It seems that the global car market has become saturated and the pandemic exacerbated an already weak industry on the demand side. As demand came back, the car industry faced new issues on supplies of semiconductors. In the early days of the pandemic, car manufacturers cancelled orders on semiconductors as they believed demand to be weak for a long time, but as governments unleashed unprecedented stimulus economies weather the pandemic and with the vaccines approved in late 2020, the economy came roaring into 2021. But car manufacturers buy lower margin semiconductors and as they were late to come back ordering semiconductors, the semiconductor industry had already found willing buyers due to high demand on graphics cars for gaming and crypto, and semiconductors used in datacenters and computers. Car manufacturers were put back in line and have ever since scrambled to get priority causing production to be reduced on lack of semiconductors.
The pandemic and climate change awareness also happened to ignite demand for electric vehicles (EVs) and the EV transition may have reached an inflection point where it is beginning to drive postponement of buying a gasoline car. Why buy a technology that is being phased out and why not buy an EV when governments are providing incentives to do so?
Despite these structural challenges and low growth profile the MSCI World Automobile Index has exploded in value over the past 18 months driven by a bonanza in EV-makers and excessive expectations best exemplified around the Rivian IPO. From December 2005 to the peak in new car registrations in August 2018, the index gained 5.2% annualized compared to 3.9% annualized gains over the period in new car registrations. This highlights that market value more or less follows volume plus/minus changes in price mix and operating margins.
With the recent gain in the global index on car manufacturer the industry’s market value has become completely unanchored to the underlying structural growth rate. The only explanation that can justify this is new car registrations quickly closes the drawdown from August 2018 and that EVs can be manufactured at higher operating margins, but this requires that competitive forces do not force retail prices on new cars down to the old profitability level on gasoline cars.