A number of years ago, Harvard University professor wrote and did You Tube videos about Disruption in the Steel Industry. The Professor’s name was Clayton Christensen and he talked about how in every market including the steel market some products have higher margins than others. If the competitors go after the lowest price portion of the market, often times the larger companies invariably decide not to compete on the lowest margins. That is good for the larger company, however in time and thanks to continuing changes in technology, the lowest cost manufacturer begins to compete in the higher margin products. In time the largest producers due to the established fixed costs, can no longer compete in the high margin items. The largest producers essentially have to do Chapter 11 bankruptcy, restructure their company and then they can compete. With this happen in the car industry?

In the automobile industry, there is a change from gasoline to electric vehicles. If you look to the future in 2050, more electric will be sold than gasoline. This is partly due to government regulations, partly due to the planet being warmer and partly due to consumers because it is expected the price to charge electric is less than buying gas. The change is not a flood because car makers do not have very inexpensive electric vehicles, at the moment the cost is on the high end.

In an article by Victoria Waldersee of Reuters, in Europe, as well as America, but more so in Europe, the carmakers have a fight on their hands to produce lower cost EVs and erase China’s lead in developing cheaper, more consumer-friendly models, executives at Munich’s IAA mobility show said.

Renault’s CEO Luca de Meo told reporters it has a new vehicle called R5 EV that will be 25-35% less expensive than the Scenic and Magne models.

Chinese EV makers, including BYD, Nio, and Xpeng are all targeting Europe’s EV market where thanks to government subsidies the sales of electric soared 55% to 840,000 units or 13% of the total market. (in China it is possible to buy a new EV for $5,000).

Some readers will remember or have read in the 1970’s, Japanese imports came into the US at the low end of the market, but they were reliable. Ford, GM and Chrysler all had smaller vehicles, but they were unsafe at any speed to quote Ralph Nader. Consumers moved with their feet to buy the Japanese models. Soon the Japanese models were on the roads and on the driveway of many family homes and they improved to the point where consumers believed Toyota was the most reliable smaller vehicle. Ford, GM and Chrysler thanked consumers that trucks and SUVs were considered made better and the margins are higher than their Japanese counterparts.

According to auto consultancy Inovev, 8% of new EVs sold in Europe were Chinese brands. This is up from 6% in 2022 and 4% in 2021. More EVs from China are coming to Europe. At the show, Chinese auto executives urged global co-operation in EV segment or they want access to markets.

VW CEO Oliver Blume told reporters through its partnerships in China, it expects to cut battery cell costs by 50%.

Linking to dividend paying stocks, as investors we like high margin profitable companies that can consistently pay dividends. However, the competition loves the prospect of receiving high margins which means every industry is always under threat of changing technology. How the companies in your investments deal with it is the secondary concern after it affirms it still maintains those high margins.

There are more questions than answers, till the next time – to raising questions.