Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE DISSERTATION ON HOW COVID-19 AFFECT THE AUTOMOTIVE INDUSTRY TRAN DUY HUNG ID No: 19046136 Intake 3 Supervisor: Dr. Pham Thu Thuy September 2020 17014126621831000000 ACKOWLEDGEMENT The past twelve months being student of MSc programs from the University of the West of England have been wonderful to me. The lecturers are very enthusiastic, while the subject of study are usually realistic and highly applicable. Thus, Im very happy and certainly will recommend the course with my collegues and friends whenever I have the chance.
I would also like to exprerss my sincere thanks to Dr. Pham Thu Thuy for her supervisor and guidance. She gave me great suggestions from establishing research methodology and organisation so I could be able to complete my work. Im grateful for all other lecturers and the staff at UWE and Banking Academy who support me throughout the programs.
And finally, thanks my parrents who support me for both their encouragement and financial supports. 1 EXECUTIVE SUMMARY This paper values four representative companies of the automotive industry – Toyota, Ford, Tesla, and General Motors to see how Covid-19 pandemic has caused impacts on these company valuations and financial strength, using financial ratios and two valuation models. Based on the analysis results, Toyota is regarded as the most investment-worthy company at present. Therefore, investors are recommended to invest in the stock of Toyota Company.
We also approach this four companies from the Macroeconomics, the automotive industry potentials to their own business model and strategies to have the comprehensive views before proceed to the evaluations. 2 TABLE OF CONTENTS Pages ACKNOWLEDGEMENTS…………………………………………………………………… 1 EXECUTIVE SUMMARY…………………………………………………………………… 2 TABLE OF CONTENTS……………………………………………………………………… 3 CHAPTER 1: INTRODUCTION……………………………………………………. An overview on the Automotive Industry……………………………………… 7 1. Area of the study……………………………………………………………….
Methods of the study……………………………………………………………. 9 CHAPTER 2: MACROECONOMICS ANALYSIS………………………………. The Global economy outlook of 2020: PEST analysis…………………………… 10 2. The United States market………………………………………………………….
The European market………………………………………………………………14 2. The Asia – Pacific market………………………………………………………….15 CHAPTER 3: Industry Analysis – Porter’s 5 Forces……………………………… 17 3. Rivalry among Existing Firms……………………………………………………. Threat of Substite…………………………………………………………………17 3.
Threat of New Entrants…………………………………………………………. Bargaining Power of Suppliers………………………………………………… 18 3. Bargaining Power of Buyers……………………………………………………. 19 Chapter 4: TOYOTA COMPANY………………………………………………… 20 4.
Business model and strategy……………………………………………………. Key financial ratios………………………………………………………………26 4. Discounted Cash Flow Model (DCF)………………………………………. Suggested target price……………………………………………………….
30 Chapter 5: FORD COMPANY…………………………………………………. Business model and strategy…………………………………………………… 31 4 5. Key financial ratios ……………………………………………………………. Discounted Cash Flow Model (DCF)………………………………………… 40 5.
Suggested target price………………………………………………………… 41 CHAPTER 6: TESLA MOTORS…………………………………………………. Business model and strategy……………………………………………………. Key financial ratios………………………………………………………………50 6. Discounted Cash Flow Model (DCF)………………………………………… 52 6.
Suggested target price………………………………………………………….53 5 CHAPTER 7: GENERAL MOTORS……………………………………………. Business model and strategy……………………………………………………. Key financial ratios……………………………………………………………. Discounted Cash Flow Model (DCF)……………………………………….
Suggested target price………………………………………………………. 62 CHAPTER 8: CONCLUSIONS AND RECOMMENDATIONS References Appendices 6 CHAPTER 1. An overview of the automotive industry If 2019 was a year of considerable disruption and turbulence in the auto industry, 2020 will likely see even more. A cooling economy in China aggravated by the prolonged US-China trade war, a struggling automotive market in India, and a looming Brexit, coupled with tough emission standards in Europe, continue to adversely affect global automotive demand.
The lower economic activity and consumer confidence mean continued depressed vehicle sales. Leading automakers, including BMW and GM, have announced guidance for lower profits and sales in 2020. Global automotive demand is flat-lining; quite different from the typical “peaks and troughs” cycles seen before. There are also profound structural changes visible.
The sacred order of the automotive ecosystem is under threat with disruptive forces – such as vehicle connectivity – encouraging new technology entrants to rethink the way we move around. Lifestyle and mobility preferences are changing as frequently as the apps on smartphones. The COVID-19 outbreak continues to develop fast. The disruption has been felt by both auto manufacturers and OEMs (Original Equipment Manufacturers) that produce parts and materials necessary for the manufacture of new vehicles.
At the same time, dealerships have seen massive drop-offs in demand and plummeting sales as retail traffic has slowed to a near stop. In some areas, dealers have been allowed to keep their stores open, but in others, they've been asked to shut down temporarily. These places are turning to alternatives, like digital showings, limited hours and social distancing policies. 7 No matter what strategy a manufacturer takes, however, they should prepare for a long period of decreased demand and general market instability.
All manufacturers should plan for a slow restarting of the global supply chain. The automotive industry will restart production at the same time as OEMs, meaning there could be significant strain on the auto parts supply chain. Because automotive is such a massive industry — accounting for an estimated $5.5 trillion of the global economy — the impacts it feels will likely have a ripple effect. Fortunately, experts predict that once the recovery begins, the demand may return quickly.
The Bank of England has warned that the UK is set to enter its "deepest recession in 300 years" but also predicted a V- shaped recovery, meaning that the economy is likely to bounce back as fast as it declined. Again, when that recovery will begin still isn't clear. Demand may not start rising until consumers feel confident in making large purchases. This may not be until after a vaccine for the novel coronavirus has been developed — a process that could go on for months.
Area of the study This study is proposing to analyse the performance and evaluate the intrinsic values of four leading companies in the automotive industry, namely Toyota, Ford, Tesla Motors and General Motors. The analysis refers to three largest regions where these companies operate, including USA, Europe and Asia- Pacific. The dissertation also aims to gain better understanding of the leaders in the automobile market and give investment recommendations for investors regarding these firms. Study Objectives 8 The following report objectives was developed to see the whole picture of the automotive industry and provide valuable investment recommendations: 1) To provide insights on the automotive industry 2) To analyse main macroeconomic factors and key economies where automotive industry product are consumed the most, namely USA, Europe and Asia- Pacific.
3) To To analyse the automotive industry in the three regions above 4) To analyse financial ratios of all four companies selected according to their financial situations, with emphasis on Debt-to-Equity ratio, Inventory Turnover ratio, Return on Equity ratio. 5) To calculate intrinsic value of these leading firms with valuation models. 6) To conclude final investment recommendations following the analyses and evaluation of four companies’s intrinsic value. Method of the study Top-down analysis method will be used.
Hence, the study starts with assessing the national economic environment of the automotive industry, followed by the automotive industry its selft. Finally, the study looks at performances of companies and suggests a price on the basis of the employed valuating models. The Global economy outlook of 2020: PEST analysis 2.1 Political The role of government or regulatory agencies in the area of international business has necessitated special focus upon political factors. Automobile companies’s business is affected by many major political factors from 2018 to 2019.
They are Brexit and the trade wars. The uncertainty created by these factors have an evident effect on its business in the previous year. Automotive industry must revise its business strategies to consider the downward pressure created by these forces. Trade conflicts in 2019 made it a challenging year for the entire industry.
However, the industry has still proved itself to be versatile and managed the increased pressure quite efficiently. The uncertainty in the political environment could cause a negative effect on auto stocks globally. From the elections in Italy to the trade disputes between China and America, the U. and Europe, several political changes around the world continued to affect auto stocks and sales.
Other factors like trade restrictions, customs policies and international trade policies also had a definite impact on vehicle sales in both 2018 and 2019. The automotive industry has made the political conditions around the world an important priority in terms of business planning. Controlling political risks is difficult because the political environment of any market can be difficult to predict and sudden changes can force auto brands to change their strategy. While these risks are not under their control, compared to other risks, political and legal risks can create higher pressure.
These risks are best overcome through focus upon customer experience and business planning. Economical 10 The global economic environment create direct impact on every automobile brands. When the economic conditions are not good, the sales of vehicles fall. In 2020, due to the severe impacts of Covid-19, many countries are expected their economic’s growth rate to be negative, meaning demands for automobiles will be affected.
Automotive industry is forcasted to have revenue decreased becaused of this overall situations. USA’s GDP plummet 32,9% in Quarter 2/2020 compared to the same period of 2019 (BBC,2020) Experts aren't confident when demand will return to normal. Consumers are likely willing to make significant investments once they are facing less uncertainty. Many people right now aren't sure how secure their employments or asking how long they should expect the virus to last.
It's likely that consumer confidence and demands for new vehicles won't recover soon until the end of the crisis is in sight. 11 A vaccine for Covid-19 is a long way ahead, even with modern medical technologies and global commitment of resources accelerating development. Before a vaccine is available, shelter-in- place orders and social distancing are required to slow the spreads of disease. In countries that have begun to reopen their economies, fears of a second wave have pushed governments to reinstate closures and other public health measures.
Manufacturers will probably be handling this crisis through the end of the year at least, and possibly well into 2021. COVID-19 may shift consumer demands for cars permanently. There is some evidences that new habits — such as avoiding public transportation in favour of private vehicles may continue, even when the crisis is over. Sociocultural Factors Society and culture are centrals to international businesses.
If a company want to perform in the international environment, it is important to watch these social and cultural changes. In recent years, the society and cultures have changed tremendously. Digital technologies is changing the society and the world. It is changing people’s lifestyles and giving rise to new trends.
From Asia to Europe and the Americas, society has undergone a major changes in a decade. The relationship between society and businesses is changing. Businesses are now focusing on building strong relationships with their customers and employees. Digital technology is changing every industry but it is also changing people’s lives.
Most automobile brands are using digital technology to give their customers a superior experience. Needs of customers are changing. Leading companies has also adopted its business strategy to suit the desires and expectations of its employees. People are looking for cars with many options advanced technologies which provide a safer driving 12 experience.
They also like cars with lower emissions. Many firms other then Tesla are also investing in autonomous driving technology since the demand for such cars has grown. In 2019- 2020, demand for electric cars shot up. It was evident in higher sales of electric cars by brands including Tesla, BMW and Volkswagen.
All leading car brands are now investing in electric cars. These cars are fuel efficiency and are better for the environment. This has helped brands grow sales and maintain growth momentum even in difficult times. Another important factor is the social responsibility that automotive companies bear.
They must focus on social responsibility and investing in projects that benefit the community. An integral part of some firms’s program included social engagement. It has supported intercultural exchange for several years now. The company awards exemplary projects in this field in partnership with the UN Alliance of civilisations.
It also rewards the employees for exemplary contribution through volunteering.