Editor's Note: The automobile industry is in the midst of a huge change, with more buyers overseas than ever before. Meanwhile, U.S. car manufacturers are struggling to stay float. A special report jointly developed by U.K. affiliate MoneyWeek Magazine and our experts here at Money Morning explores the automobile industry and how investors can benefit. For more information on MoneyWeek, please click here.
Every automobile on the roads of the world reflects a long and complex chain of industrial production and energy usage. Yet we live in a world where many of the highest quality resources and energy supplies have already been exploited and lower quality resources are more expensive to extract and exploit, if they are even available. So the world's automobile industry is in the midst of a revolution in both resource availability and energy consumption.
Today the automobile business is vast. It is a global industry that has evolved by leaps and bounds in the 100 years since Henry Ford made his famous remark in 1908 about building "a car for the great multitude." The worldwide customer base includes at least a billion people - spread over six continents - who have sufficient income to buy a car or small truck.
According to figures assembled at the MIT Sloan Automotive Laboratory, there are about 700 million automobiles and light trucks in the world. About 30% of those vehicles are in North America.
Every car requires steel, aluminum, copper and lead. Each car requires rubber, plastic, and myriad of other petroleum and natural gas by-products. And there is much else in the long industrial ladder of automobile production. Just think in terms of the energy that goes into processing materials, fabricating parts, building components, assembling a finished product - and all the transportation along the way.
In addition to the basic energy and material resources that go into manufacturing an automobile, the sheer number of vehicles reflects a lot of fuel tanks to fill with gasoline and diesel. And this does not even touch on the energy and resources that go into building road systems.
Oil Crises - 25 Years Ago and Today
The oil shocks of the 1970s - in both price and availability - spurred improvements in auto energy efficiency within the United States as well as worldwide. In the United States, the increase in fuel efficiency was related to rising costs for gasoline, as well as government mandates for higher fuel efficiency dating from the late 1970s.
On average over the past 25 years, the typical power train of gasoline-fueled automobiles in the United States has improved in efficiency by about 1% per year according to data gathered by MIT. While discrete, 1% improvements may not appear to be much, the compound improvement in the typical U.S. automotive engine over 25 years has been about 30%.
There has been even more progress in the fuel efficiency of diesel engines over the past 25 years. Diesel power trains are no longer the sooty "knock-knock" devices that they were back in the days of disco. Most cars sold today in the European Union (EU), for example, are powered with clean-burning, fuel efficient, smoothly running diesel engines.
In fact, the demand for diesel fuel in Europe is such that EU refineries routinely ship surplus gasoline to sell in the North American market. And in North America the relatively low prices for gasoline throughout the 1980s and 1990s discouraged the use of diesel engines.
So there have been significant improvements in automobile power train efficiencies over the past couple of decades. But have these improvements translated into any overall reduction in demand for fuel? No.
In 2007, motor fuel consumption in the United States was as high as it has ever been (Although according to the American Petroleum Institute, demand for motor fuel may be at a plateau due to price increases at the pump in 2006 and 2007.). In the past 25 years, we've seen more people driving more cars for more miles. But compounding the fuel issue, the cars that people are buying and driving tend to weigh more and offer higher performance.
Is a Car-dependent Culture Sustainable?
We live in a world of peaking oil output, and of energy and resource scarcity. So the trend lines for fuel usage by automobiles simply cannot continue for much longer. The most obvious sign is the rising price for oil and by extension for fuel at the pump. Something has got to give, and the energy markets are sending signals of long-term high prices for motor fuel. Where do we go from here?
Well first, people and policy makers have to realize that there is an energy problem. Everyone has to realize that this is something permanent, going forward. "Peak Oil" will not pass if we ignore it long enough. And no one can solve the problem just by bellyaching about the rising price for gasoline.
It helps to view the age of the automobile - and its future - as a systemic whole. And some social critics are out in front of the broad discussion, with a sharp focus on the automobile and what it has brought us as a society. James Kunstler, for example, author of highly regarded books such as The Geography of Nowhere and The Long Emergency, believes that the car-dependent suburban build-out in the United States may be "the greatest misallocation of resources in all of human history."
That is, in an era of expensive energy and scarce resources, a car-dependent culture has no real future and is in fact a hindrance to progress in other directions. That is quite a viewpoint, well-presented by Kunstler in his writing. It's depressing, but it sure gets your attention.
Criticism of the automobile culture is not confined just to social commentators like Kunstler. Another remarkable indictment comes from no less an automotive insider than John Heywood, the director of the MIT Sloan Automotive Laboratory. He has stated that "cars may prove to be the worst commodity of all."
What's worse, even if we improve vehicle efficiency, turn to fuel hybrids or make rapid advances in hydrogen-based fuel technologies, the scale for slowing down the degradation may run to the decades. Turning the curve won't be easy," Heywood said.
People are going to have to do things differently
You can agree or disagree with the broad themes of Jim Kunstler or John Heywood. But there's no argument with one of Heywood's points. Wherever we are going, it will not be easy to "turn the curve." Looking forward, the oil just is not there to fuel cars in the future in the way that we did it in the past. So a lot of people are going to have to do things differently.
Worldwide, the automobile industry has seen the handwriting on the wall. Fuel is expensive, and is getting more so with each passing year. So the industry has invested tens of billions of dollars in improving engine and power train efficiency.
In addition, auto designers are coming up with new ways to eliminate weight and drag. (At higher speeds, up to 70 percent of the energy used to turn the wheels on a car goes just to push the air out of the way of the chassis.) The auto industry is looking towards different sorts of fuels, and moving towards what is called fuel-flexibility.
Profit Plays for the Next Great Car Market
Already we're seeing signs of the automobile's future, as well as who are becoming the biggest car buyers.
Sales have tumbled for U.S. automotive titans Ford Motor Co. (F), General Motors Corp. (GM) and Chrysler LLC because of soaring gas prices, slowing U.S. economy and global interest trending toward smaller and greener cars.
Meanwhile, new battlegrounds emerged - China and India. General Motors and Toyota Motor Corp. (TM) have different strategies for capturing the burgeoning Chinese consumer market.
However, the company that could best them all (and dually serve its investors nicely) is Tata Motor Group (TTM), which just recently purchased luxury brands Jaguar and Land Rover from Ford for $2.3 billion.
It's also creating a huge buzz for its $2,500 car, the Nano, a stripped down two-seater designed solely to get from point A-to-B. That price undercuts Tata's Indian competition by about 30%, and is certain to add to the company's market share even as it causes that country's overall auto market to expand.
Not only is Tata a formidable competitor at the bottom end of the market, in India and other emerging markets, but with its new marquee brands and strong manufacturing capabilities it is likely to make substantial inroads at the top end also.
Where the Rubber Meets the Road
China and India have populations several times those of the United States and European Union, an increasing proportion of whom are becoming wealthy enough to buy an automobile, yet their labor costs are and will remain a small fraction of those in the United States, Japan or Germany.
At the same time, because of their size, India and China will retain important economies of scale in their domestic markets over other countries with similarly low-wage costs. That suggests that more and more of the world automobile industry will migrate to those two countries in the next 25 years. Investors in Indian and Chinese automobile manufacturers are likely to make a lot more money than buyers of Ford, General Motors or even Toyota.
Tata Motors has ADRs fully listed on the New York Stock Exchange so its shares are easy to buy, and currently trade at an earnings multiple in the mid-teens. Its main rival Mahindra does not have ADRs so you'd have to buy its Global Depositary Receipts through London or Frankfurt.
In China, the only automobile manufacturer with ADRs, although only on the Pink Sheets, is Brilliance China (BCAHY), which is currently loss-making.
That doesn't give you a lot of choice. However, never fear: the automobile business requires large amounts of capital, so in future years both Indian and Chinese manufacturers will doubtless come to New York seeking your money.
News and Related Story Links:
- Money Morning:
Emerging Markets Drive Toyota's 7.5% Profit Growth
- Money Morning:
With New R&D and Auto Plants Planned, Toyota Revs up its Rivalry with General Motors in China
- Money Morning:
Tata Targets Jaguar and Land Rover for Long-Term Returns