Thursday, August 16, 2018

What the trade wars are really about

How competitive is the world’s car industry and what is TESLA’s share?   Our cars are becoming more autonomous and better in quality by the day. Very exciting but how much profit do car makers make? 
Figure 1. World market share of leading car makers totals 51.4%   Source: Statistica
During the 1950s, the U.S. Big Three Ford, GM and Chrysler dominated the world markets. But today Fiat-Chrysler doesn’t even make the top 10. Ask yourself, how many models and brands are sold by Toyota?  15? That would mean that the typical car model has less than 0.5% of world-market share.
North America produces around 17 million cars per year and Tesla aims to make just over 5000 cars per month or 60,000 model 3s per year. Be generous, say Tesla makes 100,000 cars in total annually - if they can keep up the pace!  That is 0.5% of North America’s output. Make it worse, globally we produce around 70 million cars per year and thus Tesla's share is 0.1%   What do you think the chance is that Tesla will compete with Toyota who produces 6.4 million cars per year ?  But then… Who guessed in 1950 that GM would not be the world’s largest car-maker?
Remember the saying: What is good for GM is good for America?  Well that is a thing long gone. And here we have Ontario clinging desperately to the Car Industry and a new ‘Auto Pact’ under NAFTA.  That while Justin Trudeau claims oil and gas are fading out. The man really has no clue! 

Recent numbers from AutoCanada, one of Canada’s largest car dealerships say that it has a gross margin of 5.9% on every car sold. Well there are a lot of other charges to be deducted before we can say how much a new car sale contributed to its NET INCOME!
I am not saying that the car industry is a sunset industry, far from it. I just question its profitability. Just think of it. Those top 10 car makers listed above control just 51,4% of the total car market. The net profit margin, depending where in the economic cycle we are, averages 4.1% but they are at times it is as low as negative 3.9%.  I don’t think the car industry is dying but I don’t think they are great investments either.

Also, it shows the futility of bringing back heavy industries to North America. Our economies have changed. North America provides services (Amazon, Google), commodities and innovation. It is like my Dutch home town and Berkshire Hathaway. Once we were textile-industry driven. Now there is not a thread in sight, unless it is in your email. 😊

Our economic make-up evolves and maybe with robotics, we will get some manufacturing back but probably not as a significant source of employment. Our Western industries will evolve and if we want to stay economic leaders, we have to be innovators and creators of new ways of making money rather than focusing on a return of manufacturing jobs in obsolete or super competitive industries. We need to produce what the world craves not what it drowns in. Next time we’re so desperate about NAFTA and the Canadian auto industry let’s think again. Is it worth the effort or let the Donald ‘win’?   It also begs the question: why are so many German car manufacturers in the top 10?

For the large picture, what is Trump really trying to achieve with these trade wars?  I guess it is about the future; the remainder of this 21st century. Look at the demographics.  China and India will probably be adding 1 or 2 billion people to their middle class. Africa is in for tremendous population growth that leaves the rest of the world behind in a dust cloud. Totally we are projected to have 10 to 11 billion people on this planet. Africa could easily exceed 5 billion people. With extreme poverty on the decline, 3 to 4 billion people from Africa will join the middle class over the coming century. Thus, between Africa and the emerging economies we may add 4 to 6 billion to the middle-class lifestyle. In comparison, Europe and North America will barely grow.

That is what this is all about. The U.S. must protect its intellectual property, it must protect its manufacturing base. Today when its economy is strong, it will have to fight and establish the economic rules.  If not it will be economically overrun by the ‘Hun’.  If it does not force China today to behave as a mature and responsible economy rather than stealing intellectual property and limiting access to its markets, the U.S., Canada and Europe will be the losers of the coming century.  I may not like the Donald, but that doesn’t mean that the current trade wars are without merit and unnecessary.

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