Credit: Shutterstock photoToday's cars and SUVs, packed with revolutionary technologies, are nothing like the vehicles of several decades ago. Nor is leadership among the world's largest automakers, including General Motors ( GM ), Ford Motor ( F ) and Fiat Chrysler ( FCAU ), as the industry confronts one of the most transformational periods in its history.
The upstart, high-tech electric car maker Tesla ( TSLA ) has raised expectations on innovation, among consumers as well as in the industry itself. Japan's Toyota Motor ( TM ) and the German brands Volkswagen (VLKAY) and Daimler (DDAIF) have become the world's largest automakers by revenue, according to Fortune's 2016 Global 500 list . (The 2017 list has yet to be released.)
GM and Ford, which dominated global auto sales in 2000 , have fallen off that perch.
Yet the largest automakers, including Toyota, have seen virtually no sales growth in recent years, even as China has revved up as an automotive powerhouse. Fiat Chrysler was unusual among the largest global automakers in growing sales in 2016, but even its impressive 15% revenue growth paled next to 67% for China's Geely Automobile and and 48% for Dongfeng Motor.
Those shifts in leadership come as automakers face a technological revolution driven by electric, hybrid and self-driving vehicle technologies. A fundamental shake-up is also taking place in the global competitive sense, said Dave Andrea, executive vice president at Center for Automotive Research in Michigan.
"The industry has always been very complex and has always faced a lot of risk," said Andrea. "But it has never faced so many issues and risk factors, and the magnitude and implications of those risks have never been so great."
Automakers and components suppliers are reaching greater parity across the world, Andrea said. Korean carmaker Hyundai, for example, has successfully shed the early image for lower-tier products with which it entered the U.S. market. As the quality of cars made in Wuhan approaches those made in Dearborn, both automakers and their suppliers are forced to look for growth through vertical integration, joint ventures, major restructurings and even previously unimaginable pacts among themselves.
As one example of the "epic change" that is going on, Andrea cited last month's announcement that the three major Japanese automakers, Toyota, Nissan (NSANY) and Honda Motor (HMC), are banding together to push forward hydrogen fuel-cell vehicles. GM's decision to exit Europe earlier this year with the Opel-Vauxhall sale is another.
Auto Stocks Easily Outpace Market
For investors, Tesla, Ferrari (RACE) and Fiat Chrysler have been industry names to watch in 2017. Ferrari logged a 70% year-to-date gain through early Friday, and Fiat soared 31% while the S&P 500 has advanced roughly 11% in the same period. Tesla stock has gone on a 54% tear this year, despite falling back 15% from a June high.
IBD'S TAKE:The 15 stocks in the Auto Manufacturers industry have collectively soared 44% since the start of the year, the fourth-strongest gain among the 197 industries tracked by IBD , marking the group as a hotbed for market leadership.
The market in general, it's safe to say, is excited about Tesla's growth potential, especially as the company begins ramping up production for its mass-market Model 3 car. They are attracted to Ferrari's strong profit-growth trajectory and superior pricing power. Fiat is a turnaround story offering improving margins and attractive valuations.
Automakers as diverse as Daimler, General Motors, Volkswagen and BMW (BMWYY) have seen their charts improve as value investors move in to buy on beaten down valuations. And while U.S. demand is trending lower after record sales in 2016, there are other reasons to be optimistic about an industry characterized by extreme economic sensitivity.
"Rising prosperity in emerging markets, led by China (even as growth there slows), should drive global-demand growth, and European demand should rise, partly offset by declines in some emerging markets," equity analyst Efraim Levy at investment research firm CFRA wrote recently.
Tesla Prods Industry Innovation
For many investors, Tesla and its founder Elon Musk have become bywords for innovation. Tesla's groundbreaking work in long-range and high-performance battery technologies will profoundly affect how the automotive industry looks in five years, said Ryan Issakainen, the ETF strategist behind First Trust NASDAQ Global Autos (CARZ).
"It will become far more mainstream to have hybrid and battery-operated vehicles," Issakainen said. "Companies like Tesla are forcing the rest of the industry to adapt."
Investors have responded by pumping up the company's market capitalization, which this year surpassed that of GM and Ford, despite Tesla's selling a fraction of the automobiles that the auto giants do.
The reputations of the Big Three U.S. automakers took a pounding after the financial crisis, which led to a controversial $80 billion taxpayer-funded auto industry bailout.
Less than a decade later, GM and Ford (which took no federal bailout funding) have been throwing off record profits, but continue to wrestle with the image of being laggards with regard to innovation.
Volkswagen, long viewed as a brand of preference among engineers, is wrestling with its own image problem after the emissions-software scandal that throttled sales and cost billions in penalties and reparations.
As a result, automakers worldwide are diving deep into innovative technologies that range from continual vehicle diagnostics and high-end advanced driver-assist technologies, to 3D printing processes and all the way down to the very raw materials used to produce cars, trucks and SUVs.
"The high-strength grades of steel that are being used, and the increased sophistication needed in the production of that steel and the stamping of that steel into automotive components, are groundbreaking," Andrea said.
Similar work is being done with magnesium and aluminum, and carbon fiber and composites are being put to broader automotive use. The Ford GT and Mustang last year created a stir as the first mass-produced vehicles to offer superlight, superstrong carbon-fiber composite wheels.
Meanwhile, an expanding array of electric and hybrid vehicles continue to hit showroom floors, and the rising niche segment verges on the mainstream. China has doubled down on electrification - "new energy" vehicles in official parlance - as it battles smog-choked cities.
Earlier this month, Volvo announced that every vehicle it produces will be either electric or hybridized by 2019. The commitment was the first by a major automaker to decisively pivot against the internal combustion technology which dominates the industry.
China, And The New Car Culture
Volvo's bold shift away from combustion-engine vehicles hints at China's ambition to rule the electric-vehicle market. The proud Swedish brand is now owned by Geely Automobile, which bought it from GM in 2010.
In May, Geely announced it would buy a 49.9% stake in Malaysian auto leader Proton, and take a 51% stake in the famed British brand Lotus, which Proton had acquired in 1996.
For the Western auto industry, China has become a key survival market due to its increasingly powerful middle-class consumer base. Now the No. 1 global car market, Chinese consumers bought nearly 28 million cars in 2016, a 13.7% surge over the previous year and dwarfing the U.S. record of 17.55 million new vehicles sold last year.
The outlook for China's automotive industry is less enthralling, with vehicle sales forecast to grow between 5% and 7% this year.
General Motors sold 3.9 million cars in China last year, up 7% from 2015, while Nissan's China sales rose 8% to a record 1.4 million, according to the South China Morning Post.
That nation's tightly regulated markets require foreign auto manufacturers to partner with local ones. GM says it has 10 joint ventures there, selling vehicles under the Baojun, Buick, Cadillac, Chevrolet, Jiefang and Wuling brands.
Since 2012, in fact, China has become GM's largest market - generating more than a third of the company's global sales.
GM has shifted emphasis toward premium vehicles and SUVs in that emerging market to cater to changes in consumer tastes. The luxury Cadillac brand has surged there in 2017, with sales of the midsize XT5 crossover-utility vehicle running especially hot.
"China is now on a scale that is so different from any time before," CAR Group's Andrea said. "It can move individual corporate strategies."
That may explain the spate of recent statements from Western auto brands reiterating their long-term commitments to China, which also require commitments to meeting regulatory demands on lower-emission vehicles.
"GM and its joint ventures are well positioned from an alternative propulsion standpoint, investing heavily in highly efficient powertrains and new energy technologies, and deploying a full range of electrification solutions to accommodate changing market needs," GM said in a June statement as it marked 20 years in China.
The Hot-Rodding Of Apple And Google
For the largest automakers, the race into hybrid, electric and autonomous driving technologies continues to present both new opportunities and challenges.
Those developments have drawn new names into the automotive sector, including Wall Street icons Alphabet (GOOGL), Apple (APPL) and Amazon.com (AMZN), as well as the the broadly recognized ride-sharing services Uber and Lyft.
That has made for an increasingly tangled and sometimes uneasy web of alliances across the tech-auto landscapes.
General Motors, for example, has invested in Lyft to spur deployment of its cars in autonomous ride-sharing fleets. Meanwhile, rival Fiat Chrysler has buddied up with Alphabet's Waymo self-driving unit - which has a tie-up with Lyft, the terms of which are fuzzy.
Over in China, Baidu (BIDU), a leading search engine and cloud-service provider, and the major Chinese carmakers have similarly joined forces on self-driving car initiatives. General Electric (GE) has said it expects China to play a key role in developing the personal mobility solutions of tomorrow.
How those trends in emerging auto technologies will play out is hard to judge, experts say. In Andrea's view, the old question of where new leadership will come from as the industry evolves may miss the mark.
"Global leadership has become much more fractionalized" as both manufacturing and innovation take place around the world, he said. "This time it's different in terms of winners and losers, haves and have-nots."
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
