The global flow of capital for the auto industry will mostly go to automakers and suppliers with the heftiest plans for future technologies such as electric and autonomous vehicles, market investment analysts suggested Wednesday.
More auto companies are going to need capital lifelines in the coming years, both to maintain their critical R&D investments and production during periods of unpredictable consumer demand — such as during the current disruption due to the COVID-19 pandemic.
And it will be key for companies to have a strategy to survive short-term crises, John Casesa, senior managing director at Guggenheim Partners, said in a Zoom presentation Wednesday for the Center for Automotive Research Management Briefing Seminars.
But the competition is heating up for funding to support growth through the industry's technological transformation, said Rod Lache, managing director and senior research analyst at Wolfe Research.
"We think that sales are going to be lower for years to come," Lache said. "What's more concerning about that, at least from Wall Street's perspective, is that's going to happen at a point where investment is going to need to ratchet up."
Growth will take place where the capital flows, he said — which is largely why companies such as Tesla, Nikola Corp. and other new players are drawing unprecedented investor attention. They now have a competitive advantage in their access to capital.
"We've had nearly a decade of orphans of Wall Street," Lache said, referring to companies that do not command attention from investors. "Investors have been really having a tough time with businesses that they perceive as having low growth or they perceive as melting ice cubes."
The appealing companies, he said, are those that are "revolutionizing the industry, that can reinvent the business, sell directly to the consumer, sell software, do things that larger companies with legacy business models can't do," Lache added. "There are a lot of dynamics right now that are driving the valuation.
"It's a sexy place to be investing right now."
As a result of the fight for capital, companies will not only rush to refocus on future technologies, but will consider consolidation and other relationships, too.
"You may see some unique relationships forming that are not necessarily consolidation," Lache said.
Much of what determines whether a company wins or loses in five or 10 years will be dependent on the investments it makes today.
"If history is any guide," Casesa said, "you have these moments of dislocation that separates the men from the boys. And you wind up with companies that are well capitalized and companies that are not.
"I think that has happened here," he said of the auto sector.
"In this kind of environment, we expect consolidation," he added. "And we also expect strong companies to more strongly advance their position — and weak companies to get clobbered."