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Spinning wheels

12 Jan 2015 By Antony Currie, Olaf Storbeck

Carmakers are on something of a roll as they convene in Detroit. In the years to come, however, technology could make the ride rougher.

As the North American International Auto Show kicked off on Monday, shares of leading manufacturers were getting little, if any, credit for profit growth. BMW, Ford, General Motors, Honda, Nissan, Toyota and Volkswagen all fetch between eight and 10 times this year’s expected earnings, according to Thomson Reuters data. Daimler and Fiat Chrysler come in a bit higher.

The rule of thumb is that anything lower than 10 times earnings suggests a degree of stagnancy. In fact, however, that’s often not the case. Toyota, for one, is seen growing its bottom line by 10 percent in each of the next three years.

Recalls, currency fears and geopolitics are all to blame. The respective ignition and airbag fiascos at GM, Honda and Takata are a big factor. A weakening yen also has given Japanese companies a $3,000-a-vehicle pricing advantage in the United States over Detroit’s Big Three, according to Morgan Stanley. Problems in Russia and Latin America, a lackluster recovery in Europe and the prospect of slowing sales in China add to concerns.

Bigger trends could further restrain valuations. The rise of connected cars and, eventually perhaps, driverless ones pose three big problems for industry titans.

First, they’re not the obvious leaders for technological innovation. Incumbents are apt to yield in software, which may comprise a third of the $60 billion of connected car-related revenue by 2030, according to consultancy firm Roland Berger.

Second, manufacturers have more to fear than just Tesla and Google. Ford, Fiat and others are required to improve fuel standards. European laws demand that CO2 emissions be slashed by a quarter to 95 grams a kilometer within seven years. Volkswagen reckons each gram of reduction costs it 100 million euros, or $118 million.

Finally, carmakers are bound to be squeezed by the price of technology and the growing negotiating power of patent holders. Customers, for example, may be willing to pay up to $5,000 for assisted driving features, according to Boston Consulting Group, but the cost of producing them can be much higher. As far as automaker valuations go, tech may be driving them down a dead end.


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