External Factors Affecting the Automobile Industry
While investing in the automotive sector can be lucrative, there are many influencing factors that should be considered when making a smart investment. Aspects of world politics, the economy, and technology shifts are just a few things to consider. But with so many external factors affecting the automobile industry, how can one safely invest in the automotive industry without a full understanding of all the factors influencing this complex, global marketplace?
Investors will want to be aware of potential car industry obstacles they may encounter when considering investment opportunities. Understanding these challenges, as they have been outlined by a PESTLE Analysis, creates room for strategic solutions to overcome the issues of automobile manufacturers and maximize investor profit.
Aspects to Consider when Analyzing the Automotive Industry for Investment Opportunities
The best way to analyze the automobile industry is through the PESTLE Analysis. The PESTLE Analysis examines the political (P), economic (E), social (S), technological (T), legal (L), and environmental (E) factors influencing a specific market.
While each of these areas presents distinct points of consideration, there also exists an interwovenness between the spheres, giving each unique factor new depth for potential investors to consider.
Political Considerations when Investing
Automobile companies can be heavily influenced and even limited by the global political climate. In recent years, geopolitical unrest has contributed significantly to the number of external factors affecting the automobile industry.
Most recently, the Russia-Ukraine conflict has had and likely will have a lasting impact on international relations, thus influencing the future accessibility of oil and gas from Russia on an international scale. Both countries are monumental in the production of car supplies and parts, and due to the friction between the two nations, automotive production has slowed, and in some areas completely stopped. This conflict is expected to decrease new car and truck units by the
millions. A large percentage of car parts and global supplies are manufactured in Ukraine, which affects the types of cars the U.S. has access to and will be able to offer its citizens. This decrease in availability has driven up the cost of many cars, putting more high-end vehicles in higher demand due to the fact that these cars aren’t produced in large quantities.
Aspects like these are a major determining factor for investors who are hoping to capitalize on an unforeseen phenomenon like the war between Ukraine and Russia. Innovative strategies and pivoting to assure an investment, no matter the circumstances, is crucial.
Additionally, Straddling both the political and economic spheres, the tension between China and the US has stressed the automotive market. With China owning the largest share of global automotive sales and a trade war brewing between the two nations, there has been a decrease in consumer demand across the automobile industry.
Economic Considerations when Investing
Various economic factors have also altered the automotive investment landscape in recent years. In recent months, a rise in gas prices has been seen across the nation. This increase is due to the Russia-Ukraine conflict and other political factors that vary from state to state. As fuel prices rise, people are quickly looking to downsize their vehicles to smaller, more economical vehicles. Thus, the thought of purchasing a new vehicle during a time of surging fuel prices does not appeal to the mass consumer. To combat this, financial experts are carefully monitoring the fluctuations of the styles of cars being purchased, and shifting investments into more economically approachable companies that produce more electric cars or hybrid designs.
Purchasing crossovers, hybrids, or electric cars is the optimal choice to save money in the long run. Electric cars, specifically, are low-emission and are economically friendly due to their significant reduction of pollution to the environment. Although electric cars are a solution to the increasing cost of gas, the average cost of an electric car is $60,000, making it unaffordable for most families within the U.S. Until the pricing for electric automobiles drops to around $30,000, these economic solutions will be slightly out of reach for many. Because of this, manufacturers are constantly being pushed to innovate and provide a product that is both high quality and economically appropriate for communities worldwide.
In addition to increased fuel prices, there has been an upward trend in interest rates and inflation. The numerical increase of these two factors, without corresponding wage growth, has negatively impacted the automotive market. Consumers are no longer able to easily afford new cars and are therefore searching for alternative modes of transportation.
Technological Considerations when Investing
Advancements in the technology found in modern vehicles have been elevated, causing issues for companies that are not at the forefront of innovation. Features like autonomous driving have separated equipped vehicles from their competition; when purchasing what many consider to be a luxury item, consumers are looking for the most current technology available. Manufacturers, who are unable to provide these enhancements, may find themselves struggling to profit.
Closely linked with the challenges of technological advancement in the automotive sphere are the legal challenges being faced by players in the industry. Comprehensive copyrights have been issued over the design or technology behind some of the most desirable cars on the market, making it difficult for many manufacturers to create vehicles to compete.
Additionally, the government recently passed new and increased safety regulations for auto manufacturers. Meeting the minimum requirements for this new legislation means that manufacturers must spend money redesigning their vehicles and expect an increased cost of production.
Last in the PESTLE Analysis comes the environmental influence on the automotive industry. Government regulations have been passed to control the impact of industrial manufacturing on the environment. Carbon emissions are strictly monitored, and automotive manufacturers must adjust their assembly process to adhere to these new regulations to avoid legal action against them.
Technological Shifts to Look Forward To
The drastic shift in the utilization of cars and buyers’ purchasing behavior due to the economy has provided much beneficial data for the car industry to reference moving forward. For the first time in over 50 years, the car industry is making major adjustments to many different styles of cars, prioritizing safety advancements and minimizing their carbon footprint to become an economically sound investment for more citizens. However, while the automotive industry attempts to become the best version of itself, the added benefits and upgrades that make these cars environmentally and economically friendly can also be the source of the overall price increase of the vehicle.
Opportunities for Investing in the Automobile Industry
So, what must automotive companies do to combat external factors affecting the automobile industry? What should potential investors keep in mind when looking for the right place to enter the automotive marketplace? The good news is that there are many lucrative opportunities for investors to be a part of in this sector, despite the challenges facing it in 2022. Automotive profitability is still a reality for investors looking to be involved in the future of the industry.
Finding opportunities to invest in the alternative energy movement will lead to evolving options for investors, who choose to explore this area of the industry. Additionally, building a marketing strategy that highlights incentivized financing plans and rebates could help increase sales in the automotive sector by appealing to the current interest rates faced by consumers.
For investors, observing the relocation of previously successful automotive companies may be a successful strategy to consider when evaluating how much or when to invest. These companies have slowed down and inflated pricing due to their proximity to the escalating war between Russia and the Ukraine.
Avoiding areas of political unrest and exploring opportunities in the blossoming Asian and South American automotive markets is also a viable option for investors. Working to create new vehicle designs and creating new technological advancements for consumers to benefit from and be excited by should lead to a return on investment that is worthwhile.
The push for the advancement of traditional car models has also created benefits for auto dealerships. More than ever, consumers are searching for economical solutions for everyday needs, and electric vehicles provide an immense amount of benefits in comparison to traditional builds, a few being that they are low maintenance and create an average savings of $700 per year in fuel costs. Studies show that one of the reasons that potential car buyers are reluctant to purchase an electric vehicle is due to the lack of charging stations around them. By adding electric vehicles to auto dealerships, the new charging stations will become a recurring place to visit for current electric car owners looking to recharge their vehicles. This also provides the opportunity to increase repeat business, sell add-on products, and provide access to a reliable charging station.
As tech-driven companies spearhead the way to newly evolved electric vehicles, avenues to invest in the automotive industry become increasingly plentiful. Although these companies may not have originated in the automotive industry, tech companies have been producing the parts for electric vehicles longer than some of the EV companies like Tesla have been around. Foxconn for example, a multinational electronics contract manufacturer that was formed in 1974, gained its footing as one of the leaders in technology manufacturing and has recently decided to create its own electric vehicles. In most cases a newly formed business in any industry may be an investment risk, however, corporations like Foxconn who have mastered the art of advanced technology manufacturing provide a unique investment opportunity that many novice eyes may not see until it’s too late.
Alternatively, Investors can look at companies like GMC and Ford, as a source of investment interest as they have been consistently successful for decades. These companies, like many other traditional automotive companies, have now shifted focus to incorporating electronic versions of their most successful builds. For example, GMC recently introduced the world’s first all-electric super-truck, the Hummer EV. As they begin to ramp up a complete line of new vehicles to the market, they gain an edge over the competition because consumers already know and trust the quality of the vehicles.
With the expected shift of locations for major companies like Mercedes Benz and Audi and the sourcing of quality materials at lower prices, the automotive industry will begin to rise to the previously victorious market that it has consistently been. The factors that made their success long before this unfortunate circumstance have not changed, only their access to automotive parts at a profitable rate. The key to investment success in this game is remaining observant and moving quickly to invest as soon as they give any indication that they are in a better economic position. As with many things, the early bird always gets the worm.
Azhar Hirani manages the private equity sales team, which involves relationship management, advising and educating retail clients on new private investments, analyzing private equity portfolios, and oversight of clients’ invested capital in internal private projects. Passionate about business, marketing, and sales, Mr. Hirani maintains deep expertise in high ticket sales and has a record of success in sourcing capital and acquiring new customers.