The automotive industry is going to see a huge shift due to digitalization. In the short term, the growing middle-class in developing countries will drive growth, but the most interesting development will be through the move toward Mobility as a Service.
Requirements for more safer and efficient transportation means that self-driving vehicles will become the norm in the near future. We will probably see the first fully autonomous production units on our roads within a few years. As we know, semi-autonomous self-driving features are already available.
Whether or not the fully autonomous cars will also be driverless is up for some debate, though. This is a critical variable to some operators such as Lyft (Private:LYFT) and Uber (Private:UBER) that obviously would benefit hugely in lower costs if the vehicles were driverless.
The Shift towards Mobility as a Service
Just as we have seen in the PC industry, there will probably be a shift with profitability moving away from hardware towards services and solutions. Another interesting analogy would be the watch-making industry. In watches, there is very profitable business to be made in the luxury, even artisan, niche segment - even though the mass market moved towards low-cost mass production.
Will BMW become the Patek Philippe of the future, whereas FCA Group could be the Swatch? And it must be remembered that Apple (NASDAQ:AAPL) has been able to create an extremely profitable business around hardware with less success in the services side.
If the world will shift towards Mobility as a Service, which it most probably will due to the megatrends of urbanization and climate change, then private ownership of cars will come under pressure. The basic assumption being that in the future, the utilization of cars and efficiency of transport must rise.
The economics of cars is currently terrible.
Auto Industry and Nokia
A source in the auto industry has said: "We don't want to end up like Nokia's handset business, which was once hugely profitable... then disappeared," according to Reuters.
Nokia's (NYSE:NOK) demise in the mobile handset business can be summarized to have happened because the user experience and service (app) ecosystem fell disastrously behind the competition. New "greenfield" offerings wiped the floor with what was then the dominant solution.
Tesla (NASDAQ:TSLA) has already brought some similar kind of competition to the auto industry as iPhone and Android brought to the mobile handset market back in 2007. But it would require a more fundamental disruption for the auto industry to be completely rattled.
A successful execution of Mobility as a Service (MaaS) could be just that. People will still love cars and want to drive them. Another question is, do they want to own the cars to the same extent as people now do? Rationally thinking, we just do not need as many cars per person as we now have, mostly sitting idle on the streets and in garages.
Internal Conflicts of Interest
The asymmetric dynamic here is that whereas automakers want car prices and units as high as possible, the mobility service providers want car costs and units as low as possible, as long as the service levels and KPIs are in green. Therefore, the shift towards the MaaS service business may be painful for carmakers. In other words, carmakers may face internal conflicts of interest, which may hinder their competitiveness against pure service providers such as Uber.
Internal conflicts can cause great firms to fail, as short-term interests prevent the necessary investments required to secure long-term success. This is also known as the "innovator's dilemma".
Doing the Right Moves
While all other carmakers are talking the talk and experimenting, General Motors (NYSE:GM) is actually making very consistent moves:
- Strategic partnership and $500M equity stake in Lyft
- Gaining boardroom level control over the service provider side to make the overall business model compatible with the carmaker's
- Short term: Competitive edge against Uber as well as other carmakers
- Long term: Basis for driverless cars
- Low-cost electric car optimized (with Lyft) to be a part of MaaS delivery chain
- Maven and OnStar technology, processes and infrastructure
- Short term: Enhancing the user experience through seamless digital services
- Long term: Important parts of the driverless car service chain
A successful cooperation will provide General Motors and Lyft with a competitive edge against the competition. If the user experience and service availability is at least as good as with Uber, lower total costs and the ability to customize the vehicles to suit user requirements can lift Lyft above the competition.
It must be mentioned that other carmakers have similar efforts. For example, BMW (BAMXY, OTCPK:BAMXF, OTC:BYMOF) has DriveNow and the German carmaker consortium of Audi (OTCPK:AUDVF), BMW and Daimler (OTCPK:DDAIF, OTCPK:DDAIY) acquired Nokia's HERE Maps for $3B. Ford (NYSE:F) is talking about "smart mobility" and experimenting. But in all fairness, GM's efforts are the most consistent and well executed of the bunch.
The leading region in technology lately has unquestionably been North America. Majority of the most successful technology companies are American and hence a very special environment for technology development has formed not only in Silicon Valley but also in other locations around America. Therefore, American carmakers may well be at an advantage compared to others, as they have access to talent and an environment of innovation.
It is also worth noting that Americans seem to understand user experience better than many others. Examples of design and user experience driven competitiveness can be seen in the triumph of iPhone, Tesla Model S, Gmail and countless other apps and digital services. Many of these have not been matched by products coming from other regions.
Japan has traditionally been seen as a futuristic society. Surprisingly, Japan seems to be quite conservative in many instances when it comes to embracing new ways of using technology. For example, Toyota (TM, OTCPK:TOYOF) has long resisted the idea of autonomous cars, until late. And even with its newly found change of heart, it's setting up its research lab in Silicon Valley. Competition for talent is fierce and it could be argued that Tesla or Apple could well attract the top talent in the car technology field, especially in North America.
Another noteworthy characteristic to Asian innovation is that quite rarely have they lately been successful outside of their home market. Of course, there are tons of successful products from Asia or Japan, but such disruptive innovations as iPad or Uber have not emerged from Asia on a global scale in a long time.
The investment case for GM is compelling in my opinion. The valuation of the company seems to be in the low side, with current and forward P/E being under 6 and dividend yield almost 5%. Other key metrics are also attractive, with P/B being 1.2, P/S 0.32, cash on hand at over $20B, revenue on a 5-year upward trend and having stabilized after the ignition switch scandal.
Compare those financials with any other carmaker and GM looks undervalued.
The effect of strategy, offering and marketing on the performance of a company is always subjective. My take on GM is bullish. The reasoning for this view is that, combined with the financial indicators and the strategic moves that Mary Barra is implementing, the company offers a very attractive dividend yield for the short term and positive strategic outlook in the longer term.
In addition, the more macro view on the industry as a whole is positive, as an increasing proportion of the growing population becomes middle class, hence increasing demand. The environmental requirements will drive the modernization of the global vehicle base towards cleaner and more efficient transportation, which again will generate demand. In the shorter term, internal combustion (IC) engine cars will see increasing demand from developing countries with limited infrastructure for electric vehicles ((NYSE:EV)).
General Motors is well positioned in both IC and EV markets and looks like it is in a good position to also be successful in the coming rise of MaaS transportation.
Disclosure: I am/we are long GM, BAMXY, PEUGF.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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