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The global economic landscape is blanketed with uncertainty, thanks to ever-increasing fuel and raw materials prices, the credit crunch and rising inflation. Within the past few months we have seen crude prices rise by 40% to over $140 per barrel. Although prices have moderated somewhat in recent days, the upward trend could return. The credit crunch, which began in the third quarter of 2007 in the United States, is spreading over Europe. Fears of further write-downs by banks are beginning to have ripple effects on the booming Asian stock markets. The impact on new-car buyer behavior has been substantial, especially in the U.S. and Europe. Many are either holding off new-vehicle purchases altogether or switching to more fuel-efficient vehicles.
Given the current gloomy investment climate, how can financial firms optimize their investment portfolios regarding the European automotive market? An interesting opportunity may arise in connection with the European CO2 mandate which will come up for a vote in the European Parliament in October.
The current EU proposal is that all new cars sold in Europe must reach the 120g CO2/km target by 2012 (4.5 liters/100 km for diesel, 5 liters/100 km for gasoline), with vehicle and powertrain contributing to reduce the fleet average emissions to 130g and supplier technologies contributing another 10g reduction.
This pending EU mandate has encouraged heavier R&D investments in green powertrain technologies, weight-reduction technologies and materials, and even mergers and acquisitions and strategic alliances in the automotive industry (the legislation allows manufacturers to pool together to meet the average emissions targets). For this article, we'll concentrate on evaluating potential financial investments in emerging powertrain technologies.
Most OEMs based in Europe are already on the bandwagon of improving their powertrain technologies with green initiatives, including BMW's EfficientDynamics, Daimler's BlueEFFICIENCY, Ford's econetic, Renault/Nissan's eco2 and Volkswagen's BLUEMOTION. These OEMs are advancing their powertrain technologies in systems such as stop-start, hybrid cars, GDI turbochargers, bio-fuel, dual-clutch transmissions and cleaner diesel.
In order to understand which technologies may be good investment targets, CSM carried out an analysis of emerging green powertrain technologies. The results are summarized in the matrix below which analyzes European powertrain technologies based on forecasted installation volumes for vehicles produced in Europe between 2008 and 2014. It plots the emerging technologies according to their compounded annual growth rate (CAGR) and their relative market share. This gives investors a succinct overview of which powertrain technologies are powering ahead with the green movement in Europe.
The matrix shows possible opportunities for mid- to long-term value creation portfolio strategies. Some investors may prefer the high-risk, high-reward strategy and invest in the high-growth, low market-share quadrant that includes technologies such as biofuels or hybrid technologies. Others may prefer the moderate-risk, moderate-reward strategy and invest in technologies in the low-growth, high market-share quadrant that guarantee cash inflows with technologies such as GDI turbochargers or cleaner diesel.
Although market share and CAGR are not the only factors available to evaluate the attractiveness of investments, such an analysis does provide a good overview as to which powertrain technologies hold investment potential. And depending on each investment firm's risk strategy, there seems to be a green technology for each investor. Who knows, it may be one of the safer automotive-related bets in this cash-strapped, turbulent economy.
Figure 1: Powertrain Technology Opportunities Matrix, based on July 2008 forecast
If you have any questions in regards to this article, please contact Dr. Penelope Quah at penelopequah@csmauto.com.