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The demise of the auto industry?

The change that is sweeping through autos neither new nor unique

The demise of the auto industry?

The apparent decline of the auto sector, with new car sales just not taking off, is now seen as a deep crisis by many people. It's not hard to come across investors and investment analysts holding the view that as long as auto sales do not get back to roughly the kind of levels and growth that we were seeing till a few years ago. The auto industry is the bellwether of some equity investors' mood.

This is indeed the way it used to be. It used to be hard to imagine a modern economy doing well and auto sales not growing. For about 100 years now, this has been more or less true for most of the world. In India, this has been true since the late 80s, with the rise of Maruti. However, we may be seeing a fundamental shift today. Electric vehicles, app-based ride hailing, vehicles-as-a-service are here and the connection between a certain level of prosperity and a certain level of car usage is now broken. In fact, the narrative has changed so fast that the impending doom of the auto industry is just a breath away from becoming conventional wisdom.

At this point I could say one of two things, both equally convincing. One, I could say that habits don't change so fast, people will be buying cars for decades etc etc. Or two, I could agree with the new conventional wisdom that the auto industry is doomed.

Either way, it does not actually matter to my real topic here, which is how investors can possibly cope with what looks like a high rate of change. This goes well beyond just the auto industry. Whenever anyone looks back at a longish period of equity investing, it's almost a tradition to say that there were a lot of ups and downs. Of course, such a statement is pointless--it's what statisticians call a 'vacuous observation'. Something that is true, and yet pointless.

There are always ups and downs in the equity market, in fact, it would be news if there was an extended period of time when there were no major ups and downs. In fact, one gets an exaggerated sense of stability when one observes the equity markets as a whole, especially using large cap indices like the Sensex or the Nifty as references. However, for the last few years, it has been clear to any thinking investor that something bigger than this normal volatility is afoot. The wind of change that is driven by technology has now become a storm of transformation. In just a few years, not just companies, but entire industries are looking completely different from what they used to.

There are two aspects to this. One, entirely new kinds of businesses have been created. Google and Facebook are the biggest examples but there are many others. Nothing like Uber or Ola ever existed earlier. I mean, taxis is not a new phenomena in this world, but the scale at which such companies can organise and aggregate information transforms the simple act of calling a taxi into a completely new kind of activity. The kind of strong waves of change that are hitting the auto industry happen once every few years. In fact, at the beginning of the auto industry, there was a similar shift from animal-drawn urban transport to motorised transport.

So what should investors do? At the most basic level, this is one of the most basic problems that diversification solves. Companies and sectors will face all kinds of wrenching changes, some temporary and some permanent. However, there is often something else that does not change.

Many years ago Amazon's founder and CEO Jeff Bezos wrote this: I very frequently get the question: "What's going to change in the next 10 years?" And that is a very interesting question; it's a very common one. I almost never get the question: "What's not going to change in the next 10 years?" And I submit to you that that second question is actually the more important of the two -- because you can build a business strategy around the things that are stable in time. ... It's impossible to imagine a future 10 years from now where a customer comes up and says, "Jeff, I love Amazon; I just wish the prices were a little higher." "I love Amazon; I just wish you'd deliver a little more slowly." Impossible.

Bezos has put his finger right on not only the most important thing in running a business, but also in being an equity investor.

In the firestorm of change, investors should focus on what does not change.

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