Morgan Stanley’s Adam Jonas and the automotive industry disruption at Automotive World Congress

Morgan Stanley’s Adam Jonas and the automotive industry disruption at Automotive World Congress


go blue thanks Jason I was actually I think last presented in this audience I think it was three years ago and I maybe I used a little too much profanity or I said some unpopular things but I I usually don’t get invited back to things like this so Jason it’s your fault I blame you can blame you I want to keep it clean okay but I’m gonna tell you some things that you you may not want to hear but I’m here to make you think I’m not gonna pretend to know exactly where all these things are going but my job at Morgan Stanley in the auto team is to tell the story of Industry disruption and to try to raise awareness not panic but awareness and to try to get people to think differently about where the industry is going let’s kind of get into this here see this works the two biggest trends in the auto industry without question in our mind are the shared economy and autonomous driving the combination of which we refer to as shared autonomy pardon this is uh give this a second shared autonomy when we take these two trends you can’t wander okay yeah this is a little bit better I can see you guys when we take these two trends and we splay them orthogonal II in an XY scatter plot like this where the x axis is the spread from the owned vehicle to the shared vehicle and the y axis is the spectrum from the human driven car on the bottom to the robot driven car on the top what what comes out are four quadrants of mobility that we think overlap and evolve over time the first quadrant on the lower left should look familiar to you it would also look familiar to Henry Ford 110 years ago that’s basically where we are today where we’ve been a hundred years you owned your vehicle you drive your vehicle there’s essentially no computer technology the vehicle the the business model is virtually unchanged from when from from from the time that these these devices have hit us okay yes you can research a vehicle inventory on the web and dealers post the stuff these are these are not changes of the model these are just a couch remnants all right these are features to help the existing model if I if I could materialize Henry Ford here right now and I walked around the world and show it on the iPhone and took him to the International Space Station and human genome and particle colliders and everything he’d say where are the cars and if I showed him and I won’t name names what I showed him an average a 2016 model year new car I think he he may be like what the hell have you been doing for a hundred years seriously what what what series of what you’ve been doing let’s move all the way to the the lower right hand corner the lower right is essentially taking some very basic cell phone technology and some not too sophisticated software and voila you give birth to shared mobility you still you’re still driving they’re still humans driving the car but you’re getting consumers used to giving up control to another human being and you have these types of models I won’t even name them but you know tens and tens or perhaps hundreds of billions of capital mostly in the private arena chasing this field of shared of shared mobility the upper left corner we call owned autonomy that is let’s say technology for drivers to help you running over children skip roping in the middle of the street the business model is unchanged Detroit desperately wants to go this way ok please keep owning your car please keep keep you know buying in the way you’ve always bought them and the quantities you buy them and we’ll just sell autonomous features is like you know the way we did abs brakes and 8-track cassettes right don’t don’t don’t go too fast we’ll use these sensors algorithms mechatronics software and you know we can make even more money so this is a wonderful thing for us that’s the upper left corner and you see some some you know tech enabling firms like these names here kind of getting into that arena but then there’s quadrant 4 which we refer to as Autopia which seems like a moonshot that is the moonshot you know these roving fleets of connected robot driven taxis available in seconds on your smartphone this is when you know we call autonomous pause position on-demand as a service where what used to be known as private transportation becomes the realm of on-demand public transportation okay that might seem very futuristic and perhaps it is in when the average mile traveled is considered delivered this way but we think very soon as soon as this year at magazine is the first half of this year 2016 we think you’re going to see announcements from very well capitalized tech firms picking a major US city for example to actually announce a fleeting of maybe fifty maybe a couple hundred cars without steering wheels operated on public roads slow-speed geographically limited you might say it’s cheating it’ll be a virtually irrelevant percentage of total miles traveled except it’s going to be a moment it’s gonna be a wrinkle of disruption that’s actually happening in a city that you can do it might be a novelty but as they collect that data it’s going to get a lot of attention we think all four quadrants happen over time and but the upper-right one is the one I want to spend a little more time talking about because it’s attracting the likes of these companies here which have some some resource advantages let’s say they could they could run these businesses at a loss for a very long time before getting get getting more serious that they are what the arrows mean is the more you move to the right the more an asset is shared it is meant to be autonomous to get the rid of the human driver you’ve let the CEOs of these companies to describe that to you and the more you have a robot driving the more that vehicles should be shared so any evolution in one axis Foster’s the evolution of the other we believe let’s move on a couple a couple a little bit here I want to save time for the Q&A if you ask a traditional Auto analyst and this is the important thing and you know Detroit the Detroit Auto Show has suddenly become this autonomous shared cloud-based AI robotics show right guys and I know this is gonna sound a little harsh I’m not even going to the car not even going to Cobo I’ve been coming to Detroit for twenty years I’m not going to Cobo because it’s a waste of my time sorry it doesn’t help now we have different jobs but for my job okay talking to investors about how to allocate capital and what to do it doesn’t help me any more folks it doesn’t help me I’m not going this is important to me not there you ask a traditional auto company or Auto Analyst how do you define the addressable market and you’ll say something that’s gonna sound familiar to you 80 million cars 19,000 bucks a car 1.5 trillion dollars that’s 2 percent of GDP that’s a big number 1.5 trillion you ask Google or Apple how big the market is and they say well it’s 10 trillion miles we know this I’ve ever on a dollar a mile that excludes the value of your time for around 10 trillion dollars ok that’s about 13 14 percent of the GDP 10 trillion miles 10 trillion miles now guys we know we know the 10 trillion miles let me go back to the tension for a second for those astronomers any any astronomers out there anybody need readers of Carl Sagan Isaac Asimov this kind of thing right ok light travels at 186,000 miles a second the world’s ten trillion cars sorry the world’s 1 1 billion cars at ten thousand miles per car travel three hundred seventeen thousand miles a second we’re learning to that ten trillion is one point seven light years folks it’s pretty unusual for me to stand up here and describe a physical business in astronomical terms without being accused of gross exaggeration but in the case of the auto industry I am NOT freakin exaggerating this is an astronomical business astronomical and it’s attracting a lot of attention a traditional automaker like Toyota they’re in the business of selling machines things and the financial services accoutrements to acquire and operate the thing they’re number one in the world ten million cars two hundred thirty billion US dollars of revenue a ride-sharing firm let’s just say a ride train let’s say the world’s largest ride-sharing firm might have 0.2% of miles traveled my first observation is so they’re in the miles business let’s say that they were here and had some really audacious target like we’re gonna go for 1.5 percent share of miles traveled something just insane like 1.5 percent share that’s 150 billion miles at around a dollar 50 a mile which of course includes the chauffeur value that the value of your time that’s a 250 225 billion revenue company okay it took a Toyota 70 years from the ashes of post-war Japan to become US 230 billion revenue company how long do you think it’ll take a firm in the business of miles the bundled mile to get to be as big as Toyota by revenue what side is seven years you want to take probably not seventy right all right when you’re in the miles business the bundled concept okay it’s not just the cars sold in that year it’s all the cars in the bathtub as well not just the new water entering the bathtub and not just the depreciation of the finance or a three-year warranty but fuel okay five hundred billion gallons of gasoline for five hundred billion dollars of property and casualty insurance market it’s forty five percent of the global property and casualty insurance market all these things bundled in a couple other concepts I want to hit on before we get Jason up here and then to grill me this I’m gonna go through this quickly um Eevee’s actually are affected by the shared economy and autonomous driving to be very simple about this Ibiza bond let’s face it they were bombing even at $4 gas forget a dollar 50 gas and the reason is the paybacks terrible okay we calculate a pit if you say four cents a mile and you drive 10,000 miles a year you’ll say 400 bucks that might buy you dinner at whatever you know and I could get you a nice steak dinner for two in Detroit or something like that okay okay maybe for four and Detroit right that’s a twenty eight and a half year payback so you can get a great value here come on okay value and it’s a probably better steak no no no we’re not running from certainly better service so look if I’m gonna say 400 bucks a year but I got to pay twelve thousand five hundred dollars for battery for that privilege that’s a twenty eight and a half year payback so if I got an e V for my bar mitzva in the summer of 1987 I would just now be crusting my pay back more realistically I would have scrapped the car about two or three times doesn’t doesn’t work but what if I’d ride the car six hours a day and I’m a professional fleet well my payback got to four point six years what if I drive at a hundred thousand miles a year okay two point eight years what if at the same time battery costs come down 50 percent all right now my paybacks eighteen months now I’m working all right that works but here’s the last concept I want to leave you with ten trillion miles we know this three point two trillion the United States probably three point three three China and Europe China just crust it a trillion that doubles in the next five years we know this we can’t have a good idea that’s too so then therefore we know this four hundred billion hours driver hours spent behind the wheel what’s the value of four hundred billion hours now that excludes the 0.55 passengers in the car we know we know occupancy rates and by the way we all know that cars are only used four percent of a day but on a seat mile basis if you put your aircraft have your airline hat on that’s about a one one and a half percent seat mile utilization I’ll let you contemplate that but what’s the value of time listen GDP per capita per waking hours around a dollar eighty but that includes all 7.2 billion people in the world all of sub-saharan Africa all infants and children in the world my ten month old people that don’t own my own operate cars if you do GDP per capita of the very fortunate car owning population which is one billion out of 7.2 or fourteen percent of people I’m sorry if I’m going too fast here think of a normal distribution curve and the richest fourteen percent of that of that curve in a one dollar eighty an hour it’s gonna be something more like ten dollars an hour that’s subjective I’ll let you do your own math talk to MIT whatever you’re gonna get around there okay that’s four trillion dollars here’s what this means if you’re Apple or Google or whatever fill in the blank you could get into the transportation business at a loss or add cost just to get access to that time what did that we’ll say we want 5% of that fortune we want if we want to turn cars into mobile Apple stores not just mobile app stores your mobile Apple stores immersed in a world of media and connecting with friends and content and experiences have a snooze whatever anything but do this and trying not to die let’s once that’s liberated we liberate that 5% of 400 of four trillion two hundred million twenty percent margins 40 million 20 times earnings 800 billion Apple could I just threw a lot of numbers out that I didn’t discount it but the order of magnitude is Apple could justify their entire market cap just getting a tiny sliver of the value of time providing the point-a to point-b transport for free okay now I don’t think you’re gonna find in a single that’s something for Mark fields later how does an auto CEO how does an auto company react to that so maybe to kind of bring it home these are disclosures which is you know the business I’m in I’m not here to sell you by the way I’m not here to sell you stock by the way so and I don’t think you’re gonna find a lot of people from Wall Street if I am here to sell stock I’m doing a pretty bad damn job of it I think right everyone let’s bring it to Detroit 2016 I’ve been in a couple conferences and I was at CES last week and all the auto companies whether they’re new tech disruptors or the existing incumbent guys they all say the same thing we’re mobility tech we’re gonna lead this disruption is good for Detroit this is good we’re gonna we’re gonna use it we’re gonna take advantage of it every single one saying the same thing and the thing I told mark fields last night is you know mark it’s great PR event power of positive thinking that’s awesome great but I could show you videos from the CEO management team of Kodak and Blockbuster Video and Blackberry and Barnes and Noble and they said the same thing Kodak we invented the digital camera come on we’re gonna just yeah the world’s changing but we’re there we can do this just food for thought I don’t mean a sleevee dystopian Aldous Huxley you know the world’s ending kind of thing I just think we need some creative thinking here there’s there is massive invested capital in Detroit there are smart people there’s a lot of money there’s you know the even if a car is flying or robot driven or whatever there’s a place for this world in the future but it might require some incredible sacrifice as an outside-of-the-box thinking to keep this industry relevant it’s not just press releases and BS and that that’s that’s one thing I would caution you on Jason let’s get up here and ticket next ride Adam Jonas entertaining as always we were gonna do this at the Auto Show but I figure there’s a waste of time let’s do it sorry what’d you think of the Chevy Volts speaking of the Auto Show that’s a game-changer isn’t it no no it’s not it’s actually really it’s not difficult to make an Eevee in fact I think there’s probably 10 with all due respect there’s a number of Chinese firms that could probably make make the bolt if you if GM can make money on the bulb that would be a game-changer but that that remains to be seen so I think that was an effort to say listen we can do it it’s good it’s not just PR it’s also I think money they feel they love to spend it anyway and this is gonna sound a little cynical but they the California zebb credit legislations driving a big part of this and and I’m not saying this is the only reason why they did the bowl I think there’s long-term thinking at GM recognition but I think one possible Avenue is if these rules that are not gonna be met okay these rules are not going to be these standards not gonna be met when California is like jam what’s the deal come on you’re not even close to yours EV credit getting yours F Kretz are like listen we made this car it’s on sale for $35,000 nobody wants to freakin buy it so I think it’s more like Oh like don’t we need to we need to drop a bomb on these rules and recast so that’s kind of a hedge as well so you’re not big on TVs I’m big on TVs if you I’m not big on personal use of V’s for the payback period you know that I’m talking about anyone I don’t think it can make strong economic rounds especially even at even at $4 gas four V’s but if you used for in a shared as ecosystem we could get higher than two or three percent utilization then I am big on e B’s so the two kind of go together so your advice to carlos Cohen would be what because he put these bet the farm on this right I actually uh met with Carlos recently and Carlos is a very talented manager and I think he’s got vision and I think that you know you have to try even if even if those efforts fail you have to kind of hopefully fail fast and then recast I would say that don’t I think that the go-to-market strategy has to involve miles rather than units sold in a retail context that would be my advice and misleading because V’s well my advice to mr. Moss I’ve written this and I’m a bullish on Tesla Motors but Tesla has not been disruptive Elon gets a lot of credit for like oh he’s disrupting the auto industry all right listen I mean I get a lot of board members a lot of auto CEOs want to talk to me about Tesla so it’s disrupting people’s you know the auto industry sleeping at night perhaps a bit but that hasn’t disrupted the model 0-60 in two and a half seconds of an electric motor is not disruptive it’s fun it’s not disruptive so my advice to Elon if you were asking the question is you have no future analyze you have no future selling a hundred thousand dollar car to rich people using him 2% of a day so what’s your movie you on and I think he’s gonna have to do something different what does he say to you when you say that he doesn’t answer my questions I know the feeling well I told him you can tell more from the non-answer than from the answer and you know I asked some type I genuinely asked questions that I know aren’t gonna be answered just to listen to the count the seconds and just enjoy the silence Mike Jackson told this crowd yesterday that we’ve hit a plateau we’re all on the plateau and the industry cannot after having grown it cannot get its get out of the way of itself in a plateau it doesn’t know how to handle a plateau and will inevitably lead to a decline your thoughts well first I love Mike I have man lust for Mike Jackson I mean that guy who does yeah he just goes out there and just says he says all the stuff that everyone’s thinking it doesn’t want to hear and he says me like cats why do you say he’s in a different business first of all so wait you know Mike Jackson can go out and say those things and even be more negative than the line of scrimmage right now because maybe he’s trying to buy that dealer group across the street or he’s got a business that you know I’m where I heard some laughter they’re you know insecure you know he’s in he’s in a different business so we’ve written about the car dealer model what is it what is the role of a car dealer in an autonomous world you’re not dealing anything you’re a hundred percent service business so means your Autopia it it’s not there so what but you need service so you’ll still need the real estate in this service skill to vacuum up the vomit from the back of an autonomous uber so I’m sorry I may not be the most glorifying existence but at least it’s something right um so listen III think he’s you asked about something shorter-term I did we think were clearly deep down the path of an auto the largest auto credit bubble ever it wasn’t allowed to fully mushroom because the housing bubble stopped it from happening so these are near I mean we asked a car dealer how would you describe credit conditions in one of them memorable responses was it’s pink fluffy unicorns dancing on rainbows okay maybe that’s not how all of you feel but almost perfect and and there are some some behaviors that are pulling forward volume pricing and mix from the future and it just might mean exacerbates the downturn when not if when when is it up one I knew the answer to that is be you know carrying someone’s briefcase out here instead of being a talking head it’s gonna be them I can’t give you a point year it’s going to be the moment when the collective financial services community either the captive or the third parties wake up on whatever morning and said I feel a little less good today about yesterday I would watch the asset-backed security securitization market very closely that’s like the crack cocaine of the new used source what happened ten years ago mm-hmm except this time around I have I hear people in the auto lending community say things like well we learned that people always pay their loans on time right you can’t you know you can’t you can’t you can’t drive your house you can sleep in your car you can’t drive your house and if anything Auto alone all alone characteristics are better than ever and so you’re starting to have this like where did I hear that last time Oh a housing bubble so I fear that some structures and habits are being built along well auto auto credits gonna be there forever and of course that that’s just that’s ludicrous isn’t it hmm it is margin pressure obviously for everybody then coming I mean this is what Barrington Green Jackson talked about as well as oh well it depends what part of the chain you’re doing I know you know I don’t I wouldn’t I like to use the corollary we imagine an Apple car all right and whether Apple makes the car or not doesn’t matter even if there’s a Foxconn of autos we think there will be a comma Foxconn of autos or many maybe maybe Foxconn go Foxconn along but I’ll we say we asked what’s on that car and if you’re not on that car you’re in trouble and so things like I mean I’ll just give you something’s things like fuel delivery systems or rearview mirrors or steering wheels I mean like you could go on and on things involving the internal combustion system even though it will be around for a very long time I mean BorgWarner was out today saying you know some pretty harsh recognition of the terminal value of some of their icy products but feel they can reinvent themselves and pivot over that period it’s a pretty bold statement and maybe it may be a painful journey hmm what are you and your colleagues on Wall Street have against Ford I mean he just delivered you know mark just delivered another dividend of what a million dollars it’s going there right 25 cent dividend I hear today in the last since he took his position on July 1st of last year the stock is down 33 percent and I think today was down another 65 cents at one point what’s up he can’t well can’t get any when you say we have what do we have against wordage we’re under we have an underweight rating on Ford we happen to be the only underweight rating on Wall Street on Ford like I said I’m not here to sell stock but we have a $14 fair value so it’s a we think it’s a fairly valued equity but I’m not in the business of telling people to buy risky equities for no money I mean I’d buy a gas station or a lump of gold or something like this that anything you know so that’s an underweight that’s how we see sure they’re just they’re just caught up in this and forward I think caught up in what their thought up in there they’re suddenly if I told you if I told you a year ago then Apple is gonna make cars maybe you would have left if I took a poll this room hey apples gonna make cars Google’s gonna build what there’s rumors that Google might carve out an alphabet Auto what do you think of that even like what are you talking about but now it’s like front page of your stuff IV of your of your incredible publications so that’s a major change I can’t spend that positively folks I can’t do that it’s been that positively for me of course Detroit is out some people can spin it can spin and possibly but it can also spend it green angle and think the stock markets like oK we’ve seen this before this industry is incredibly ripe for disruption and the disruption is probably not going to come from the hundred-year mechanics of Italy so they don’t believe in the legacy the legacy is weighing them down there is a mechanical legacy and as a business model legacy that it’s relevant but the car the future is 60 percent or 80 percent software and content it’s a skill set that they it is untested at best and more likely difficult for them to attract and retain the right talent here then you combine that with things like bigger risks on bigger questions on China where Ford gets around 20 or 10 percent of their profit and then it’s almost like damned if you do damned if you know the better we the farther we go along the u.s. our curve the more investors alike great opportunity to sell you named Ford is doing BMW margins and the stock markets just like I just can’t buy that that’s not even half percent or 10 percent said I can’t buy that record record year again yeah okay I mean they stand up I mean both company and Ford was saying that their breakeven is 10 or like 11 million units and if that in that calculation they hold pricing flat now you tell me an environment where US auto sales go from 18 to 11 with flat pricing that is just it just doesn’t happen but that’s the kind of charge we should they show but it’s got a little bit around the world then we’ll go around some country US and companies and then we’ll let you go Europe what’s your prognosis 416 so we go we go around the earth prognosis 416 is I think in some ways the way it has always been it’s the most structurally challenged market in the world most politically in some ways most politically challenged now we think the market growth is about two or three percent it’s entirely dependent on the ECB so it and and it means that Europe’s in a place where it’s a good ear a good year meaning the industry can break even how much do you want to pay for a region we’re in a good year you break even that’s our prognosis for your first year in China China our our analysts are bullish on volume but again entirely dependent on on government stimulus and tax stimulus to achieve it and we think increasingly moving towards the local manufacturers who are actually making cars that remember the first Chinese cars they used to show in Detroit you could put your whole arm in some of those gaps it was like wow I can feel the engine through the door now these things are like exportable so china volume up six to eight percent but the bigger picture is one is trying to go from a demand story into a supply story right Russia irrelevant right now for a while India India is one of those markets we think goes straight but you know like so sub-saharan African countries went straight they never had landlines they went straight to cell towers we think India goes straight to shared economy two percent of the population owns cars and we don’t think that you ever get much more than that you just go straight to and you know say uber ization of that market not a relevant sales market Brazil big market a lot of ownership another mirror so pain I have no reason to believe it can’t be down another five or ten percent but at least the cops are easy okay at least the cops are using let’s go through our companies as we do every time we ask you here we’ve done it in Europe we do it here as well so you’re gonna buy sell or hold even though I know you don’t buy sell or hold any stock or you don’t recommend but we’re you’re gonna go out right now all right no I got it I got my own record we’re tell my recommendation so I have a recommendation okay if I don’t cover the stock then I’ll tell you no okay 44 sells so yeah Excel FC a restricted smile she smile or I’m the only animals in the world I believe restricted on Fiat Chrysler Sun ok back sorry how much longer you gonna be restricted boy that’s not next question please yeah I’d love to know that it’s been a tough year for you right it’s been liberating actually it’s quite nice I’m able to spend more time like kids all right well you got a chance to you know think a little bit weren’t writing let it marinate yeah okay General Motors restricted I’m the only else in the world restriction on GM I’m quite an expensive analyst apparent boy you’re hot yeah I guess I don’t get invited back to things like this son nice knowing you by the way did the did the FCA GM deal make sense to you I am not even coming close to touchin that I’m sorry I’ll give it a shot okay Magna by BorgWarner sell Toyota nah we don’t we don’t cover it I don’t come okay then Volkswagen we are currently our analyst in the Europe is new is equal weight on that stock ran equal weight can you believe that that happened yes I can unfortunately I really can’t again hubris and arrogance it’s a it’s a real sponsor yeah okay so I think can’t cost something yeah it’s a thing okay auto nation by Penske by Hyundai it equal weight and yeah anyway Tesla by Morgan Stanley I’m just kidding all right no comment actually I’m a director I’m gonna fix on that one dude yeah I do respect it yeah Automotive News no all right i Adam Jonas thank you thank you very much


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