Electric and autonomous vehicles: can Daimler and others stay ahead?
Daimler and other traditional automotive stocks are accelerating their move toward electric and autonomous vehicles. But can they survive the threat from new tech rivals like Alphabet and Tesla?
Daimler is the latest carmaker to step up its efforts to get ahead of the electric vehicle market as traditional automakers struggle to fend off new competition from technology firms leveraging their expertise in breakthrough areas like autonomous driving and vehicle-sharing services.
Daimler’s ambitious plan for electric vehicles
The German carmaker has ambitions to electrify the entire Mercedes-Benz suite and introduce ten new all-electric models by as early as 2022, and forecasts electric vehicles will contribute 15% to 25% of its total unit sales by the middle of the next decade.
The world’s other largest automakers have held what long seemed like an impenetrable monopoly over the global car market, largely thanks to their expertise in improving the power of the combustion engine and the speed of cars. But the inevitable shift toward electric transportation and other new technologies means the industry is having to spend big to ensure it doesn’t fall behind.
Daimler has recently announced it has locked in suppliers for €20 billion worth of electric batteries through to 2030, as well as plans to invest another billion in their global production network. The company intends to open six of its own new factories over the coming years to assemble the batteries, three of which will be in its homeland of Germany with one each in the US, China and Thailand.
The transition to electric vehicles is also coinciding with other technological revolutions, the main one being autonomous vehicles. Daimler’s efforts to deliver self-driving vehicles are being channelled into its commercial vehicle division that will receive €500 million over the coming years to make hopes of launching highly automated trucks within the next decade a reality.
Both electric and autonomous vehicles are posing challenges to the traditional carmakers that they have never been seen before. For example, the world of battery-powered cars needs charging infrastructure equal to, if not better than, the swathe of fuel stations that keep vehicles on the road at present, while self-driving cars are slowly reshaping the mindset behind car ownership as new services such as ride-hailing grow in popularity. Such momentous tasks mean collaboration has intensified, with Daimler having merged its mobility business that is home to both its ride-hailing and electric charging businesses with that of its rival BMW, with reports the pair are looking to tighten relations further by building core components for electric vehicles together.
Daimler’s hefty investment in the next wave of automotive technology is part of a wider restructuring of the company that was announced in the middle of last year. The changes will start to be made at the beginning of 2020 and involve a shake-up not only to its corporate structure but also its management, with chief executive Dieter Zetsche to step-down in 2019 (although he will return as chairman after a cooling-off period of a couple of years). The firm’s new structure will have just three divisions compared to the five it operates under now: Mercedes-Benz cars, Daimler Trucks & commercial vehicles, and Mobility & Financial Services.
Electric vehicles: are traditional automakers losing their grip?
Still, sales of traditional fossil-fuel powered vehicles remain strong despite tighter environmental laws and the likes of the diesel emissions scandal increasing demand for electric vehicles in recent years.
More Mercedes-Benz cars were sold in 2018 than any other, representing the eighth consecutive year of volume growth, but this is no longer feeding through to earnings. This is because the industry is stuck in a period of limbo whereby it is having to plough hundreds of billions into new technology without undermining the traditional combustion engine that they still rely on. German peer Volkswagen, the largest carmaker in the world, recently said it had increased its electric vehicle budget to the tune of €30 billion. Estimates from Alix Partners suggest the industry will spend a combined $255 billion on researching and developing electric vehicles alone before 2023.
The heavy investment requirements, twinned with trade tensions and growing protectionist policies hurting its ‘Just-in-Time’ supply chain, has squeezed the industry’s margins. Daimler and others like BMW issued several profit warnings in 2018, casting a shadow over annual results that will start to be released in February.
German carmakers that have been atop the industry have seen drastic falls in their valuations as higher sales fail to feed through to bottom-line growth. Daimler is trading at its lowest level in almost six years, while BMW and Volkswagen have fallen 40% and 45% from their all-time highs recorded in early 2015, respectively.
Quite simply, confidence in the industry’s prospects has taken a serious hit. Investors have faith that electric self-driving cars are the future, but lack belief that the traditional automakers will lead the charge. With development of these new technologies levelling the playing field several new tech-savvy entrants, capable of overtaking the likes of Daimler when it comes to self-driving cars and battery technology, have pounced on the opportunity.
Tesla: by far the fastest growing car brand in the US
Take Tesla as an example. The traditional carmakers have long tossed aside Tesla as a niche carmaker unable to challenge their long-held dominance, but Elon Musk’s company has come a long way even if it still must convince investors that it has a profitable future. The 245,000-plus Tesla cars that were sold last year are far from rivalling shipments from the likes of Daimler, which saw volumes jump 0.9% in 2018 to 3.3 million vehicles, but Tesla’s latest quarterly results showed production had more than doubled quarter-on-quarter and the company is reported to have outsold big name brands like Jaguar and Porsche in its core US market in 2018:
Sales of new passenger cars and light commercial vehicles in the US in 2018, by model
|Company||2018 sales||YoY % movement||2018 % of total sales||YoY % movement in market share|
(*Estimates. Note that Daimler owns Smart)
Overall vehicle sales in the US rose 0.3% in 2018, according to automotive industry portal Marklines, but only because strong growth in light trucks and SUVs (up 8% to 11.8 million) managed to offset a hefty decline in sales of passenger cars (down 13% to 5.5 million).
The data shows how close the likes of Tesla, by far the fastest growing automotive brand in the US with sales more than doubling last year, is to rivalling the likes of the German carmakers. While the top three US car brands collectively lost 1% of their market share last year Tesla increased its slice by 0.5% - the largest gain behind Fiat Chrysler Automobile's (FCA) impressive 1%. Meanwhile, Daimler was the worst performing German carmaker with Mercedes-Benz sales down 4.9% last year.
It is worth pointing out the obvious: Tesla is achieving stunning growth with its electric-only vehicles while the rest of the market, still languishing behind with their petrol-guzzling models, are struggling to maintain market share. According to PriceWaterhouseCoopers, around 70% of profits made by the global automotive industry in 2015 went to the traditional automakers but forecasts show this will drop to 50% in the future as new car companies and tech firms steal a huge chunk of the market.
Electric vehicles: automakers unite against new tech rivals
Uber, Lyft and Alphabet's Waymo are among the new breed of players trying to reinvent the industry by replacing car ownership with self-driving ride-hailing services and, as the value and appeal of cars moves away from how powerful it is to how much tech it has packed inside, the rewards are shifting to those with a foothold in areas such as augmented/virtual reality, 5G connectivity, or in supplying vital equipment for autonomous driving like radars and cameras.
NIO, the Chinese carmaker that has been dubbed China’s version of Tesla, is one of the best examples of how the automotive industry is changing. The company, which listed last year, is managed by a team with expertise in technology and ecommerce, not cars (it outsources manufacturing entirely), who are focusing on monetising what they call the ‘in-car ecommerce’ opportunity: it already has a deal in place so its customers can order items from clothing giant JD that are then delivered to the boot of your car. Traditional automakers have no experience in these new arenas.
The convenience that new models can offer will grow in importance as the humble car turns into a portable living space where people will, instead of grinding through the daily commute, be able to play a game using virtual reality, get a head start on work using smarter artificial intelligence, or simply sit back and watch themselves be chauffeured around by a car capable of communicating through augmented reality displayed directly on the windscreen.
Traditional players like Daimler, aware they must spend now to avoid being left in the dust by the likes of Alphabet that are not short on cash, have had to team up with rivals to share the burden of heavy investment and to ensure they have the right resources and capabilities to compete. Daimler and BMW will have merged their individual mobility divisions by the end of this month, combining their respective ride-hailing services Car2Go and DriveNow that together operate 20,000 vehicles in 30 major cities around the globe.
Everyone has scrambled to find a buddy: Honda has invested over $2.2 billion in General Motors' autonomous driving division, Cruise, BMW has formed an autonomous vehicle consortium with the likes of FCA, and reports have suggested other big partnerships are currently on the table including the possibility of Volkswagen and Ford helping each other with both autonomous and electric vehicles. They have also sourced the expertise of the new competition with Volkswagen having teamed up with Microsoft, BMW with Intel and Mobileye, and Daimler with Uber and Bosch.
The race for autonomous vehicles
Daimler has concentrated its self-driving capabilities through its commercial division that supplies trucks, vans and buses to businesses and other organisations. The firm is the largest commercial vehicle maker in the world with shipments hitting a ten-year high of over 500,000 in 2018. With businesses and governments under pressure to meet climate targets the company has made a bigger push with its electric commercial fleet and already has a number of buses and distribution vehicles on the road.
There are five levels of autonomous driving and we are currently at Level Two, which is partially automated driving that still relies heavily on the driver. Daimler’s new Freightliner Cascadia is the first-ever level two truck in North America.
Although basic math points progress toward level three, Daimler and others are looking to leapfrog straight to level four. This is because level three still needs significant driver input, meaning the advantages to business customers eager to eradicate the salaries of drivers are still limited compared to level four, which sees cars perform all safety-critical functions and capable of completing an entire trip with no human input.
Level four represents fully-autonomous driving and while this often prompts visions of self-driving taxis zipping around the commercial opportunity is sometimes overlooked. Morgan Stanley forecasts the US freight market alone is worth $900 billion and the rise in online shopping means deliveries and logistics are set to grow exponentially going forward.
Although the race to conquer the electric vehicle is important, the competition to master autonomous vehicles is more so. Whatever company can start to offer commercial trucks that don’t require a driver inside will be able to offer logistics at a price far below the traditional lorry driven by a human. Some reports have suggested Waymo is looking to offer self-driving freight services to US customers at 30% to 50% below the current cost of business.
China: key automotive market now and in the future
China is the single largest automotive market in the world and a key battleground for new electric and/or autonomous vehicles. While business has slowed for most carmakers in western markets, China is supplying growth. The record shipments of Mercedes-Benz in 2018 was driven by an 11% year-on-year sales rise in China offsetting a decline in the US and Europe.
Daimler, in what could be seen as a sign that the traditional automaker can beat its new technological foes, was the first company to receive authorisation to test level four autonomous vehicles on Chinese roads last year. It has also partnered with automotive firm Geely to launch a premium ride-hailing service in the country, tapping into the Chinese firm’s CaoCao service that has over 17 million users. The 50-50 joint venture followed on from Geely Group investing in a 9.7% stake in Daimler early last year.
China is too big a market for new or traditional automakers to ignore and, amid rising trade tensions and protectionist measures, localising production is becoming key for the entire industry. Tesla has recently grabbed headlines after the Shanghai government revealed its new Chinese production factory could be in partially operation later this year.
Daimler too has put China at the forefront of recent expansion plans. In the past, when it was looking to build manufacturing facilities outside of its home market of Germany, it invested in the likes of the US. This has cost Daimler as trade between the US and China has become more expensive with the introduction of tariffs, highlighting the importance of localised production. Daimler’s new Chinese plant should be operational in 2020.
Electric vehicles: investing in battery makers
The heightened demand for electric vehicles is creating a lucrative market for battery manufacturers and chemical companies, such as Japan’s Panasonic, China’s Contemporary Amperex Technology Ltd (CATL), or SK Innovation, LG Chem and Samsung of South Korea.
Daimler has not revealed the identities of those that will supply it with the €20 billion worth of batteries it will purchase over the next decade, but the largest battery makers are likely to benefit, with most of them already holding relations with the traditional automakers. Plus, companies from China and the wider Asia Pacific region are doing particularly well because of the growing need to have localised production across the supply chain. Equally, battery makers are realising they too need to build facilities closer to their customers outside of the Asia Pacific region. For example, SK Innovation, part of conglomerate SK Group, has announced plans to build a new US plant in Georgia that would be well-located to potentially serve automotive partners.
Electric vehicles: do lithium-ion batteries have limited firepower?
If the masses are to adopt electric vehicles, then they need to be able to compete effectively with existing petrol-fuelled cars on a number of fronts beyond price. This includes developing a battery capable of lasting as long as a tank of fuel and giving people the confidence, they won’t be stuck at the side of the road after running out of juice by ensuring there is sufficient charging infrastructure.
Lithium-ion batteries, used to power the swathe of portable electrical equipment like smartphones, is where short-term hopes lie. The distance electric vehicles can cover on a single charge is growing: Tesla’s Model S can travel up to 335 miles.
However, the nature of technology means other avenues are being pursued in the hope of finding a better solution to lithium-based batteries, with some believing they cannot be improved much further. Most have placed hopes on solid-state batteries that would use solid materials rather than liquids currently used in lithium-ion batteries that have exposed fire risks during charging.
The hope is solid-state batteries can store more energy (lengthening distance) in a safer manner and although a variety of firms are trying to further the technology, including oil giant Total (who bought battery developer Ionic Materials last year) and US luxury electric car company Fisker, there are no concrete signs that it is the answer to the industry’s problem. Toyota, who according to Bloomberg has three times as many patents concerning solid-state batteries than anyone else, has only managed to send a light one-man vehicle over a short distance using the technology and others have started to doubt it’s an avenue worth chasing, including Tesla.
If solid-state batteries (which still use lithium) are to prove the next generation of batteries for electric vehicles, then it won’t be until the late 2020s – although Toyota has ambitions to release a commercial version in the first half of the next decade. This is why it is important for firms like Daimler, itself researching a solid-state alternative, is still securing supplies for lithium-ion batteries over the shorter term.
Electric vehicles: cutting out the cobalt
The rapid development of batteries has created huge demand for the commodities needed to build them such as lithium, nickel and cobalt. Demand for a metal can rise at exponential rate over a short period of time but creating the supply takes much longer – building a mine can take over a decade – resulting in supply deficits that drive prices higher.
The price of cobalt more than quadrupled over the two years to March 2018. This is because of justified concerns over the sustainability of future supply – nearly 60% of the world’s known cobalt lies in the unstable nation of the Democratic Republic of Congo.
This poses another problem for the industry that knows it needs lithium-ion batteries for at least the next ten years. Around 20% of Daimler’s batteries are thought to be made of cobalt but reports suggest it is trying to cut that down to 10% when it starts to roll out its new electric models over the forthcoming years. Some have said they are trying to cut out cobalt altogether, with Tesla aiming to make batteries with 'close to zero' cobalt. The price of cobalt has since fallen by almost half from recent peaks as appetite for the metal wanes but remains well above the average since the financial crisis.
Electric vehicles: when push comes to shove
Developing vehicles is a long-term game and the changes in the industry should be taken seriously. The number of companies across the supply chain building new factories to serve local markets suggests escalations like the trade war between the world’s two biggest economies is just the start of a longer-term trend of rising nationalism and protectionism rather than short-term disruption.
While the traditional players in the automotive industry have always had a complex friend-but-foe relationship with one another, the need for partnerships is greater than ever as tech rivals move in to liberate transport in ways not seen since the days of Karl Benz or Henry Ford. However, if collaboration doesn’t prove enough to compete with the resources and capabilities of the new competition then it could prompt them to go one step further, possibly paving the way for the world’s largest carmakers to merge with one another, or with one of the new tech rivals.
The difference in mentality could, however, prove to be the ultimate difference between the old and the new. Traditional players have built up large, expensive supply and production networks over the decades which are becoming inefficient amid global trade conditions and slowly redundant as the combustion engine fades out. The challenge for firms like Daimler is managing what is proving to be an expensive transition – delays are in their interest as it helps spread the cost and maximise the value of their existing petrol-fuelled vehicles. While governments are pushing them to clean up their act following scandals such as Dieselgate, the new breed of competition like Tesla is being driven by a genuine desire to make the world a more environmentally-friendly place. This difference in mentality and the fact these new entrants don’t have a legacy auto-business to overhaul means there is every reason to think the biggest carmakers that have dominated the industry for so long are about to shift down a gear over the coming years, and possibly to halt in the not-so-distant future.
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