 14,000 jobs at VW by 2020 and warning that “around a quarter of the jobs in our factories would have to go in the space of 10 years – a total of 100,000 posts,” if the EU succeeded in its push to slash carbon output by 40 percent between 2020 and 2030.
He went on to say that it would also require an overhaul of the carmaker’s in-house components business, which is the largest part of the group’s €170 billion euro procurement spend, and employs 80000 people.
His comments followed the announcement that Porsche (effectively a division of Volkswagen) will no longer produce the diesel engine in its popular Cayenne and Macan four-wheel drive vehicles. Investors who had bet that the 2015 VW diesel scandal would just ‘blow over’ were wrong, with Volkswagen off 40% since the cheating was revealed.
Exhibiting the same share price trajectory as VW is Daimler Benz, down 30% in three years to €57 per share. It wasn’t caught cheating but will probably also phase out the diesel over time.
It is worth thinking about this in the context of buying shares in the many companies making electric and self-driving cars, relative to those in companies making internal combustion engines. VW makes 10m cars a year, Tesla makes 400,000 (at present) – yet VW is only 50% more expensive at US$75b in market capitalisation (while making 25x the number of cars).
The perception that investors are paying too much for exposure to electric cars – whether Tesla or one of the many others now springing up – is naïve. These companies are outgrowing their nearest competitors so investors have to pay up to access them.
If we were simply considering a comparison based on cars produced per company then the valuations should be very different. But pre-existing structures mean that their journeys will be different, and so will their share price trajectories.
Boards and management, as well as shareholders, are not rewarded for disrupting their existing businesses
The real way it works is that existing managements, boards and shareholders don’t get paid for the value they create through disruption but are still penalised for the coming re-engineering that will be forced upon them.
Fossil fuel engine companies have extensive supply chains which produce tens of thousands of components, which means that any car maker will have to manage the costs in that process in tandem with the costs in any new process.
Like all manufacturing, how all these parts come together often isn’t just a matter of contract, it’s also about the hundreds of other things that need to come together to get the job done.
New technologies blow all this away – disrupt it, in fact – breaking down the industries just as they eat into sales, creating new pockets of wealth all along the way.
As Dr Diess said: “If you look at the former bastions of the auto industry like Detroit, Oxford-Cowley or Turin, you understand what happens to cities when once powerful corporations and leading industries falter.”
Photograph: VOA News
It is becoming hard to find an industry not hit by disruption
The disruption hitting the car industry is also at work in many other industries – energy (where the head of Saudi Arabia’s Aramco was reported to have said that the value of oil in the country’s vast oil reserves will decrease significantly in coming years), telcos, and banking, to name a few. Locally, in retail, Woolworths and Coles are optimised for sales in shopping centres controlled by Westfield and the like. A significant move online simply cannibalises their existing store sales without reducing the fixed costs of those stores. At the same time, creating an online fulfilment channel can be very expensive. The combination of lower throughput in the physical store and higher costs for online is a drop in profit.
Another example: Foxtel and free-to-air networks are struggling to make their existing one-to-many broadcast television models work, in part because Netflix and others have taught viewers to expect that their favourite content should be available any time, including with a fast forward or pause button. Foxtel can’t offer this with the same economics as its regular pay tv service – it hurts the advertising and subscription funded business model, which is based around as many people watching the programme at the same time as possible.
Globally, Walmart, AT&T, Procter & Gamble, the car companies and a host of others are affected. In fact, it’s becoming difficult to find examples of industries not affected. By the way, this is the reason that Murdoch sold out of content creation in the US and UK.
And banking? What will the banks do with their heavy management structures built to corral people during different credit cycles at a time when the world’s understanding of money is that it is truly a digital commodity?
The massive shift that is taking place globally into disruptive companies is pushing up the price – but investing in the alternatives, even for gutsy deep value players, does not look like it will stack up for some time.
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