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We have a new video from Sandy Munro talking about how legacy auto makers are still playing "checkers" while Tesla and the Chinese electric vehicle makers are playing chess. We'll go over what Sandy Munro is saying here and why it matters.
An OEM is an original equipment manufacturer. Many of the legacy auto makers have supply chains for their parts and engines that rely on these OEM's.
It's important to note, that a company like Tesla makes much of its vehicles in-house, but does still need to rely on suppliers.
Sandy is a big fan of EV companies because they are disrupting legacy auto makers with battery power. Sandy's company does not work with the "big boy" OEM's and doesn't have any business with them.
Sandy uses many sources and compares the legacy auto makers and OEM's to those with a scotoma or blind spot to reality in that they are blind to what is coming for the future and will ultimately fail and be disrupted because of that.
Playing Chess Analysis
Pawns: The shareholders. They have very little knowledge of the true workings of the OEM's and must rely on the words they read in the financial papers.
Most of the analysts also read the same news but get to attend gala marketing events where the "Happy talk" about the products is as plentiful as the Champagne and jumbo shrimp. So the feed back of the Pawns is a tornado of speculation, false and true news, and mostly garbage. The Pawns are always in jeopardy.
The Rook: Like inventory, assets, and debt of the OEM's. Just like the real-estate market, they can only move up down left or right. The Rook is supposed to save you through "assets and liabilities". This is like "too big to fail".
Sandy believes the American people have had enough of save the "Hometown Boys". Assets will turn into malls, or housing developments, or parks, similar to what happened in Pittsburgh when all the steel mills closed.
The Bishop: Are like the Tier supply community. Tier's move diagonally between the normal pieces and the Tier's must keep up with the times because they are not really connected permanently to the OEM so they move their technology from OEM to OEM. Tier 1 you interact with directly; Tier 2 supply Tier 1 and Tier 3 suppliers typically work with raw materials.
The Knight: New technology that is continuity dropping in when you don't expect it or sometimes want it.
When you learn to play chess, a master will always tell you to watch out for the Knight because he move in an L shape. In the OEM game, Knights are a constant pain because you get the technology too early when you don't need it or want it. New technology can kill your engineering career and most politically minded engineers will run from a new supplier with a good idea. In the big OEM world, you get promoted by saying "No!" a lot.
The King: OEM - slow to move and only one square at a time. The King may be the center of the game, but they have their issues with not being nimble.
The Queen: The Queen protects the King and the Queen represents finance. She can move in a straight line in any number of squares. She is the most powerful piece on the board. Cash is the mother's milk of the success and if the Queen sneezes, the King gets pneumonia.
Gas Cars and Legacy Auto Makers
Gasoline will continue to go up in price significantly. Sandy sees the average gas price being $5 per gallon within 2 years. Along with rising gas prices and maintenance, EV's sold will be 30% cheaper overall than a gas powered vehicle. Nobody is going to want a gas car and that will happen soon.
Sandy shows a slide of the debt in the auto industry. It's worth seeing that Suzuki, Kia, and Tesla are the lowest with debt and VW, Toyota, Daimler, BMW, and Ford have the highest debt. And the difference in debt is enormous. VW group has 259.9 Billion dollars of debt with Tesla having only 11.7 billion dollars of debt (as of April 7, 2021). Tesla has even less debt now.
Sandy asks, "How in the world will you pay $260 billion dollars of debt back?". Sandy doesn't understand how the rest of the chess pieces that there is something in it for them when the debt load of the queen is so high.
The Altman "Z" Score
Sandy shows the Altman Z Score, which explains which companies are at most risk for investing in. This may explain why Tesla has moved up so fast in price and other auto makers aren't moving much. To see an explanation of the Altman "Z" Score, please visit Wall Street Mojo Altman Z Score.
Sales and Forecasts
If you have a look at U.S. monthly sales by group, you can see that Toyota has sold the most vehicles in October, 2021. Other legacy auto makers are selling large volumes of vehicles in the U.S. and China. But they aren't making much money on the sales of each vehicle.
It looks like it's going to be rosy times for Toyota, VW, and other legacy auto makers. This means that it seems like things are going good for them today, but the reality is that a storm is coming.
First, look to the future in EVs: Norway has an 87% adoption rate, Denmark a 40% adoption rate, and Germany a 30% adoption rate. Tesla has the largest slice of the pie for EV brands in Norway.
What will happen to the regular auto makers when Chinese auto makers show up with better made cars for a better price. 30% of new cars in Germany are EVs. That's a pretty big deal.
Times are Changing
It's going to be tough for legacy auto makers and OEM's. The rules are different. The reason is due to huge growth in China. China EVs are being sold at a ferocious rate.
In 1963, GM has 50% of the vehicle market, with Ford at 26%, Chrysler at 11.4%, and VW at 3%. GM now has a 13.3% market share, with Toyota at 14.5%. How do you go from 50% to 13% market share? You get disrupted by better vehicles in a paradigm shift.
In 2030, the players will be different than in 2021. Stellantis, GM, and Ford are declining. Tesla is rapidly increasing. It appears that Tesla and Chinese EV manufacturers will be the key players. It's not going to be long before Tesla overtakes all other auto makers.
Toyota, VW, Honda, Ford are all in trouble if they don't make efficient EV's now. Tesla is going to win the race in China hands down. Tesla is leading the way. There appears to be a "valley of death" that will occur around 2025.
This was a little more technical and detailed article than I usually write, but it's important to see the patterns and trends that are occurring, and Sandy does a great job explaining what is going on in the disruption and transition to electric vehicles.
What do you think of Sandy Munro's video? Is he accurate? Will any legacy auto makers survive?
Leave your comments below, share the article with friends and tweet it out to your followers.
Jeremy Johnson is a Tesla investor and supporter. He first invested in Tesla in 2017 after years of following Elon Musk and admiring his work ethic and intelligence. Since then, he's become a Tesla bull, covering anything about Tesla he can find, while also dabbling in other electric vehicle companies. Jeremy covers Tesla developments at Torque News. You can follow him on Twitter or LinkedIn to stay in touch and follow his Tesla news coverage on Torque News.
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