The iPhone problem, self-driving car industry consolidation, and the hellscape that is the trade war. All that and more in the Morning Shift for July 2, 2019.
1st Gear: The Data’s Still Preliminary But It’s Not Great
Bloomberg has a preliminary report out on auto sales for the first half of 2019 (it’ll still be a while before we get the definite numbers, considering the first half of 2019 was over like two days ago), and the results are a tad disconcerting. Car sales are likely down 2.9 to 3.3 percent, and even that’s been offset by fleet sales, but that second data point is one I’d like to focus on for a bit:
- With car and truck inventory hovering near all-time highs, manufacturers are leaning on rental-car companies and commercial buyers to help move metal. J.D. Power and LMC predict that fleet sales rose 3.9% in June, and Cox Automotive says this segment of the market is on pace for a record year
- While sales are slumping, average transaction prices were on pace to reach $33,346 in the first half, the highest ever and up almost 4% from a year ago, J.D. Power said
Sales numbers are down, but sales prices are significantly up. In case that’s not really registering with you, it means that people are buying fewer cars, but the cars they are buying are notably more expensive.
That could imply a number of things, from loan terms to incentives to just general economic feelings, but to me, it’s looking like the iPhone problem.
Apple’s iPhone sales are cratering, as over the past few years the company has jacked up the price of models jam-packed with features, like the iPhone Xr and Xs. A lot of that is down to competition from companies like Huawei and Samsung and Google, sure, but even Apple CEO Tim Cook has admitted that the damn things are just too expensive.
After all, why pay exorbitantly for an iPhone with a slightly better camera, or a nearly imperceptibly better screen, if your years-old iPhone 7 works just fine? There used to be significant year-over-year improvements on the iPhone, but for a couple years now the design and the company seem to have settled into a groove, figured out what worked and what didn’t, consumers are satisfied, and now if you want a new phone, you need to REALLY want a new phone, and you’ve got to have a good chunk of money to spend on something you don’t truly need.
We’ve noticed a similar problem in cars while writing our reviews. Just a decade ago, it was easy to dunk on whatever plastic-and-vinyl garbage GM had vomited out that day, for instance. A lot of cars in general were just plain bad, and those that were bad were very bad indeed.
But these days, a lot of cars are fine. They won’t knock your socks off, but they won’t make you cry, either. They’ll barely make you feel anything at all, in fact. They get you where you need to go. Very few models are failing crash tests in wildly spectacular fashion. They’re more reliable than ever. They’ve got more tech than ever, but most cars are equipped with the exact same features. Every new car has got a backup camera. Every new car has got the right number of airbags. Every new car’s got bluetooth connectivity. They’re a bit boring, but they get the job done in a satisfactory way for people who just want transportation, much like a lot of people just want a phone that works and can take bad photos and can play some music.
Much like with phones, if you want a new car with the latest-and-greatest features, much of which you absolutely do not need, you’ll have to pony up a lot more than you used to, and you’ve got to really want a new car. Especially if your car that’s just a few years old is fine.
And normally, that wouldn’t be much of a looming nightmare for the car industry. After all, as Bloomberg points out, profits are still fat because the fewer number of cars being sold is largely offset by the higher margins associated with the vehicles that are being sold.
As long as the economy keeps chugging along, that’s all fine.
If the economy keeps chugging along.
But there are worrying signs. One very significant worrying sign, in fact. An economic indicator involving short- and long-term interest rates has flipped upon its head, and that’s portended bad things in the past, as NPR points out:
It is known among economists and Wall Street traders as a “yield curve inversion,” and it refers to when long-term interest rates are paying out less than short-term rates.
That curve has been flattening out and sloping down for more than a year, raising worries among some analysts that investors’ long-term view of the market is not positive and that an economic downturn is looming.
But on Sunday, an inauspicious milestone was achieved: The yield curve remained inverted for three months, or an entire quarter, which has for half a century been a clear signal that the economy is heading for recession in the next nine to 18 months, according to Campbell Harvey, a Duke University finance professor who spoke to NPR on Sunday. His research in the mid-1980s first linked yield curve inversions to recessions.
“That has been associated with predicting a recession for the last seven recessions,” Harvey said. “From the 1960s, this indicator has been reliable in terms of foretelling a recession, and also importantly, it has not given any false signals yet.”
Made your business on selling expensive cars packed with things people don’t need?
Good luck in the next recession.
2nd Gear: We’re Going Through a Big Wave of Self-Driving M&A
Much like any new industry, the self-driving car industry is made up of tons and tons of smaller players, many you’ve never heard of, many quite specialized. It’s not just Google and Tesla trying to develop the entirety of a self-driving car from scratch, there are companies just working on algorithms, or just working on cameras, or just working on radar, and on and on. There are even companies just focused on self-driving cars that can do one particular job, like self-driving cars for The Olds.
But given enough time, industries will naturally consolidate. One hundred years ago, the number of automotive manufacturers was probably somewhere in the quadrillions, and now there’s like two companies building cars in the entire world (my math is fuzzy on this, but you get the idea). We’re seeing the same thing with self-driving car companies now, the Financial Times reports:
Consolidation is sweeping through the self-driving cars sector like the last dance at a high school disco — everyone seems to be grabbing a partner or two for fear of being left out.
In the past few weeks, Apple snapped up autonomous vehicle start-up Drive.ai and Uber acquired Mighty AI, which provides training data for the computers that “drive” autonomous cars. Meanwhile Volkswagen severed its ties to Aurora, a Silicon Valley start-up backed by Amazon, in preparation for an expected partnership with Ford’s self-driving unit Argo AI.
I’m going to start my own self-driving car company for dogs, and someone will give me a billion dollars for it. Later, suckers.
3rd Gear: Trump Says That Any Trade Deal With China Must Be Slanted
Okay this is dumb and impossible to parse because we all know what Donald Trump is like at this point, but I’m dumb too, so let’s try it. Reuters reports that President Trump has said that any trade deal with China must be tilted in the United States’ favor:
Trump said China has had a “big advantage” over the United States in trade for “many years.”
“So obviously you can’t make a 50-50 deal. It has to be a deal that is somewhat tilted to our advantage,” Trump said.
We can take this in one of two ways. We can assume that Trump means what he says this time, something he has never done once in his life, and that he will try to get China to agree to something that puts it at a significant disadvantage, just to be nice, or something.
Or, Trump could just declare any trade deal he gets as “tremendous” and “wonderful” and “beautiful,” no matter what, even if it has all the appeal of congealed processed cheez.
Considering his undying, creepily passionate love for the plastic food product, we’re banking on the latter.
4th Gear: Over Half of Cars Sold in Norway Are Electric
Norway produces a lot of oil, but that’s just the addictive drug it sells to the rest of the world. You always try to avoid getting into your own supply, after all. In accordance with that policy, Norway exempts electric cars from heavy taxes it normally imposes on car sales, and that has resulted in big electric vehicle sales, Reuters notes:
In total, 48.4% of all new cars sold from January to June were electric, surpassing the 31.2% seen for the full year 2018, and making oil-producing Norway the global leader in per-capita electric car sales by a wide margin.
Seeking to end the sale of diesel and petrol engines by the middle of the next decade, Norway exempts battery-driven cars from the heavy taxes imposed on vehicles powered by fossil fuel. It also offers benefits such as discounts on road tolls.
That might seem wild or unfair or whatever, but most countries do the exact opposite, heavily subsidizing petroleum products. The world is what we want it to be, and most countries have decided they want it covered in seawater. Even Norway.
5th Gear: Aston Martin’s Investors Fighting to Prop Up Aston Martin’s Share Price
Aston Martin’s share price has been tanking ever since it went public, so seemingly in an effort to prop that up, its biggest investor is pumping more money into it (again from Reuters):
The biggest investor in Aston Martin (AML.L) is considering buying another 3% stake, offering to increase its holding after shares in the luxury carmaker crashed almost 50% since its listing nine months ago.
Strategic European Investment Group, part of the Italian private equity group Investindustrial, owns 31% of Aston Martin. It only wants to buy a maximum 3% stake but has to make an offer to all shareholders due to its already large holding.
Aston faces some headwinds in its market, considering its competing against everyone from Lamborghini to McLaren to BMW to Porsche, and many of its competitors, like Lamborghini and Porsche, have the benefit of being part of a mega-conglomerate, unlike independent Aston.
Maybe Aston should try building its cars out of wood? Everyone at Morgan seems pretty happy.
Reverse: Who Doesn’t Love Balloons
From the Los Angeles Times back in the day:
After failing five times and nearly losing his life in the process, American adventurer Steve Fossett on Tuesday became the first person to fly around the world solo in a hot-air balloon—and when he succeeded, he had to celebrate alone.
After spending 13 1/2 days floating six miles above Earth’s surface in an unpressurized gondola smaller than a prison cell, the 58-year-old multimillionaire finally succeeded on his sixth attempt at the record. He floated over Kalgoorlie, Australia, at 6:40 a.m. PDT Tuesday, coming full circle 19,428.6 miles from the point where he embarked. He continued to drift, anticipating that winds would bring the giant silver balloon down to a landing in Australia today.
Neutral: What’s One Feature You Don’t Need?
Have you bought a new car lately? Is there one feature your new car has that is entirely useless to you?