Sweden's 33% Drop In Car Sales Foretells A Coming Crash Of The U.S. Car Market

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Includes: BMWYY, DDAIF, DMLRY, F, FCAU, FUJHF, FUJHY, GELYF, GELYY, GM, HMC, HNDAF, HYMLF, HYMTF, KIMTF, MZDAF, MZDAY, NSANF, NSANY, TM, TSLA, TTM, VLKAF, VLKPF, VWAGY
by: Anton Wahlman
Summary

Sweden, the U.S. and California have varying ways to impose cost on gasoline and diesel cars, while subsidizing electric cars.

This took a step “forward’ in Sweden on July 1, 2018, with a new taxation regime that radically increased annual vehicle registration tax.

For the four months since July 1, car sales in Sweden are down 33%. Battery-electric vehicle (BEV) sales remain around 3% of the market.

The similar policy goal in the U.S. and California is implemented differently, and over a different (longer) time horizon.

Still, the end result may turn out to be similar: Fewer cars sold. This is why automotive company valuations are depressed, largely for good reason.

The last few years in the U.S. new light vehicle market have a been filled with “peace and prosperity” with sales landing around 17 million units per year. Sure, the mix has shifted from so-called “passenger cars” (sedans, coupes, etc) to SUVs and pickup trucks, but in the aggregate, light vehicle sales have been basically flat.

Yes, a majority of the large automaker stocks have gone nowhere but flat to down. Profitability has been, and remains, strong, so multiples have fallen. Ford (F) and General Motors (GM) have delivered on many financial metrics, but Ford stock has gone down and General Motors has stayed flat.

Fiat Chrysler (FCAU) stands along among the volume automakers in having delivered strong shareholder returns. The stock has gone from under $6 to approximately $16, driven by Jeep and RAM sales, as well as improving profitability working to eliminate industrial debt.

So why are most automakers seeing lagging stock prices despite relatively decent financial results? Why are the price to earnings multiples so low and moving lower? Why are the dividend yields so high and increasing?

I can tell you why. The answer is that you can see Sweden from the tops of Detroit’s headquarters buildings.

Say what? Sweden?

Yes, that little country of 10 million people far away. It was the home of Volvo Cars - now owned by Chinese Geely - and SAAB, which GM acquired and then eventually it was shut down a decade ago.

But this is not about automotive manufacturing in Sweden. It’s about automotive "sales" in Sweden. You see, Sweden introduced a new automotive taxation scheme to deal with fleet electrification on July 1, 2018, and the results are clear as Kosta-Boda and Orrefors crystal.

The purpose of the new Swedish car sales laws are to force the preferences of politicians onto the people. While the people in Sweden, just like the people in the U.S., want to buy SUVs of all sizes, the politicians are now taxing them hard and steering them into small electric cars instead.

How do they do that? Apart from a notoriously high gasoline tax, on July 1, 2018, Sweden introduced huge increases in the annual registration tax for new cars sold - if they run on gasoline or diesel, and the more CO2 emitted, the bigger the annual registration tax.

Take the Renault Trafic 1.6 liter engine version with manual gearbox, for example. It got hit with a 16,890 SEK ($1,860 at today’s exchange rate) increase in registration tax.

I don’t think you need to be a Nobel Prize winner in economics to see that if you jack up the cost of ownership of new cars, fewer new cars will be sold. So let’s take a look at how many fewer cars were sold in Sweden following the introduction of these rules, designed to encourage a higher percentage of sales of electric cars:

Sweden

2017

2018

change

July

24722

12504

-49%

August

29915

24670

-18%

September

31672

19111

-40%

October

32112

23088

-28%

TOTAL

118421

79373

-33%

As you can see in the table above, the result has been devastating for new car sales in Sweden. Sales are down a cumulative 33% since the introduction of this law mid-year 2018. Sweden used to sell around 30,000 new cars a month - and now it’s around 20,000. It’s down by a third.

Did the new Swedish taxation scheme boost sales of electric cars?

Sweden

total

BEV

BEV %

July

12504

521

4%

August

24670

559

2%

September

19111

658

3%

October

23088

795

3%

TOTAL

79373

2533

3%

As you can see in the table above, not much. Sales have gone up by a couple hundred cars per month, at the most. As a percentage of the overall car market, it has moved by approximately one percentage point. It still almost rounds to zero. Obviously these numbers are higher than what they were a year ago, but that’s not really the point, with the total at only 3% of the market after the implementation of the new policy which reduced the overall size of the car market by 33%.

But hey, what about plug-in hybrid cars? Aren’t they popular in Sweden, thanks to the T8 versions of various Volvo models, Volkswagen’s popular GTE models and Niro and Optima from Kia?

Sweden

total

PHEVs

PHEV %

July

12504

1905

15%

August

24670

1979

8%

September

19111

1725

9%

October

23088

1867

8%

TOTAL

79373

7476

9%

As you can see in the table above, the PHEV sales numbers are approximately triple those of the pure EVs (BEVs). So these are not bad numbers - but they don’t appear to be increasing. After that one outlier month of July 2018, when the whole market fell but PHEVs did not, PHEVs have been below 10% of the overall market.

Add the two BEV and PHEV categories together, and you are at close to 12% of the total car market having an electric plug. That’s much higher than in the U.S., but nowhere near Norway which is at 50%-60% and rising.

All of this should be put into the context of the overall Swedish car market being down 33% after July 1, 2018. So despite the fact that the overall Swedish plug-in car market is now around 12%, which is an increase from where it was a year or so ago, it must be seen in the context of the overall market crashing by 33%. The impact on the industry overall is devastating.

Implications for the U.S. car market and automaker stocks

So what does the lesson from the Swedish car market mean for the U.S. new light vehicle market, and by extension for automaker stocks? In brief, it’s a disaster coming around the corner, over the next few years.

Why is that? Because the objective of Swedish lawmakers is eerily similar to that of many U.S. law and rule makers. I’m not necessarily talking about any one particular law or rule maker in Washington DC, but about the broader trend toward forcing automakers to sell cars that people don’t want to buy - often enforced by the states such as California and at least 10 other U.S. states.

The U.S. federal administration in Washington DC right now is trying to soften some of these trends for the 2022-2025 years, by essentially freezing the fleet mix requirements at the 2021 levels, but that is only just that: A softening of the overall trend. It does not reverse the trend. It’s a bit like saying that it’s better to crash your car into a cement wall at 60 MPH instead of 90 MPH. It’s better, but still not a good outcome.

What the market is seeing: Mandated losses

The way the markets are - or at least should be - looking at this is a bit like rent control. If you are to invest in building or buying an apartment building, you will be willing to pay a lot less for it if the government basically mandates what kind of product you have to offer, and at that price.

The same thing is true here: If the government is to decide what product you must sell, it effectively also dictates your profit level - especially if it raises taxes on some of those products a lot, but not on a small subset of the product mix. Imagine if the government suddenly told landlords that they were going to tax two-bedroom apartments by $1,800 per month, one-bedroom apartments by $900 per month - but subsidize studio apartments to the tune of $450 per month. What do you think would happen to the value of most apartment buildings?

A select few would go up, but most would plummet. That’s what would happen.

The automotive industry has, as a result, become mostly uninvestable. How do you invest in an industry where politicians - and not the supply-demand interplay between producers and consumers - decide prices and what products must be produced?

Of course, the U.S. automotive regulatory maze is different and a lot more complex (federal vs. state, for example) than the Swedish system, which is unitary and easy to understand, in comparison. These regulatory regimes are not identical - and they are not being implemented at the same time over the same time horizon.

However, it’s the direction and trends that are significantly similar. Investors are seeing this. The politicians are using the automakers as punching bags for their own desires to force a certain set of products onto their populations.

Whether in Stockholm or Washington D.C. or Sacramento, politicians and regulators have decided that because they like small electric cars, they must be forced upon the populations - whether they like them or not. These politicians and regulators don’t drive pickup trucks or large SUVs as much as their subjects do.

What does this mean for U.S. sales trends?

After a few years of around 17 million units sold per years, I think 2019 or 2020 could see a drop to 16 million units or even below. The new laws that are forcing increases in automaker costs will impact affordability of buying regular cars, by regular people.

People are not going to spend much more money on cars. If these costs go up, they will buy fewer of them. People will keep their used cars longer. The U.S. new car market almost is destined to decline, just like the Swedish new car market took a 33% dump after the imposition of these new rules. Barring any change in policy and reversing of these rules, how could it not?

Automotive sales trend bear market ahead

Automotive stock valuations for Ford and GM are near recent year lows, and dividend yields are strong. However, with these new laws and trends I see little or no reason to be long, other than perhaps a temporary tactical trade here and there. Until and unless Washington D.C. and Sacramento give up or at least significantly reduce their propensity to legislate profits away from the automakers, I predict it will only get worse.

For example, we will have a new U.S. House of Representatives majority being seated in January 2019. Will they be more or less interested in intervening in the U.S. auto market with further taxes and “green car” mandates? Take a guess.

Whatever little case there was for a turnaround in the automotive stocks may have just gone out the window. As an investor, and other than temporary tactical trading, I don’t see that the secular trend as directed by government policy is positive at this point.

Disclosure: I am/we are short TSLA. 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.

Additional disclosure: At the time of submitting this article for publication, the author was short TSLA. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.

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