KPMG’s Gary Silberg engaged Morgan Stanley analyst Adam Jonas in a conversation about the global auto industry and its electric and shared mobility future, as well as the companies and personalities that dominate the sector.
Morgan Stanley is forecasting a 2019 SAAR of approximately 16.5 million new vehicles sold, below consensus and a decline after four years over 17 million. “Without an extraordinary level of stimulus, the incremental lending attitude is a little bit less good today than a year ago,” said Jonas, who heads up the firm’s global autos and shared mobility equity research. A 5 percent drop in used car prices doesn’t help.
Still, he was positive. “I think it's a year where the industry might struggle to grow profitability, but from historic or cyclical standards, it can be a year where the industry can still generate cash, and we're not having a recessionary discussion.”
As the world moves toward shared mobility, Jonas said he anticipated that new vehicles might still have the footprint or silhouette of a passenger car, but that the market has shifted to larger vehicles. “The average car in the United States is a truck.” If GM retreats from the passenger car market in South America as it did in Europe, it could mark a permanent shift.
Electric vehicles (EVs) continue to be viewed through the lens of private ownership, which has a limited market of 5–10 percent of U.S. revenues. But in fact, ride sharing and the logistics of fleet management will alter the dynamics, potentially increasing EV market penetration beyond those limits, Jonas said.
China wants to go electric, but they need help from foreign manufacturers. The country lifted its 50 percent foreign ownership cap for joint ventures, and Jonas joked that BMW’s increased stake in Brilliance China Automotive wasn’t necessarily all free will. “The Chinese government goes, ‘When we say you can go above 50 percent, we're saying you will go above 50 percent.’”
But at present, the Chinese market is contracting. The greatest positive impact could come this spring from the National Development and Reform Commission (NDRC), such as lowering the reserve requirement ratio, VAT cuts, or direct auto-specific consumption tax stimulus, Jonas said. That will make the difference between China being up as much as 5 percent, or down 10–15 percent. “Until that point, there's a buyer's strike.”
When it comes to U.S.–China trade policy, tariffs have disrupted the global supply chain, and industry leaders are looking for resolution while watching carefully for anti-American sentiment on the ground.
As China becomes less accessible, the auto industry is shifting an eye toward India where vehicle penetration is just 3 percent¾the same as the U.S. in 1915, Jonas said. However, private ownership in India will struggle to reach even 15 percent as the market will likely go straight to shared, electric mobility, in large part based on environmental concerns: India is home to 9 out of 10 of the world’s most polluted cities.
“We think India is going to be one of the largest—if not the largest—shared mobility [market] in the world,” he said. “I'm not trying to make it look like it's God's gift, but it's the main event.”
For Germany to meet Europe’s emissions standards by 2026 would require a rapid transition to pure electric mobility, ripping the economy apart, Jonas said.
“When I solve for clean air in Germany, I'm solving for two million jobs at risk, because the skills transferability for making internal combustion engines and transmissions to making electric motors is not one-for-one.”
Jonas also called the Daimler–BMW partnership “smart” given the likely commoditization of mobility services and how expensive and uncertain the transition will be. Volkswagen and Ford are also a good fit; however, it remains to be seen if their arrangement is actually transformational. In any event, Volkswagen will look to control joint projects.
Jonas described the autonomous car race as a marathon that begins with a sprint, and we’re still sprinting. “You're going to see some companies that are not going to make it. Or those that you think were running really fast actually didn't pace themselves and they're going to burn out.”
He discussed Aurora, Zoox, Argo AI/Ford, and Cruise Automation/GM, but agreed the leader is clearly Waymo. Morgan Stanley’s internet and Alphabet analyst team values the company at a whopping $175 billion, which is in line with consensus. The valuation is driven by a market for mobility that is measured in vast miles traveled and time spent in cars, as well as by the logistics and licensing models.
Waymo won’t try to be as big up front as the major ride-sharing companies, Jonas added. “They’re not going to have a million cars on day five. They're going to go to Portland and just blow whoever’s there away,” he said.
Jonas said his colleagues looked into the arrest of Carlos Ghosn by Japanese officials in November 2018, and he hinted that the trouble seemed to start with a dispute around control of the combined Renault-Nissan-Mitsubishi Alliance, which may have been moving more favorably toward the French.
“When you look for stuff, sometimes you find stuff,” he said, adding, “It seemed like there was an incentive to have the Japanese law enforcement and government look for stuff.”
Elon Musk is spending about a third of his time focused on space and wants to leave Tesla because he’s “bored,” Jonas said. Without a natural buyer, Jonas and team are solving for a merger between Tesla and SpaceX in the next year or two, “kind of like a reverse SolarCity.”
Jonas called the late Sergio Marchionne “the best auto CEO, industrialist, deal maker, risk taker, leader of anyone I've seen in any industry,” adding that he believes GM’s Mary Barra inherited his mantle. “She is bar none the best CEO living today. It's great that she gets attention as a mother and as a woman CEO. But forget best female CEO—best CEO, period. Not just autos, any industry.”
Finally, Jonas quoted Marchionne, who would say, “Vision without execution is hallucination.” He added, “There's a lot of vision out there right now. It's relatively easy to have the vision. To do the execution, that's a whole different kettle of fish.”