February 24, 2025 | In this edition of The Institutional Risk Analyst, we go back to 2017 when we published “Ford Men: From Inspiration to Enterprise,” and ponder what has changed in the global auto sector since that time. Passenger vehicles are more commodities than ever before, whether powered with internal combustion engines (ICEs) or DC motors with lithium batteries. The global auto industry has significant overcapacity, moreover, as the US government threatens tariffs on all imports into the world's most valuable car market.
The flow of capital into the automotive sector has surged over the past decade, primarily driven by the politically mandated transition to electric vehicles (EVs). Automakers have poured large sums into EV research and development, manufacturing facilities, and battery technology, but the returns on these investments are in doubt. As we noted in "Ford Men," battery driven cars have been the goal since the days of Henry Ford and Thomas Edison, yet remain impractical:
“While there is no question that a DC electric motor is a superb way to power vehicles such as train locomotives and warships, the lack of a compact power source continues to constrain the development of electric automobiles or even aircraft. It is interesting to note in this regard that technologically advanced manufacturers such as Toyota, Daimler and Honda initially avoided the all-electric vehicle in favor of hybrids that combine gasoline engines with battery power.”
The progressive swerve into EVs was more aspirational than intentional. When President Joe Biden entered the White House, the progressive left made EVs a centerpiece of a larger agenda than included massive deficit-driven spending and social engineering on a vast scale. The prescriptive regulatory world of the Biden Administration has now been replaced by Donald Trump and his 19th Century approach to fiscal spending and “reciprocal tariffs.” How will this impact the global auto sector? Badly.
Ford Motor (F) CEO Jim Farley says that the auto sector is going to be forced to consolidate due to the sheer cost of investing in electric cars. “Farley said the market that EV start-ups are going after isn’t ‘big enough to justify the capital that they’re spending or the valuations,’” CNBC reports. Ditto. But why isn't Farley running away from EVs? Too embarrassing to admit error? This is why we own EV-skeptic Toyota Motor Corp (TM) as our bet on the winner in electric vehicles, but perhaps not in EVs as they are known today.
Looking at the sad spectacle of Nissan Motor Corp engaged in talks with Honda Motor Co. (HMC) about an “investment” illustrates the difficulty of putting down moribund national champions. Nissan was just cut to junk by Moody’s and is in the process of downsizing in the costly and difficult US market. Nissan and Renault are part of the Renault-Nissan-Mitsubishi Alliance, which was founded in 1999. By rights, all three brands should get bought and absorbed by a more viable automaker, but note that Chrysler is still here 50 years after it too should have disappeared.
Lee Iacocca saved Chrysler from bankruptcy in 1979 after being fired from Ford Motor Company by Henry Ford II. Iacocca was more than anything else a great salesman who made miracles happen at the low-tech Ford of the 1970s. Remember the Ford Pinto? Chrysler made products that were not notable but could be sold to consumers. The fact that Iacocca needed a federal loan guarantee to save Chrysler 45 years ago illustrates the strange politics of killing zombie automakers. But 50 years ago, the US still believed in "free trade."
Look at the merged Stellantis NV (STLA) brand, including Jeep, Dodge and Chrysler, and you see a business in danger of dying of its combined mediocrity. Stellantis was created in 2021 when Fiat Chrysler Automobiles and Peugeot merged. Stellantis has managed to assemble an impressive collection of niche sports cars and also-rans in the broader passenger category, many of which ought to have been shut down years or even decades ago:
Abarth: Iconic automotive brand
Alfa Romeo: Italian sports car brand
Chrysler: American car brand
Citroën: European car brand
Dodge: American car brand
DS Automobiles: A car brand
Fiat: A global brand
Jeep: American SUV brand
Lancia: Italian brand
Maserati: Italian sports car manufacturer
Opel: German car brand
Peugeot: European car brand
Ram: American truck brand
Vauxhall: European car brand
The global auto industry is expected to produce 90 million new passenger cars in 2025, but has at least 10% overcapacity. Stellantis is the second largest auto producer in Europe, but has less than 10% market share in North America. The prospect of tariffs on imported vehicles could force Stellantis to retreat from North America entirely. Fiat, for example, has exited the US market twice in the past 30 years, first in the 1980s and most recently in 2022.
“The production outlook for 2025 is dominated by the assumption that the incoming US administration will levy a new wide-reaching tariff regime, effectively creating a universal tariff of 10% on all goods coming into the US except for Canada and Mexico where the terms of the USMCA are assumed and mainland China where it is assumed a tariff of 30% will be applied,” notes S&P Global.
Even if all of the Stellantis and Nissan brands were shuttered tomorrow, the global auto industry would still have overcapacity due to more recent entrants in China and Asia. More important, the surge in EV-related spending may not produce any investment returns for global automakers and may actually drive some smaller producers out of business. Over the next two decades, we expect Toyota to be the winner in Japan and for the EU market to eliminate roughly half of today's existing brands.
Morgan Stanley (MS) noted in a 2022 research note that "EVs’ share of global auto sales is likely to grow from about 7% today to nearly 90% by 2050." Really? While we expect to see uptake in hybrids and other new technologies in coming years, the expectations for growth in battery-powered EVs seem wildly out of line with consumer preferences and the available technology. The automakers which shed money-losing EV investments most rapidly may be the survivors.
General Motors (GM) introduced the EV1 "Impact" electric car in 1990, but little has changed. Today Tesla Motors (TSLA) has 4% market share in North America, but nothing has changed in the physical world of physics and materials science. If Thomas Edison were alive today, would he tell Elon Musk to make electric cars with batteries? Or would he repeat the advice given to Henry Ford 120 years ago and tell Musk to use gasoline engines?
In the pre-Trump world, mediocre auto brands might linger for decades, but after years of malinvestment in EVs, many automakers may struggle to rationalize operations quickly enough to survive. The addition of tariffs imposed by the US could force an acceleration of the global process of consolidating moribund auto brands. Does the US need three domestic automakers and several more transplants? More, does Japan need half a dozen different automotive marques? Looks like we are going to find out.
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