Automotive (Short the B2B Business Model)

More Signs of Upcoming Auto-Related Distress

Assuming Uber Technologies Inc. can survive its latest self-imposed issues, e.g., an unreported data breach, increased regulatory scrutiny, skittish investors in Softbank and Benchmark Capital, etc.,, it appears to be positioning itself and the automobile industry towards a brand new business model. This week Uber announced its (non-binding) agreement to purchase 24k sport utility vehicles from Volvo Cars to seed a fleet of autonomous cars. Deployment date: 2019. Yes, 2019. Anyway, in addition to the obvious and previously discussed implications for labor, this move might have bigger ramifications: a forced pivot of the automotive business model in the direction of the airline model.

What do we mean by that? Assuming a great many things (including Uber's ability to successfully deploy its sensors and software with Volvo's hardware, regulatory hurdles, etc.), this could be another blow to the model of individual car ownership, the B2C formula deployed by the OEMs for years. Hyperbole? Maybe, but if people stop buying cars (and borrow money to do so), auto companies will see significant revenue effects. And they'd have to sell more to fleet operators, i.e., Uber, Lyft, etc., much like Boeing ($BA) and Airbus ($AIR) sell to Delta ($DAL), United Airlines ($UA), etc. This could mean fewer cars on the road, all told. Which, as we've previously discussed here and here, could lead to increased pain in the auto supply chain. 

Elsewhere in auto, the Faraday Future dumpster fire is turning into a full-fledged conflagration and looks like a ripe candidate to be voluntaried into bankruptcy.

And, finally, we noted back in February that 3D-printing could have a big impact on a number of industries. Now, apparently, 3D printing is projected to have a spike in activity in 2018. Businesses sourcing it most? Manufacturing, telecom, defense, and, of course, auto. To point, Divergent 3D just raised $65mm Series B financing round to build its car frame business. Curious.

Gearing Up for Auto Distress

Is Another Wave of Auto-Related Bankruptcy Around the Corner?

We take this break from your regularly scheduled dosage of retail failure-porn to introduce a topic we haven't addressed yet in detail: auto-related distress.

The auto narrative appears to change by the week depending on, uh, well, generally whatever Elon Musk says/tweets, so let's take a look at what's really been happening recently and filter out the hype (note: Tesla recently failed to deliver on production, lost key execs, and fired hundreds of people on Friday...draw your own conclusions...p.s. stock still going bananas): 

  • Short Interest in Auto Parts StocksIt has increased. This piece attributes this to Amazon's new foray into the car parts business. Is that really the reason why? 
  • Sales. Car and light truck sales are trending downward. Auto loans that maybe - just maybe - jacked up sales are also on the decline. Mostly because default rates are going up. Here's a chart showing auto debt climbing as a share of household liability.
  • Supply Chain Distress. Last year we saw DACCO Transmission Parts Inc. file for bankruptcy. During the Summer, Takata Inc. filed for bankruptcy (on account of a massive liability, but still) and Jack Cooper Enterprises Inc., a finished-vehicle logistics/transportation provider, reached a consensual agreement with its noteholders that kept the company out of bankruptcy court. For now. Then, a little over a week ago, GST Autoleather Inc. filed for bankruptcy, citing declining auto output. Is this the canary in the coal mine? Hard to say. Literally on the same day that GST filed for bankruptcy - again,citing declining auto output - General MotorsFord and other OEMs reported the first YOY sales increase (10%), surprising to the upside. It seems, however, that the (sales) uptick may be artificial: in part, it's attributable to (a) Hurricane Harvey damage and mass vehicle replacement; and (b) heavy vehicle discounting. On a less positive note, Ford announced that it will beslashing billions in costs to shore up its financial condition; it also announced back in September that it would slash production at five of its plants. And General Motors Co. announced earlier this week that it would be idling a Detroit factory and cutting production. Production levels, generally, are projected to decline through 2021. Obviously, reduced production levels and idled plants portend poorly for a lot of players in the auto supply chain. 
  • EV Manufacturing. There is increasing interest in investing in and developing the (electric) car of the future. And that includes major luxury car manufacturers like Mercedes-Benz and Audi. These manufacturers may just be putting the nail in the coffin for upstarts like Faraday Future, which barely seems like it can get off the ground.
  • EV Manufacturing - Second Order EffectsEarlier this year we covered Benedict Evans' (now famous) piece on the second-order effects of the rise of electric and autonomous cars. Others, more recently, have been raising questions about what this electric-car future will look like. While others, still, are saying chill the eff out. We, rightfully questioned what would happen once electric cars gained greater traction given the relatively small number of components therein relative to the combustion engine vehicle. To point, Bloomberg writes, "After disassembling General Motors’s Chevrolet Bolt, UBS Group AG concluded it required almost no maintenance, with the electric motor having just three moving parts compared with 133 in a four-cylinder internal combustion engine." Whoa. That's a lot of dis-intermediated parts manufacturing. UBS also projects that electric vehicles will overtake gas and diesel cars by 2038 - with a rapid ramp up succeeding a slow build. 
  • Charging PointsThey've doubled in Germany and a plan is in place to get more super-chargers in place by 2020. Royal Dutch Shell announced on Thursday that it agreed to buy NewMotion, one of Europe's largest EV charging companies; it plans to deploy them at existing gas stations. All of this points to bullish views about EV adoption - worldwide. And we didn't even mention China, which is voraciously trying to curb emissions/pollution and go electric
  • IncreasesRange and prices. Anything that combats "range anxiety" will help adoption. Prices, however, still have to come down for electric cars to be competitive. 
  • Derivative Distress. This was interesting: folks are concerned that autonomous cars may also mean the end of public radio. Will other players that benefit from captive car audiences, e.g., iHeartMedia Inc. and Sirius, also see effects? In all of iHeartMedia's discussions (see below), what are analysts assuming about the future of car ownership? About the rise of podcasts? 

To put the cherry on top, The Washington Post had a piece just this week asking whether 2017 will mark the end of the internal combustion engine. Once you add up all of the above? Well, it becomes clearer that restructuring professionals may have to re-acquaint themselves with auto distress strategies. Maybe that dude who was once the "gaming guy" who is now the "oil and gas guy" will have enough time to become the "auto guy."