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Big US Bank Earnings And The Future Of Global Automakers

The IMF has upgraded its GDP forecasts for developed economies but what is the outlook like for developing economies in South-East Asia? The Morning Run asks Tony Nash, CEO of Complete Intelligence. They also get into insights from the earnings out of JP Morgan and Goldman Sachs, as well as how traditional automakers will have to adapt in light of the EV boom.

 

This podcast first appeared and originally published at https://www.bfm.my/podcast/morning-run/market-watch/big-us-bank-earnings-and-the-future-of-global-automakers on April 15, 2021.

 

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Show Notes

 

LM: The IMF has upgraded its GDP forecasts for developed economies, but what is the outlook like for developing economies in South East Asia?

 

TN: It’s actually not bad to look at this IMF report. We had such a pullback in economies in 2020 that we really have to look at the growth rates in 2019, 2020, and 2021. To understand it in context, Southeast Asia looks to be doing pretty well when we average those three years out. There’s growth in just about every country except Thailand, now with a slight pullback over that time. And so what that means is Thailand will not necessarily back up to the 2019 levels unfortunately, but Malaysia is 1.7%. In Asia, 2.4%. Singapore, 0.38%. So Southeast Asia is growing. Europe, on the other hand, there is only one country that shows growth over that period, which is the Netherlands within the Eurozone. So Europe has a bit of a problem. The US continues to grow, though around 1%.

 

NL: Meanwhile, is the sharp rise in March, U.S. CPI prices compared to February a good sign or something to be concerned about?

 

TN: We didn’t see long term inflation effects and a lot of kind of buzz about long term inflation affects or medium term inflation affects in the US. But our view is that this is two factors. One is the base effect, meaning we saw so much disinflation or deflation in 2020 that we’re seeing a base effect on that. The other one is supply constraint. So we’re seeing hold back in supply chains or we’re seeing supply chains catch up from closure.

 

There is a constrained supply which is driving up prices as supply chains continue to equalize and balance out. We should see those prices return to normal. If we go back to the IMF forecast, we don’t necessarily see rousing growth for 2021 compared to, say, 2019. So we have the manufacturing capacity in place. So I don’t necessarily see demand outstripping supply to create the inflation that many people are talking about.

 

NL: When do you expect the situation will normalize?

 

TN: It really all depends on when countries open up and and that sort of thing. I would do three of twenty one is when we start to see things more normal, I think it’ll work out in between now and then. Of course, currency dynamics have a lot to do with that, but we’ll have to see what happens with the dollar with CNY and the euro to really understand how that will shake out. But we think we’ll see normalization in Q3.

 

RK: The big Wall Street banks have kicked off earnings season with numbers from JP Morgan, Goldman Sachs and Wells Fargo. They beat estimates, but are these numbers sustainable or just a one off blip following a what was really a tough year?

 

TN: They both did really well in terms of return on equity. And that’s really one of the major requirements for banks. The real question is around loan. So we saw a spike in loans in the middle of 2020 in the US, largely on the back of small business loans and very low interest rates and government programs to push loans out. Loans are down in Q1 of ’21. There is an expectation that loans will perk up again in the second half of ’21. I’m not quite convinced we’ll see the loan growth that was talked about today with JP Morgan’s call. I think we’ll see loan growth in the second half of ’21, but I’m not necessarily sure that we’ll see the spike that we discussed on the call.

 

LM: So Tony, Legacy Cockburn’s and IT companies are both rushing into the electrical electric vehicle space out of these two, who’s likely to come out in front?

 

TN: I think it’s a combination. Car brands make really good hardware, but they’re really not great software makers. So I think there’s going to be a combination of the car brands relying on battery makers and relying on software to make great electric vehicles. There are a lot fewer parts in EVs. And so these supply chains that the car manufacturers had to have for internal combustion engines change pretty dramatically for EVs. They’re going to have to rely on battery makers and software makers.

 

I think the real question for the auto manufacturers is what is that business model going forward? I think they may learn from software makers with the recurring revenue model. So we may take a car and pay a monthly charge for that car, almost like combining finance and the car itself. So carmakers have a recurring revenue model with regular upgrades similar to the way maybe some mobile phone carriers operate, those sorts of things. I think it’s a stretch to have the one time payment. I think carmakers see that finance revenue go to other people and they may want to do that themselves with EV.

 

RK: Out of curiosity, do you have any thoughts on what will define whether a legacy car brand is going to succeed in the new car world? Because a lot of them have been hesitant to move. They’re going to have to make partnerships with the battery mate because they’re going to have to make partnerships with software makers is going to be the two defining parts who they’re putting on the battery and the software name.

 

TN: Yeah, I think it depends on, you know, the first mover is not necessarily the winner. So I think Tesla ultimately, they’re a great company. They make fine cars like every car company. They have problems. But I think they’re fine. It doesn’t necessarily mean they’re going to be the winner. I think with Volkswagen announcing, you know, big moves in the market a couple of weeks ago, say if Toyota really I mean, of course, they’re going after it already. But if there are real moves in that direction, I think the very, very large scale carmakers will ultimately win.

 

A lot of this has to do with regulatory and subsidy regimes within the consumption countries. So it is more expensive to buy an electric car. There is not the infrastructure necessarily to have electric cars to drive long distances. So the subsidies that national governments put out to push that market forward are going to have a major impact on the adoption of those cars.

 

The real danger, I think, is it’s going to take a long time to rollout that infrastructure and other things. So the real danger for the guys who invest in EVs in a big way is a different type of technological change that could come around. I don’t know what that could be. It could be a more efficient internal combustion engine. It could be, you know, I don’t know, a different type of fuel or something that’s a lot cheaper and a lot easier to use.

 

So there are a lot of question marks around the rise of EVs. I don’t necessarily think that it’s guaranteed that EVs will take over and the big car companies are going to go on a percent to electric vehicles.

 

RK: The large scale makers like Volkswagen, Toyota, they’ve got they’ve got essentially a conglomerate of other brands within them. Do you expect to see more consolidation, especially as this? Because the car industry hasn’t been doing well that great over the last few years and we’ve seen more M&A. We should we expect more consolidation, especially after last year?

 

TN: I don’t know how much more there is to consolidate. I think it may get specialized boutique. When you have technology changes in an industry, you always have specialized boutique companies that come around. We saw this in mobile phones, say, 10 or 15 years ago, and those ended up being purchased. So I think we’ll have an era where we’ll have even more TV companies, small ones that end up being bought by the larger guys. So, you know, a technological change really pulls a lot of innovation. Big companies are really not good at innovation, so they typically have to acquire it. Will it Tesla be acquired? Probably not, at least not at this valuation. But other small companies, early stages could potentially if they have very good tech. So I think that’s the way they leapfrog. I don’t think it’s the massive processes that they have internally, like a Volkswagen today. I don’t think that’s the way they leapfrog.

 

LM: Thanks so much for joining us this morning. Tony, that was Tony Nash, CEO of Complete Intelligence, giving us some insight into what’s happening in global markets.

 

RK: So we are talking about cars very quickly. I see this headline here that Jilly’s Lotus cars, miles, raising four billion ringgit.

 

And they’re only doing this to help the iconic British sports and racing automobile brand to expand into the IV market in China, according to people familiar with the matter. And this is a story from Bloomberg. So Geely is working with advisers to slander potential investors interested in funding the round. And that could see that would value good value lotus operations at about five billion U.S. dollars. This is going to be interesting because this is, of course, was formerly part of the Proton Group, which was then bought by Geely.

 

LM: And so so we’re going to be heading into some messages now and then. Up next, taking a look at Mithras financing with financial columnist Pankaj Kumar. Stay tuned. BFM eighty nine point nine.

 

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Visual (Videos)

Why legacy car brands, IT giants are rushing to make electric cars

This article originally published at http://www.arirang.co.kr/News/News_View.asp?nseq=274827 on April 1, 2021.


Can Hyundai, Kia, Volkswagen, GM make better electric cars than Tesla? Last year, sales of electric cars surged 44.6% despite the general downturn of car sales in the global market. In early 2021, a number of automobile giants announced plans to go fully electric within the next ten years. Can they beat the likes of Tesla and offer innovative rides for consumers?

 

Show Notes

 

SO: Last year sales of electric cars surged 44.6 despite the general downturn of car sales in the global market and that trend looks set to accelerate in early 2021. A number of automobile giants including Volkswagen, General Motors and Volvo announced plans to go fully electric within the next 10 years but can they beat the likes of Tesla and offer innovative rides for their customers?

 

For insights on this we turn to Tony Nash, CEO and founder of Complete Intelligence based in Houston, Texas and Jason Salvucci, national manager of the Overseas Military Sales Group based in Seoul but currently in Okinawa. Well, a very warm welcome to you both and well Tony good to see you again.

 

I think it’s our first time connecting this year but well we’ve seen we’ve heard some very exciting news coming from these automakers and the likes of Volkswagen and General Motors. They’re going all electric they’re really moving away from this at the main business that they’ve been building over the decades based on combustion engines.

 

What’s led them to take this risk and do you think it’s the right move?

 

TN: I think, it’s a move that they have to make. Whether or not it’s a move that they want to make. I don’t think there’s really a lot of debate there but I think their equity market valuation they have to catch up well.

 

I don’t know that they will but they’ll try to catch up with say Tesla or something within terms of the equity market valuation but the customer perception they’re actually making viable EVs that they want is really critically important especially with younger customers. But from a balancing perspective at least in the US for example there are emission standards and the more electric vehicles they produce that also allows them produced to produce other larger vehicles SUVs and other high polluting vehicles. So as long as on an average basis they keep it down to the emission standards.

 

They can produce EVs to allow them to produce say the SUVs that other say consumers want. So, it’s both perception and equity market valuation as well as balancing out the regulatory aspects.

 

SO: So, they’re wearing the different sort of costs and risks here. Well, Jason, what’s your thoughts on this? I mean the world’s biggest legacy automakers scrapping their combustion engines. Do you think they’re making the right move?

 

JS: You know, I kind of got to agree with Tony that this is electric is the future. I mean, they have no choice. It’s not just the standards. Electric cars are easier to maintain. They’re quieter. They’re cleaner. They’re more efficient. I mean, the power is better it’s the way everything’s going. I mean, we don’t really have much choice in the matter. While it may not be 100 electric tomorrow. We’re getting there.

 

The big manufacturers if they want to, they want to play with you know companies like Tesla, they have no choice. That’s where the future is.

 

SO: And the force Tony, Tesla is without a doubt the world’s most iconic electric car company but do you think it’s leading the global market is going to last with all these other competitors now coming into the market these giant auto businesses? And are these car makers catching up quickly enough in terms of battery technology and other key technologies?

 

TN: Well obviously, they have a lead but will they be able to keep it as the real question. I think they may be able to keep it for a few years but I’m not sure that they can keep it say over the medium to long term.

 

So, Tesla has a lead but that gap is closing. And with technology they can use external, say sources to either acquire or develop the battery technology that they need to compete with Tesla. So, I think really at the end of the day it comes down to: can you produce a quality vehicle? Can it perform like consumers want and does it drive like consumers want?

 

So, the novelty of an EV is wearing off. And as it goes broad-based that first user advantage or first user interest wears off. And the broad market really just wants a functional car that is electric. And so, you have the segmentation and other things but I think Tesla is going to have a tougher job going forward to keep the lead that it’s got.

 

SO: Well, Jason is it as straightforward as one might think for these giant automakers to transition into all EV?

 

I mean, what are the major differences that traditional car makers are going to have to adapt to and really face as they transition into all electric?

 

JS: Well, the manufacturing process for one, you know, the number of components in a combustion engine vehicle, compared to an electric car, it’s night and day. I mean it goes beyond the manufacture of the vehicle. It’s the maintenance of the vehicle it’s really everything.

 

The shell may look the same but when you transition to, you know even a mild hybrid to a all-electric vehicle. It’s completely different. Not only will the way the cars are sold have to change but also because how the customers buy the cars. How they maintain. How they operate the cars everything changes. It’s not as simple as just shifting from one to the other.

 

So, I think that the manufacturers have quite a task ahead of them. They are really playing catch up, if they want to grow in this and be industry leaders as they have been for years like Volkswagen, Toyota, Ford. They were industry leaders for years and they’ve surrendered that position to a startup company like Tesla.

 

SO: Right and there was some news this week that Volkswagen might be changing its name in the US to Voltswagen. So, really goes to show. It’s not as easy or straightforward as simply changing the name and probably…

 

JS: That’s an April fool’s joke by the way. Yeah, it was April fool’s joke. I fell for it too. Voltswagen is their April fool’s joke.

 

SO: It was a bit too early for April fool’s day but well thankfully yes, they’re retaining the Volkswagen brand. And well Tony, internet companies like Apple and Google and apparently Xiaomi now and Huawei. They’re working on electric vehicles as well and it’s clearly not going to be such an easy ride. So, what’s really in it for them? And what kind of innovations do you think they’re going to bring to the market as tech companies?

 

TN: Well, that’s a great question. Jason brought up a great point about the business models and as you move into the more software-based business models that EVs are you move into a different ability. In a different way for consumers to pay for things. And you know, I think it’s possible for kind of that big expense of a car that a consumer would buy instead of it being financed. It could be a service fee that’s put over a period of time. I don’t really know what that model looks like but these software companies are companies that really balance out especially Apple. A hard asset like a phone plus monthly recurring software fees.

 

And so, these guys will come into the market. Understanding the risk associated with making hardware and balancing that out with software fees. Whereas automakers traditional automakers at least are accustomed to one big transaction that gets financed by a third party. So, it’s a fundamental change in the business model.

 

SO: And Jason, now South Korean car makers, Hyundai and Kia. They currently set fourth place in the global EV markets and of course Kia having unveiled its EB6 this week. And Honda continuing to expand this EB lineup, of course.

 

So, how competitive are these South Korean car makers products? And do you think they’re really going to have to step up the game? Now as market leaders global market leaders Volkswagen GM they’re going out all electric?

 

JS: I’ve been in South Korea 20 years and the way cars have improved in the last 20 years is phenomenal. When I first got to South Korea. Korean cars were far behind but now the fit, the finish, the quality is amazing.

 

I think the larger auto manufacturers are going to get a run for their money by the likes of Hyundai and Kia when it comes to electric vehicles. I really do.

 

SO: So, what kind of… I suppose, what kind of advantages or what kind of features do you think they offer Jason that might really help them really engage in the competition especially as all these car makers go electric?

 

JS: It seems to me the… not just the quality but the design of the Korean cars is a little more exciting than some of the other manufacturers. That’s what I’ve noticed over the last couple of years, is that they’re good-looking cars and they’re reliable. And the price points are, well, I mean they’ve significantly come up in cost in the last 20 years, that’s for sure but they’re nice. And I see a future of like a subscription type of service for electric cars because you know the United States every three years to 39 months. Americans are trading their vehicle up trading in one car for another car. And we have a traditional dealer manufacturer, dealer model that we have to require our customers to go through a subscription service in the future.

 

It is definitely, in the makes for electric cars because you’ll trade out of them much more frequently.

 

SO: So, it’s not just the hardware but also the software that’s going to bring about a lot of changes in how we consume electric vehicles, as well. And of course, everyone cares about the design too. And well Tony, it seems that EVs really are the future but it looks like for now the stock market is quite confused about the prospects they’ve been fluctuating. They’ve been declining over the last few weeks. And of course there was a boost on Wednesday after the Biden administration announced its plans to really ramp up green vehicles and infrastructure but what do you make of these market fluctuations? And how does Complete Intelligence really project the demand or market for electric vehicles in the near future?

 

TN: Sure, obviously there’s a healthy market ahead. I think the equity market fluctuations over the last few weeks are really just, that its markets searching for the right price. And there are so many different variables with bond prices. And currencies. And equity markets that are going into the calculations around the stock market prices for these companies but I do think that those companies that will not only crack the battery technology. And the value proposition for the market but also the business model, as Jason mentioned. Those companies are the ones that the equity analysts. And the investors will really want to follow.

 

So, Tesla is a high visibility leader, early leader in electric cars. And I think they’ll remain a leader but the volume of cars that they produce compared to say a Volkswagen on an annual basis is tiny. And so, the scale that a Volkswagen or a Hyundai or somebody can bring to this market can overwhelm almost an artisan car maker like a Tesla.

 

That’s I don’t mean that as an insult to Tesla at all they’ve done some amazing groundbreaking work but they just don’t have the scale that a Volkswagen or Hyundai has.

 

SO: Well, the likes of Volkswagen and Volvo. They’re going all electric Jason but Hyundai seems to be putting its eggs in multiple baskets. It’s been betting on hydrogen cars as well. Which right now are considered a bit less economical. And there’s also a lack of supportive infrastructure in most parts of the world.

 

Do you think this investment is going to pay off for the company?

 

JS: I think the future is multi-faceted. I don’t necessarily see the entire replacement of the combustion engine, anytime soon. I mean, they’ll definitely be hybrid vehicles, will be mild hybrid plug-in hybrids. There’ll be some hydrogen fuel cell vehicles. I think that there’s multiple avenues that manufacturers will have in the future.

 

So, that we can kind of have something for everybody. I don’t know that the investment in the infrastructure for hydrogen pays off because right now extracting the hydrogen requires fossil fuels. That’s a bit of a problem until they can crack the hydrogen extraction of via solar or something like. That it’s a bit of an… it’s not there yet. I don’t think.

 

SO: And Tony, before we go now there’s a massive EV market in China. And recently, Huawei technologies. They’ve come out and said they’re going to invest billions into that market.

 

How do you see the prospects and do you see China sort of leading the global market in terms of EVs just with the massive number of consumers they have?

 

TN: Sure, I think, Yes. I think China’s challenge is moving their vehicles beyond China and beyond Asia. There’s so much intense competition from Korea, Japan, the US, Germany and so on and so forth, that I think their challenge will be taking an electric domestic, electric vehicle market that will be massive. And moving that into other countries whether it’s safety standards or features or business models.

 

I think, there is something especially with technology that is specific to China that is very difficult to move beyond Asia. And so, if there is a Chinese EV maker, who can move beyond China and beyond Asia. I think they’ll do very very well.

 

SO: See, well, this is all we have time for today but that was Tony Nash, CEO and founder of Complete Intelligence and Jason Salvici, national manager of the Overseas Military Sales Group.

 

Thank you both so much for your insights today. And to our viewers, as always, thank you for watching.