Avoiding industries ripe for disruption - local newspapers - automotive

[Dynamic]

Around 18 years ago I took a position in a UK company that owns numerous local newspapers. Most towns have one weekly paper and perhaps a free paper light on news but concentrating on classified advertisements. Often these are owned by the same firm but have separate titles. Local monopolies. Numerous real estate agents, car dealers and tradespeople need to advertise their services to a local audience, so in addition to the news and advertisements each paper tends to have a Property section and a Motoring section with a few editorial articles and a lot of advertisements.

 

The high readership is a barrier to entry for new rivals. The advertising income generally supported the journalism and kept the cover price low and this made it a negligible cost purchase for its readership to buy habitually. With regional printing centres supporting colour newsprint across numerous towns' print runs, efficiency was another crocodile in the moat allowing a paper to slash its cover price, introduce competitions a giveaways and see off a new rival while barely affecting the parent company financials then return to high profitability.

 

The company is called Johnston Press plc and when the 2008/9 Global Financial Crisis came, I knew real estate and new car sales declines would hit it temporarily but expected it to recover and still do well across the cycle.

 

What actually happened is that it almost breached its debt covenants requiring an equity capital raise during a bear market. A good reason to be wary of debt load even if interest cover looks healthy. The recession turned out to be a long one and deep, but simultaneously internet advertising became more local and location-aware and online real estate aggregators diminished the value of newspaper property advertising and slashed commission rates for many agents.

 

I probably got back about 10% of my total investment by the time I saw the writing on the wall.

 

The debt lesson is valuable.

 

The lesson on industry disruption is more valuable.

 

Now we see many giants of the automotive industry making sensible platform sharing consolidations and selling cheaply.

 

There has certainly been good money made by Value Investors buying post-bankruptcy GM and also Fiat-Chrysler to name two examples. Certain revaluation and spin off gains have produced some nice gains fairly fast in recent years

 

I have not invested. I am very interested, but particularly in the advent of Electric Vehicles, much like fellow forumite Liberty. Some TED talks have championed the coming tipping point for EVs and Autonomous Vehicles.

 

However this very measured interview with really useful infographics on Fully Charged YouTube channel has some particularly good points.

 

 

First it lays out the barriers to EV adoption:

Range (most people need >200 miles/320 km)

Cost (to obtain that range today you need to pay more sticker price than for gasoline cars)

Performance (early small battery EVs were slow but now EVs tend to have higher performance, instant torque and low centre of mass)

Choice (not such a wide selection of vehicle types and brands available as EVs)

Charging (number of locations and charging speed on long trips)

 

They discuss each of these and the trends and previous projections.

 

EVs have about 50 moving parts compared to about 3000 for gasoline ICEV. The battery cost is key and falling faster than early projections.

 

They interestingly discuss with will happen as 200 mile EVs reach price parity.

 

Some manufacturers may try to retain parity and go no further but as EV prices continue to fall, competitors including EV only makes will lower prices (or offer more range for the same price)

 

They referred to an interesting statistic that cost per mile for a horse was about £1.30 in today's money. Cars brought that down to about £0.30 including fuel insurance and depreciation and only horse enthusiasts keep a horse today. EVs and Autonomous EVs should lower it substantially really soon and by 2030 internal combustion engines may well be for enthusiasts and niche use cases.

 

More interestingly, as most new car buyers lease, the resale value after 3-5 years makes an impact on lease cost. Before EVs reach price parity the likely resale value of an ICEV in 3-5 years will plummet so lease payments would rise for ICEVs in anticipation of price parity.

 

They also discuss how a number of industries are simultaneously preparing to serve the EV market including mining, industrialised battery production etc over the course of the next 5 years or so.

 

I recommend you watch the video with a view to industry disruption, potential investments etc.

[SharperDingaan]

It's useful to take a page from the project managers playbook, where 'potential' projects are rated red, yellow, green.

Red being low probability or distant; green being the reverse. EV's would be red, tending to yellow.

 

There is also cyclical versus disruption. Trump canceling NAFTA is cyclical; NA integrated auto producers would take an immediate and hard hit, local unemployment levels would spiral, current leaders would be replaced in the next political cycle, leading to implementation of NAFTA2. Automating the plants and warehouses with 90% robotics is disruptive, as the jobs are never coming back. An investor would either go long the robotics immediately, or long auto producers 2 years after NAFTA withdrawal (after the bankruptcy's have already happened).

 

Marketers refer to 'product life cycle', industries are similar. Time on the 'X' axis is just replaced with 'innovation'. Incorporating the small innovations will improve your product and extend its life cycle; the big innovations rapidly put you out of business (motor car replacing the horse and buggy).

 

The take-away's here are be strategic, and be patient.

Which very few will do in today's age of instant gratification.

 

SD

 

[Cigarbutt]

Interesting post Dynamic.

Have always been naturally attracted to industries being disrupted and it took 1 or 2 mistakes early on before the realization of the potential challenging impact of disrupters knocking on the barriers to entry.

 

Good video.

"We're on the cusp..."

Not an expert but follow the field for several reasons including an interest in the oil and gas sector and previous investments in OEMs.

You might like:

http://image-src.bcg.com/Images/BCG-The-Electric-Car-Tipping-Point-Jan-2018_tcm96-180862.pdf

 

Again, another piece of work that seems to be relatively objective but that contains also a "hype" component.

Like they say, the tipping point is in sight but, at least from my limited horizon, the road won't be straight.

It is hard to see a radical change within 5 years but after, it's anybody's guess.

With innovation and technology, it all becomes so clear in hindsight.

 

Your comment about depreciation made me think of Carmax (KMX), a used car reseller that I'm following and triggered an inspiration for a new post that I will make later today about "reappreciation".

 

[Uccmal]

I am holding out on replacing our vehicles for 2-4'years in favour of an plug in hybrid, or all electric. 

 

One way to think about this is where we get our electricty from.  The utilities that deal only in electricity and renewables should continue to grow.  I have looked at the data a bit.  Electricity demand will rise, but not dramatically but enough for utilities to have to raise capacity. 

 

I haven't come to an opinion on how fast this will happen.  Suffice to say it is happening, and the speed of adoption is getting contantly faster.  How fast this displaces ICE vehicles is anyones guess.  Then there is the age of the existing fleet.  Put another way, I haven't sold my oil stocks, or Enbridge stock yet.  But I am not going to overload in these areas either. 

[Viking]

I have also learned over the years to stay away from industries that are shrinking or facing disruption (newspapers being a great example). This is not to say that money cannot be made, it is just much more difficult.

 

One of the keys to investing success is to invest in sectors and companies that have lots of positive tailwinds. As time goes by surprises tend to be positive and this drives the share price higher. Time is your friend. In struggling industries, the surprises tend to be negative and this results in lower share prices. Time becomes the enemy of a patient investor.

[rolling]

My take is that a much bugger disruptor would be autonomous car. And it is a much more certain disruptor. Why?

- it has no physics, chemestry or raw material supply problems. With batteries you can come to the conclusion that you cannot turn rock into gold.

- only limitation is informatic innovation, which is no limitation at all

- it heavily affects multiple industries, the most disrupted I can think about right now:

A) taxi companies (ride sharing services also do, but with AV it is will be much worse)

B) car dealerships: there might be a car penetration rate reduction in developed countries due to cheap autonomous ride sharing and, simultaneously, bulk car sales might become the norm (ride sharing companies will have bargaining power and deal directly with auto companies)

C) auto insurance in developed countries: less cars, less accidents and bargaining power from big clients

D) ...

 

[Dynamic]

I could see autonomous cars and ride sharing changing the age profile of the vehicle fleet substantially.

 

If cars are much better utilised there may be many fewer cars but they could clock up 200,000 - 300,000 miles maybe 500,000 miles in 3-5 years and thus the potential reduction in the number of vehicles could be offset in part by the increased replacement rate. Alternatively, they may be able to last for 1 million miles / 10 years instead of the typical 200,000 miles and 20 years of current cars.

 

That could mean that the auto industry new car sales don't suffer so much, but maybe second-hand dealers would have a tougher time (or just take on newer cars with higher mileage for those who want to use their own car in the traditional way).

 

I wouldn't be putting money on this now, but a lot of things could change and there will be a lot of second-order effects.

[StubbleJumper]

So, on the subject of disruption, what do people think about outfits such as Alimentation Couche Tarde or Parkland?  Essentially, their business is to buy crappy gas stations that the majors want to dump and then operate them.  So, is the value in those companies from their operations (selling a tank of gas and a pack of smokes) or is it in the real estate?  Or will convenience stores which rely on gas station traffic go the way of the dodo bird?

 

 

SJ

[TorontoRaptorsFan]

My take is that a much bugger disruptor would be autonomous car. And it is a much more certain disruptor. Why?

- it has no physics, chemestry or raw material supply problems. With batteries you can come to the conclusion that you cannot turn rock into gold.

- only limitation is informatic innovation, which is no limitation at all

- it heavily affects multiple industries, the most disrupted I can think about right now:

A) taxi companies (ride sharing services also do, but with AV it is will be much worse)

B) car dealerships: there might be a car penetration rate reduction in developed countries due to cheap autonomous ride sharing and, simultaneously, bulk car sales might become the norm (ride sharing companies will have bargaining power and deal directly with auto companies)

C) auto insurance in developed countries: less cars, less accidents and bargaining power from big clients

D) ...

 

D) Health care industry - reduced traffic accidents eases strain on hospital emergency rooms and gov't health care budgets

[TorontoRaptorsFan]

So, on the subject of disruption, what do people think about outfits such as Alimentation Couche Tarde or Parkland?  Essentially, their business is to buy crappy gas stations that the majors want to dump and then operate them.  So, is the value in those companies from their operations (selling a tank of gas and a pack of smokes) or is it in the real estate?  Or will convenience stores which rely on gas station traffic go the way of the dodo bird?

 

 

SJ

 

They'll play a role in electrical charging stations that may take 20-30 minutes to charge up a car or truck's battery.

[Cigarbutt]

"So, on the subject of disruption, what do people think about outfits such as Alimentation Couche Tarde or Parkland?  Essentially, their business is to buy crappy gas stations that the majors want to dump and then operate them.  So, is the value in those companies from their operations (selling a tank of gas and a pack of smokes) or is it in the real estate?  Or will convenience stores which rely on gas station traffic go the way of the dodo bird?"

 

Can't comment about Parkland but Couche-Tard history has been characterized by adaptive evolution.

I would say that location (real estate) has value but most of the earning power comes from intelligent operations.

For instance, they have recently "tested" rapid charging stations (+/- 10 minutes) in Norway and have recently put together a joint venture to expand across Europe.

http://corpo.couche-tard.com/wp-content/uploads/2014/06/PR-EV-Europe-Circle-K_final-EV.pdf

 

I understand that they plan to transform this disruptive event into an opportunity as customers may spend more time (and more $) when they "visit" the store during charging: fresh food, seating locations, TVs etc

In addition, interesting to remember that they lost turnover because of cigarette sale bans and tried (recently and with no apparent success) to obtain cannabis selling rights in parts of Canada, as marijuana consumption is becoming legal within months.

Disruption may come from all angles.

 

 

[mrholty]

My understanding is that # of gas stations in US/Canada are shrinking by 1-2% annually.  That may not sound like a lot but model out 10 years at 2% and eventually there will be a tipping point where you have massive closures.  (I live in a small town where there are 2 main roads that intersect the city and there were 6 gas stations but now there are 3).  I spent some time looking at this.  Dover and Fortive are the two big players in this industry.  Its hard to break out their gast station financials but they appear ok.

 

The guys who know what they are doing (Casey's, Wawa, Love's) are going to just steal share.  My wife visits our version of this local chain Kwik-Trip 3-4x for every time she gets gas.  Milk, butter, eggs, potatoes, and bananas are all cheaper than the local grocery store.  Free ATM machine. etc.  This place will eventually swap out 4 of their 16 pumps for electric and grow it over time. 

 

 

[K2SO]

So, on the subject of disruption, what do people think about outfits such as Alimentation Couche Tarde or Parkland?  Essentially, their business is to buy crappy gas stations that the majors want to dump and then operate them.  So, is the value in those companies from their operations (selling a tank of gas and a pack of smokes) or is it in the real estate?  Or will convenience stores which rely on gas station traffic go the way of the dodo bird?

 

 

SJ

 

They'll play a role in electrical charging stations that may take 20-30 minutes to charge up a car or truck's battery.

 

Outside of cities - agreed.  But there are too many gas stations around residential areas if you assume that people will be charging cars in their homes or work garages.

 

Having said that, it will be interesting to see how these valuable, high traffic locations are repurposed.

 

[StubbleJumper]

So, on the subject of disruption, what do people think about outfits such as Alimentation Couche Tarde or Parkland?  Essentially, their business is to buy crappy gas stations that the majors want to dump and then operate them.  So, is the value in those companies from their operations (selling a tank of gas and a pack of smokes) or is it in the real estate?  Or will convenience stores which rely on gas station traffic go the way of the dodo bird?

 

 

SJ

 

They'll play a role in electrical charging stations that may take 20-30 minutes to charge up a car or truck's battery.

 

Outside of cities - agreed.  But there are too many gas stations around residential areas if you assume that people will be charging cars in their homes or work garages.

 

Having said that, it will be interesting to see how these valuable, high traffic locations are repurposed.

 

 

 

Well, that's pretty much my observation too.  I fill my tank perhaps 40 times per year, and 30 of those fills are in my neighbourhood.  If I get an electric car, presumably I will plug it in overnight which will eliminate the 30 fills that I currently do in my neighbourhood.  For longer distance driving, once battery life is good for ~300-400 miles, I'll probably be able to pretty much plug my car in overnight at my destination when I drive to visit family or when I stay in motels, and that would displace a good chunk of my remaining 10 fills.

 

I can envision a time when I might only use a commercial "re-fueling site" on 4 or 5 occasions per year.  If my usage of "fuel stations" declines by 90%, would that be typical of everybody else?

 

 

SJ

[DTEJD1997]

Hey all:

 

In my area of the country (Detroit/midwest) I see LESS than 1% electric cars.  Teslas are more common than Ferrari's, but NOT as common as Porsches.  I see a Volt from time to time and sometimes even a Leaf, and once in a great while something I can't identify.

 

I will sometimes travel to OH, WV, IN, PA, NC and the ratios of electric cars don't change much.

 

Hybrid cars are much more common.

 

I wonder if other board members are in NYC, LA, or other spots where electric cars are much more common than in other parts of the country?  I am further going to speculate that most other board members/financial analysts are relatively well off and an electric car would be a realistic purchase.

 

Not to make this a political discussion...but is this a similar situation as to the Presidential election?  That is, media/coastal elites think that the rest of the country is following them closely, when in reality, that is not the case.

 

Electric/self driving cars may be coming one day....but I just don't see it anytime soon (next 5 years).

[Dynamic]

From an investment perspective, I'm certainly looking beyond the next 5 years, even if I'm offered a company at a P/E ratio of 5 as my terminal valuation if I were to sell in 2023 will have a lot to do with the future prospects as seen from 2023's vantage point.

 

I believe around 5 years is the time it will take for the current investment around the world in greatly increasing the kWh of lithium ion battery production (and investment in the supporting industries such as raw material mining for Lithium, Cobalt etc.) to bear fruit and substantially increase the available supply to support an accelerating shift towards long-range EVs, with more choices from more manufacturers. The vehicle fleet on the road WILL NOT change nearly as fast as the new vehicle sales, and it will certainly differ from region to region. Also, future battery technology for EVs might not be lithium ion as we know it, though lithium is a great material, being the lightest metal in the periodic table and highly abundant in nature (albeit in compounds rather than the elemental form). Other elements used at the moment, such as cobalt, might well be replaced in future.

 

The parochial experience in one area such as Detroit/midwest adds some color to the canvas of a variety of very different environments around not just the USA but the world. Currently gasoline is cheap and it's also lightly taxed in the USA (though this varies by state), as with a good many countries around the world. I visit a city in northern Mexico every year and don't see a large uptake of EVs being likely there for a good few years. This will doubtless delay the tipping point in such jurisdictions, but it's worth looking elsewhere to see what is happening.

 

However, there are many countries where the oil price is less significant and fuel duties are significantly higher, emissions standards are tighter (or certain taxes on vehicles increase with increased emissions) and indeed the way cars are used tends to be for shorter commutes and smaller cars have a larger market share, even among the wealthy.

 

In most of western Europe, gasoline averages typically around USD $6 per US gallon and probably no lower than USD $5 at the lowest point in the oil market in the last 3-4 years, thanks in part to taxes levied in part to pay for road maintenance and in part to incentivise fuel efficiency and reduce CO2 emissions. Electricity costs, however, aren't much different from those in the US. Diesel is often up to 30% cheaper in much of Europe but in many countries there's a levy on the purchase cost of diesel vehicles.

 

Additionally many populous cities and some countries in Europe offer major incentives for EVs and plug in vehicles (e.g. reduced parking costs, dedicated EV parking, free entry to congestion charging zones, use of bus-lanes or HOV lanes as well as money off the purchase price), which are helping to accelerate ownership. Although it's still the minority, even short range EVs and PHEVs are gaining ground even outside large European cities very fast compared to just a few years ago, providing sufficient growth rates in car sales (multiplied by a likely doubling or tripling of kWh capacities over coming years) to incentivise greater battery production and continue to push the cost per kWh lower faster than even the most optimistic projections made in 2010-2012.

 

In Norway, with their oil reserves falling but plenty of oil wealth to subsidise EV sales for their population, EVs have grown to over 40% of new car sales thanks to substantial incentives both financial and in terms of use of bus lanes etc, so it's providing an early example of how things could play out elsewhere. Now that still means that far less than 50% of the car fleet on the road in Norway is EVs, PHEVs or hybrids, but as older cars are retired and current EVs move to the second hand market, it is gradually going to shift over. It's also interesting to see how Norwegians who live in apartment complexes without charging facilities at home are still able to make EVs work for them very well, for example charging while shopping once or twice a week or using on-street chargers.

 

With the enormous cost reductions continuing to come in batteries, reducing the sticker price of long-range EVs and increasing the range of short-range EVs without an increase in sticker price, the picture elsewhere without incentives is likely to be somewhat similar to Norway's experience now with incentives. Doubtless people commuting shorter distances in congested cities will be among those who switch sooner than those who make frequent longer trips, but it seems very likely to me that the pattern will spread across various populations surprisingly fast as EVs become suitable to their individual needs and eventually I'd say they're almost certain to become cheaper than internal combustion engine vehicles and to keep on getting slightly cheaper for a fair while beyond that point. It does not require enormous extrapolation of current trends to reach parity, and as parity is neared for vehicles, home batteries and grid-scale batteries can become far more cost-effective, expanding the market even further and supporting intermittent renewable energy sources that themselves are getting cheap very fast too.

 

China is pushing EVs and hybrids in a big way for personal and public transport, particularly in polluted cities such as Bejing. This is partly to abate pollution but also is strategic, having only a modest car industry now and the scope to take significant market share in future decades from traditional automakers in the rest of the world. With their population, what's happening in Europe would hardly matter, and the cost improvements they're striving for are crucial to adoption given the lower average wages in their economy. There is certainly scope for one or two Chinese car-makers to overtake giants like Toyota and Ford in the coming decades as the industry shifts away from internal combustion and once most people in China have a car.

 

So yes, people with environmental problems and perhaps 'liberal' agendas may be leading the march toward EVs but this is helping provide sufficient demand to increase the supply and reduce the costs quite dramatically so that in the end a gasoline car is going to be considerably more expensive than an EV so you're going to need a special use case to choose to pay more for internal combustion (or to be an enthusiast or collector, just like horse enthusiasts now).

 

The exact timing in different areas is difficult to predict, but the cost changes are starting to look inevitable.

 

I could well imagine that in the face of EVs approaching parity, oil prices set by the likes of OPEC controlling production may indeed decline below the lows of a few years ago to eke out value in their reserves and delay the switch to EVs by a few years in countries with low fuel taxes. Countries with higher fixed fuel duties will see much less of an incentive to stick to internal combustion, so demand for batteries will continue to increase and price per kWh will continue to decline until EVs become cheaper than ICEVs.

 

Eventually it's quite possible that oil will principally switch to being used as chemical feedstock, though jet fuel is likely to remain in demand for quite a while longer than gasoline, and heavy oils for shipping won't be displaced for some time either.

 

It may seem hard to believe now, but there are many switches we barely think about now, such as the massive and rapid adoption of LED lighting or LCD displays which are better, greener and cheaper than what preceded them.