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Business trends

Shifting tech and business trends threaten old-line carmakers

As EVs, connected cars and shared vehicles catch on, investors flee auto stocks

Car industry leaders are having to refashion their vehicles and adapt rapidly to new technology. (Photos by Getty Images)

TOKYO -- A wave of technological disruptions is throwing the global auto industry into turmoil and upending many long-held assumptions about car manufacturing.

Advances in technology have led to the creation of connected, autonomous, shared and electric vehicles, now commonly referred to as CASE and that Daimler describes as "mobility intuitive."

In recent years, automakers have waded into unfamiliar territory such as software and internet technology to ensure their survival but this has come at great financial costs. Yet, there will be little financial reprieve for them in the years ahead as new, highly innovative competitors, including internet and technology conglomerates, enter the game.

Industry leaders are having to refashion their vehicles and adapt rapidly to new technology -- a costly exercise that could take years to show reward, analysts said.

For example, Toyota Motor Senior Managing Officer Masayoshi Shirayanagi said the company would have to spend over 100 billion yen annually on the development of CASE-related technologies over the coming years. "Considering the impact of CASE, we face a big risk in terms of future operating profit," Shirayanagi said at a December meeting with union leaders.

A Nikkei analysis of the financial standings of some 860 companies in the global auto industry based on QUICK FactSet has shown a clear rise in debt loads and sluggish earnings growth. Their earnings before interest and taxes increased by a tepid $220 billion in fiscal 2017. 

This compared with their interest-bearing debts that increased by $530 billion in six years from slightly less than $1.07 trillion in fiscal 2011. That grew to an all-time high of about $1.7 trillion in 2018.

An economic slowdown in China, a huge auto market, hasn't helped either. The EBIT of some 550 companies fell by nearly 3% in the year ended in March 2018. That puts the industry's overall EBIT rise at a modest 36% between fiscal 2011 and 2018, compared with surging debts. 

As the industry moves toward automation, employees are also facing an uncertain time. The ramifications of technological change overshadowed annual wage negotiations between Toyota management and the labor union this year. For the first time in 13 years, both sides were not able to reach a deal.

Auto parts suppliers are also worried about the future. A senior Aisin Seiki executive said: "If all vehicles are made electric, there would be no demand for automatic transmission systems," which are the company's main products. The supplier is now trying to carve out a new future for itself by, for instance, ramping up production of AT systems equipped with motors for hybrid cars.

For Akebono Brake Industry, a leading brake maker, its heavy investments in technology has taken a particularly heavy toll as it was forced to file for an out-of-court turnaround process with a state-certified third-party body. It has sought a capital infusion from Toyota, its top shareholder, and debt relief from lenders.

It spent 10.3 billion yen on research and development of new braking systems for electric vehicles in the year through March 2018, 13 times its net profit.

Yet, despite such expenditure, information-technology powerhouses are leaving automakers in the dust. Google started developing autonomous driving vehicles about a decade ago, ahead of the game. With a war chest of over 12 trillion yen, it has the financial and technological muscle to beat leading automakers.

Apart from the fierce competition, the car industry is also facing pressure from tightening environmental regulations. Britain and France have announced plans to ban domestic sales of gasoline and diesel vehicles by 2040.

Such seismic changes in the industry have made it hard for investors to plow money into traditional automakers. The total market value of the world's carmakers has plunged by some 57 trillion yen ($509 billion), or 21%, from its recent peak in January 2018. 

While the MSCI World Index, a broad global equity index, has risen 30% from the end of 2015, the MSCI Automobiles and Components Index, which traces the stocks of carmakers and suppliers, has declined 4% during the period.

The stock prices of Ford Motor, Daimler and Nissan Motor have slipped 20% to 30% in that time, while Toyota and Honda Motor have also suffered 10% to 20% slides. The market value of parts suppliers Continental of Germany and Valeo of France have shrunk by about 30%. 

General Motors and Volkswagen, however, bucked the trend with near-20% rises in that period but largely due to cost-cutting restructuring drives, which investors believed put them in a better position to meet future challenges.

Shares in Lear of the U.S., a supplier of automotive interiors, and Koito Manufacturing, which focuses on automotive lighting equipment, have also climbed by up to 40%.

One strategy taken by established automakers has been to invest in the new players. Toyota has taken a stake in Uber Technologies' self-driving car unit.

But the implications of the CASE revolution goes far beyond the car industry. In particular, Japan's economy could take a hit as the auto industry provides jobs for nearly 10% of the country's workforce.

Mitsubishi UFJ Morgan Stanley Securities analyst Koichi Sugimoto sounded a grim warning for the industry, saying that if automakers fail to pump up their sales and cut fixed costs, they face an uncertain future.

Sugimoto's prognosis echoes the views of a growing number of analysts who are predicting an increasingly harsher business environment for the companies that manufacture automobiles or their components.

Nikkei staff writer Tomohiro Noguchi contributed to this report.

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