Auto companies spur Africa’s new middle class

Auto companies spur Africa’s new middle class

When most people talk about rising disposable incomes, the knee-jerk reaction tends to be one that involves China or India. While those are natural reactions and are key drivers for our Rise of the New Middle-class investing theme, we are seeing the same begin to unfold in Africa as auto companies invest for what they see as a vibrant market in the coming years. That compares to an auto market in the mature markets that is primarily driven by replacement demand and faces an uncertain volume future longer-term due to prospects associated with autonomous vehicles.

On the flipside, the investments in making North Africa a car manufacturing hub and the better-paying jobs that follow are helping speed the rise of the new middle-class in the region. That bodes well for companies ranging from Colgate Palmolive, Proctor & Gamble, Clorox and the other rising tailwinds associated with our Rise of the New Middle-class investing theme.

Auto manufacturers are betting on Africa as the next growth frontier, and they’re building a new production hub to power it.

In a rare industrialization success story for the continent, some of the largest car makers have been transforming North Africa into the world’s newest car-manufacturing cluster. Volkswagen AG , Renault SA, Peugeot SA, Hyundai Motor Co. and Toyota Motor Corp. have invested billions in Africa in recent years, drawn by growth prospects that maturer auto markets no longer offer. New-car sales in the U.S., China and Europe are ebbing after a bumper decade.

While still a small market, the Middle East and Africa are expected to have 90 million vehicles on the road by 2040, up from 59 million today, according to OPEC forecasts.

Foreign direct investment in North Africa rose from just under $5 billion in 2011 to $12 billion in 2016, largely driven by auto makers’ investment, according to Frost & Sullivan, an industry research group.

Source: Car Makers Turning North Africa Into Auto Hub – WSJ

Diabetes solutions tapping our Disruptive Innovators and Digital Lifestyle investing themes

Diabetes solutions tapping our Disruptive Innovators and Digital Lifestyle investing themes

Diabetes treatment has evolved since Mary Fortune was diagnosed in 1967 and hospitalized because there was no reliable way monitor her blood sugar. These days, a glucose skin patch transmits her levels day and night to her iPhone and shares the data with others.

Fortune and other diabetics are benefiting from an explosion in technology and innovation, from under-the-skin sensors that eliminate the need for painful finger pricks, to smartphone alerts when glucose levels rise too high. But the technology, and its integration with mobile devices, has brought the types of lawsuits typically seen by Silicon Valley companies.

For glucose monitors alone, the number of published patent applications has grown steadily for a decade and has accelerated significantly since 2015, according to an analysis by the research firm Patinformatics. More than 880 patent applications related to glucose monitoring have been published so far this year, said Tony Trippe, managing director of the Dublin, Ohio-based company.

“Everybody in the market is realizing there’s an enormous opportunity there,” said Paul Desormeaux, a senior analyst with Toronto-based Decision Resources Group. “Other players are starting to come in, and there’s a lot of competition to make advanced products.”

Insurance coverage for new devices has increased, and there’s a growing number of partnerships between health companies and traditional technology firms such as Alphabet Inc.’s Google, International Business Machines Corp., and Fitbit Inc.

Abbott Laboratories, Roche Holding AG, DexCom Inc. and Medtronic Plc are the top owners of patents, with San Diego-based medical device company DexCom having shown the highest rate of growth since 2015, Trippe said.

Desormeaux is projecting the market for continuous glucose monitors like those used by Fortune to reach $2 billion in 2026, up from $670 million in 2017. That figure doesn’t include devices like insulin pumps, smartphone applications, more traditional products like one-time blood tests, or projections for new products like an artificial pancreas.

“We have so many choices that are more innovative now, than what we had when I was diagnosed,” said Fortune, now executive vice president of the Diabetes Foundation of Mississippi. “With the latest technology, it is much easier to manage and it is only getting better.”

 

Source: Sensors to Smartphones Bring Patent Wars to Diabetes Monitoring – Bloomberg

Data breach exposes vulnerabilities at GM, Ford, Tesla, Toyota and dozens more

Data breach exposes vulnerabilities at GM, Ford, Tesla, Toyota and dozens more

A few months ago in episode 59 of the Cocktail Investing podcast, we discussed the looming cybersecurity threats to be had in the corporate supply chain. After that conversation, we figured it was only a matter of time until a high profile supply chain attack occurred. It was only a matter of months until the vulnerabilities for several automotive companies and their suppliers were exposed. How they address it means more spending associated with our Safety & Security investing theme.

To check out our latest Cocktail Investing podcast, click here.

 

Security researcher UpGuard Cyber Risk disclosed Friday that sensitive documents from more than 100 manufacturing companies, including GM, Fiat Chrysler, Ford, Tesla, Toyota, ThyssenKrupp, and VW were exposed on a publicly accessible server belonging to Level One Robotics.

The exposure via Level One Robotics, which provides industrial automation services, came through rsync, a common file transfer protocol that’s used to backup large data sets, according to UpGuard Cyber Risk. The data breach was first reported by the New York Times.

According to the security researchers, restrictions weren’t placed on the rsync server. This means that any rsync client that connected to the rsync port had access to download this data. UpGuard Cyber Risk published its account of how it discovered the data breach to show how a company within a supply chain can affect large companies with seemingly tight security protocols.

This means if someone knew where to look they could access trade secrets closely protected by automakers.

Source: Data breach exposes trade secrets of carmakers GM, Ford, Tesla, Toyota | TechCrunch

U.S. auto demand likely to see a post-Harvey pickup

U.S. auto demand likely to see a post-Harvey pickup

The tallies for the damage inflicted by Hurricane Harvey are rolling in, and in the coming days, we expect to see those figures refined even further. Retail and restaurants will clearly feel the pain, but so too will automotive dealerships in and around Houston, the fourth largest city in the U.S. This is likely to have a negative impact on August auto & truck sales. However, with estimates calling for “several hundred thousand vehicles” ruined as a result of the hurricane, the industry could see a boost in the coming months as replacement demand picks up. This would be welcomed by an industry that is seeing declining sales, rising inventories and aggressive use of incentives. The problem is this would likely be a temporary surge, and it also assumes the potential buyers of those cars can afford them.

 

Hurricane Harvey and its catastrophic aftermath likely destroyed more vehicles than any other natural disaster in U.S. history, according to several early reports.

The calamity likely ruined several hundred thousand vehicles along the Texas Gulf Coast, including more than 1 in 7 cars in the Houston area alone, according to Evercore ISI analysts.U.S. auto sales suffered a temporary setback in late August as flood waters shut down hundreds of Texas dealerships. But sales are likely to get a boost in the fall as Texans scramble for transportation and spend insurance checks to replace their cars, sport-utility vehicles and pickup trucks.

Harvey destroyed about 300,000 to 500,000 vehicles owned by individuals, Cox Automotive chief economist Jonathan Smoke estimated. Insurance is expected to cover a large portion of those losses.

Source: Hurricane Harvey car damage worst in U.S. history

Auto Sales Miss Again

Auto Sales Miss Again

While the mainstream financial media does its darndest to convince investors that the weak Q1 GDP was once again due to “seasonal” factors, the Cash-Strapped Consumer showed up again this morning as auto sales for April came in weaker than expected again, after a rough March.

With about 84 percent of the industry reporting at this point, the overall sales pace is tracking at 16.67mm SAAR versus expectations for 17.10mm. Here is the breakout by company:

  • Ford (F) down 7.2 percent yoy
  • Toyota (TM) down 4.4 percent yoy
  • General Motors (GM) down 5.8 percent yoy
  • Fiat-Chrysler (FCUA) down 6.6  percent yoy
  • Nissan (NSANY) down 1.5  percent yoy
  • Mercedes (DDAIY) down 7.9  percent yoy
  • Mazda (MZDAF) down 7.8 percent yoy
  • Honda (HMC) down 7.0  percent yoy
  • Volvo (VOLVF) up 15.4 percent yoy
  • Volkswagen (VW) up 1.6  percent yoy

With only two companies reporting better sales on a year-over-year basis, April was another rough month. We did see one slightly bright spot out of Ford (F) where overall sales of trucks were up 7.4 percent year-to-date over last year. These could be a barometer for the health of small businesses, which we’ve seen have been more optimistic of late on hopes for tax reform in their favor.

So far consumer income and overall spending have been disappointments, and now auto sales came in weaker than expected. That argument for “seasonal” weakness in Q1 isn’t looking too strong.

Markets and auto sales in reverse

Markets and auto sales in reverse

Last week the S&P 500 lost 1.4 percent, the largest weekly loss since the week before the election. No wonder investors pulled $9.1 billion net out of mutual funds, resulting in the steepest weekly redemption rate since last June’s Brexit freak-out. This move reverses about 10 percent of the some $90 billion of inflows since the election as the Trump Trade loses steam in the face of weakening hard data. When we look at what happened in March versus January and February, we can see how investors could get spooked.

In January and February, most everything was moving up, save for the energy sector.

XLY Chart

By March sector performance has shifted around significantly, with most every sector now in the red for the month.

XLY Chart

 

Looking into the details a bit, we see that the 50 stocks in the S&P 500 with the largest exposure to domestic sales fell 4.2 percent in March while those with the most global exposure were flat – a stark contrast from the earlier narrative of deregulation and protectionism which boosted small cap stocks with a heavy domestic focus. We are also seeing a move back into quality and liquidity with the largest 50 companies in the S&P 500 outperforming the smallest 50 by 3.6 percent in March. We’re also seeing more defensively positioned companies, like real estate investment trusts (REITs) and other dividend stalwarts come back into favor.

Aside from equities, we’ve seen bond yields cease their upward climb as the dollar has rolled over and even the Mexican peso is now up 15 percent year-to-date in an apparent refutation of a NAFTA rethink. While the mainstream financial media may be jawboning about growth that is right around the corner, core capital spending orders are flat year-to-date and up all of 1.3 percent year-over-year from 2016’s painfully depressed levels.

For all that talk of the consumer in a giddy mood with the Michigan Consumer Confidence Index hitting a record high, real consumer spending just experienced its worst three-month rate of change since 2012.

Oh and remember how we’ve been hammering about how if things are oh so rosy why is the auto sector having a rough go of it? Well, it just got rougher. With about 80 percent of the auto industry reporting so far this morning, sales are tracking to be coming in at the lightest pace in almost three years. So much for accelerating spending.

  • Honda (HMC) started the reporting off with a miss, down 0.7 percent. This miss is particularly painful as March 2017 has a more favorable sales calendar and day trade adjustment than 2016.
  • Nissan (NSANF) and Mazda (MZDAF) did better, up 3-5 percent year over year.
  • Ford missed big time, down 7.2 percent year over year versus expectations for 5.9 percent decline.
  • GM (GM) missed estimates as well, up 1.6 percent versus 7 percent expected.
  • Fiat-Chrysler (FCAU) missed with a 5 percent volume drop versus expectations for roughly no change.
  • Toyota (TM) sales in the U.S. fell 2.1 percent.

Our Cash Strapped Consumer may be feeling better, per sentiment surveys, but they certainly aren’t out buying and unless we see some real wage gains or (and this is decidedly not a long-term solution) consumer credit starts flowing more freely, spending can’t get much more robust. In many respects these sentiment and confidence surveys are like watching a person consume an excess amount of alcohol – at one point they are feeling great and all is well with the world, but it’s only a matter of time before they are reaching for Drinkwell, Alka Seltzer and other hangover remedies as they contend with the next day’s reality.

First disappointing May auto sales, now Jamie Dimon sounds the alarm on auto loans 

First disappointing May auto sales, now Jamie Dimon sounds the alarm on auto loans 

While some see a booming auto market, there are reasons to be concerned as subprime loan volumes mount. Yes, those two dirty words are once again back in vogue, kicking up memories of the housing crisis and giving rise to thought the automotive market could be over inflated at best and at worst preparing for a pop. Following May sales declines at  Ford, GM, Volkswagen of America, Honda, Toyota and Nissan, Dimon’s comments are likely to question the vector and velocity of the domestic automotive market in the coming quarters.

 

Auto-loan balances surpassed $1 trillion in the first quarter, a record, growing 11% from the year-earlier period, according to credit reporting firm Experian. That is fueled by the growth in car sales in recent years as well as loosening underwriting standards that also have made it easier for subprime borrowers to get financing.

The volume of car loans held by subprime consumers increased by 11%, outpacing the 9% increase for prime customers, according to Experian.

“Auto is clearly a little stretched, in my opinion,” the JPMorgan Chase CEO said Thursday morning, speaking at the AllianceBernstein Strategic Decisions Conference in New York. “Someone is going to get hurt. … We don’t do much of that.”

Source: Jamie Dimon just sounded the alarm on auto loans

Italy and California: A Sisyphean Nightmare?

Italy and California: A Sisyphean Nightmare?

I think most people are clear that in a robust, healthy economy entrepreneurs are able to quickly turn their ideas into reality, in the process creating jobs and occasionally having an enormous impact on the way we live, as in the case of Apple, Amazon, and for the ladies out there, Spanx.  My two homes, Italy and California both appear to be hell bent on becoming Sisyphean nightmares for not only the budding entrepreneur, but even for well-established, international corporations.

Yesterday the Wall Street Journal ran a piece entitled, “Can Italy Find it’s Way Back?”  The article opens with an example of just how difficult it is to get a business going in the country.  We are told of an entrepreneur who bought a tract of land when he was 45 with the intention of building a supermarket on it.  At 88 years old, he’s finally received the necessary permits!  Seriously!?  Colleagues of mine in Italy have shared similar insane tales of government bureaucracy, their frustration mounting and gesticulations increasingly animated as the bottles of vino empty.  It is Italy after all and intense conversation requires a good bottle of champagne or a rich bottle of red.

California is moving rapidly in the same direction, making it more and more difficult for entrepreneurs to translate a passion into reality, while for existing companies the regulator and tax burden is pushing them to locate elsewhere.  The headlines for years have told of one company after another deciding to leave the state.  Carl’s Junior announced that it would not open one more restaurant in the state because it takes too long and is too expensive to get through all the red tape.  Just this week Toyota announced it is moving a facility it has had in Torrance, California for over 30 years to Texas.

This is what I like to call, for obvious reasons, Elle’s Law of Unintended Consequences whereby bureaucrats’ attempts to protect invariably end up harming the very thing their legislation intended to protect.

Entrepreneurs, being adventurous types by definition, rationally choose to go where there are fewer barriers to success.  Large corporations may find that over time, the benefits of being in a specific locale are falling further and further below the associated costs.  When bureaucrats enact legislation that creates barriers, any reasonable businessperson will have to compare the associated costs with the potential benefits of operating under such conditions.

In Italy, labor laws have become so onerous that the economy is bizarrely bifurcated into two distinct types of businesses:  very small, family-run, mom-and-pop shops and large multi-national corporations that were already large by the time they entered the Italian market.  Why is this?  The labor laws that were enacted in Italy with the intention of protecting workers have made it inconceivably risky to hire anyone, because if it doesn’t work out, firing them is almost prohibitively costly.  If you have a small shop, with just you and your partner, it is insanely risky bring on additional help, so you simply don’t grow.  The economy is deprived of the potential success you could have had if the risks of expanding weren’t so great!  Think of how many jobs wouldn’t exist today if Google had never made it out of the basement.  Large multinationals that come into the country face a slightly easier mountain as for them, the likelihood of a high portion of hires not working out is fairly low.  Due to their size, they can survive having some level of deadweight, unlike the small firms.

Unfortunately, the damage doesn’t stop here.  The culture of protecting labor in this manner comes from a history of communism and socialism that emerged as a violent reaction to the hell experienced under fascism.  This mentality applies subtle negative attributes to those who attempt to be special, to do something unique and worthy of attention.  Thus there is a disincentive for putting in the extra effort, for taking the risks associated with overachieving and given this cultural climate, overachievers aren’t compensated much more than their colleagues who do the bare minimum.  Couple this with the reality that it is really difficult to fire someone, so imagine the incentives!  Shockingly enough, human beings, like all animals, respond strongly to incentives.  If I won’t get compensated much more for working my tail off, why would I put in the effort and take the risks to be outstanding?  If I can’t be fired, the floor for the level of performance I consider reasonable is going to be a lot lower than if I know there’s a line of people just waiting to take my place!  Now while we’ve all had days when this situation would sound awful comfortable, think about what it means for the performance level of the society as a whole.  How often have you heard envious tales of Italian efficiency and professionalism?

Is it any wonder that Italy’s economy is essentially stagnant?  How can it possibly grow when entrepreneurs are so heavily hamstrung and when workers have very little incentive to do more than the bare minimum where their is neither a carrot, nor a stick.

Sadly, every time I leave Italy and return to California I am struck more by the similarities than the differences.  The U.S. would be wise to look across the pond and understand what it is that is keeping so many countries in the eurozone economically stagnant and fight like hell to move in the opposite direction.

Toyota and GM Recalls

Earlier this week I spoke with Graham Ledger on the recent Toyota and GM recalls.  So far this year, automakers have recalled about 9 million vehicles in the U.S. If that pace continues, the nation would break the record of 30.8 million recalled vehicles set in 2004.

Toyota’s recalls come as rival GM recalls 2.6 million small cars for defective ignition switches the company links to at least 13 deaths. Of those, 2.2 million are in the U.S. As that crisis unfolded, GM announced recalls of another 3.4 million U.S. vehicles.

Toyota’s latest recalls were announced before the company even developed specific repairs. They come two weeks after the Justice Department skewered the Japanese automaker for allegedly covering up problems that caused unintended acceleration in some cars starting in 2009. Toyota agreed to pay $1.2 billion to settle that case, but federal prosecutors can resurrect a wire fraud charge if the company fails to comply with the terms of the settlement.

The bigger picture is that Toyota’s cars are hardly unsafe. For the 2001-04 model years, for example, Toyota and Lexus accounted for five of the 12 models with the lowest death rates per driver year, and zero of the 12 with the highest. But the company is a multinational whose bottom line depends on a return to good publicity and putting legal troubles behind it in the huge U.S. market.

Is all this a triumph for safety? Or in the case of Toyota, have aggressive federal prosecutors seized on relatively minor missteps to stampede an image-conscious company into a big payout?

As for GM, the bankruptcy and government bailout complicate the feasibility of class action lawsuits.

While clearly the deaths linked to the GM defects are horrific and worthy of much furor. We’re also seeing a trend in enormous government crackdowns on the private sector with enormous fines that lead one to question the utility and purpose of such aggressive actions.