There are few manufacturing subjects more intriguing and complex than the car industry. The industry itself is just so huge; each individual vehicle is a masterclass in design, manufacturing technique and complexity; it’s so tied up with national fortunes. What a feast of a topic for engineers, designers, even politicians and journalists.  

To my mind, there have been three major trends in the car business over the past few decades; the arrival of electric vehicles as a viable alternative to internal combustion engine cars; the explosion of Chinese production, and the increasing reliability and longevity of cars. 

Just to start on the second point, I don’t think there is a general realisation of just how the Chinese industry has exploded. The International Organization of Motor Vehicle Manufacturers (OICA) keeps more or less up to date information of motor vehicle production and sales around the world, and it pans out roughly like this: about 93 million cars were produced last year, including commercial vehicles (which by the way is a very big market; about a third of the total). There was a big dip in 2020 and 2021 because of Covid, but numbers are not above 2019. The industry as a whole is still in expansion mode; it’s growing globally by about 4% a year, which doesn’t seem like much but when you are talking about such a big industry, that’s quite a lot of cars.

There are 40 countries around the world where cars are built, including of course SA. In 2000, the biggest global producer was the US, followed by Japan and Germany, producing 12 million vehicles, 10 million and 5 million respectively. It is just incredible how things have changed. China was at that stage producing about two million cars a year, about a third less than Canada. This was roughly five times what SA was producing at the time.

Jump to 2010, China is now in the lead, producing 18 million cars that year, Japan has held its position, still selling about 10 million cars, and the US is now third, selling a little less than eight million. SA, by the way, produced 470,000 cars that year. India is also by now seriously on the scene, building 3.5-million cars that year.

Jump again to more or less the present day, and in 2023, Chinese production is now producing 30 million cars a year, a third of the global total. I am not making this up. The US, Germany, South Korea — all serious players in this market, are more or less holding their own, but their production markets are static or declining. The point is that although the industry has been growing, the vast majority of that growth has happened in China and has been absorbed by Chinese producers. 

SA, by the way, has actually recorded a respectable increase in production, if you look at it in a decade-to-decade way: SA produced 630,000 cars in 2023, although it should be noted this is roughly the 2019 level. This is not to be sneezed at: the UK only produced about a million cars a year in 2023.

Of course, these cars are produced by car makers based in a variety of different countries. Volkswagen, for example, produced about nine million cars around the world in 2023, roughly equal to all the cars built in Germany that year. But for all this size, the key characteristic of the car industry is that margins are just absurdly tight. Just take the Chinese company BYD for example: in 2023, it made a $4-billion pre-tax profit off a revenue of $80-billion. Toyota made a $31-billion profit off a $285-billion revenue. This is respectable, but by no means outstanding.

In a way, this brings us to the third point and that is about improving build quality. Cars are just lasting much longer than they did, which is partly the result of the huge competitive pressure in the industry,  improving manufacturing techniques, and more standardised production. There is this joke that the reason Apple decided to dump its car programme was that they couldn’t think of a way to make customers buy a new one every year. Anyway, the result is that there are more cars in use around the world, and that this number is increasing faster than cars being built every year. There are around 1.6-billion cars in use around the world, up from 1.3-billion in 2015, Oica tells us. Cars are now almost part of the family, except without the arguments about what music to play. 

For the industry, it really is hard to escape this trap, and you can see it in the valuation of car companies. Renault, for example, is trading at a 3.3 price to earnings ratio; that’s incredible. All the car manufacturers are trading in “screaming buy” territory, but nobody is buying — except of course for Tesla.

Which brings us to the fourth point, electric cars. There are now about 26-million electric cars on the world’s roads, which means the global auto industry has made a $1-trillion commitment to carbon neutrality.  This is a tiny proportion of the total cars in use, but it is a five-fold increase since 2018. What is more, the country variations are enormous; some countries have really pushed the idea; about 90% of the new cars sold in Norway are electric. But others, like SA, are only just starting to think about it now. 

How does SA fit into all of this? The short answer is badly: SA has a great and longstanding industry. But it is built on some very significant tariff rebates and tax breaks. If those didn’t exist, it’s somewhat doubtful whether we would have an industry at all. 

SA has to find a way to move with the times, make cars cheaper, and adopt electrification; it’s just better for the consumer and better for the environment.  My colleague Don Pinnock has just done a great set of stories about SA’s attempt to build an electric car called the Joule. 

The car project was killed by some extremely short-sighted people at the IDC. Honestly, isn’t this exactly the kind of thing they are supposed to do? A colleague  of mine actually drove the car, and said the build quality wasn’t great, but the drive-train of the car was just superb. This was in 2008, when the only manufacturer internationally thinking about an electric car for mass production was Nissan, with its Leaf.   

SA once again missed a trick, but you know, it’s not too late. Come on IDC, this is a $4-trillion market, develop some gonads and throw some money at a project. It can’t be more wasteful than spending R50-billion not saving SAA.

Good investing,

Tim Cohen