Shorting ICE

[jhm]

Find the automakers with most resistance to change, those will be the ones to short. Toyota, Fiat, GM, Ford and BMW come to mind.

This is a good insight. My sense is that Ford is more resistant than GM or BMW. I largely base that on their current market share in the EV market. But one could like at other streams of information, qualitative and quantitative. For example, statements from management can reveal attitudes and ambitions...cough, Fiat. But ultimately all that talk comes down to what they produce and how they market it. So if we look at models and market share, I think they do say something about cultural resistance. For example, BMW seems to have some of the more compelling EV products and it shows on their market share, second behind Tesla. So it seems a fair inference that BMW management is willing to compete on the EV space, certainly not pathologically resistant.

 

[Olle]

BMW seems to have some of the more compelling EV products and it shows on their market share, second behind Tesla, for obvious reasons. So it seems a fair inference that BMW management is willing to compete on the EV space, certainly not pathologically resistant.

I thought a lot about this too, before I recently sold my BMW shares which I had for almost a decade. I used to believe in them. Here is my problem with BMW now. Shareholders demand that they develop EV to compete with Tesla, for obvious reasons. Management has too much power, so they refuse. The only choice is to create an inferior sub brand (i) and to create a parallel organization for it so that the ICE people can remain undisturbed in their reign of what they believe are the true BMW products.

Until they truly consider their own EVs to be their most desirable cars, remove the ICE engines on the most coveted and luxurious vehicles, remove the i brand and call them BMW and consequently make their A team manage them, they have zero chance to compete with Tesla. Look at how many 7 series they sell compared to Model S or many reservations the 3 series has compared to Model 3...

 

[jhm]

I thought a lot about this too, before I recently sold my BMW shares which I had for almost a decade. I used to believe in them. Here is my problem with BMW now. Shareholders demand that they develop EV to compete with Tesla, for obvious reasons. Management has too much power, so they refuse. The only choice is to create an inferior sub brand (i) and to create a parallel organization for it so that the ICE people can remain undisturbed in their reign of what they believe are the true BMW products.

Until they truly consider their own EVs to be their most desirable cars, remove the ICE engines on the most coveted and luxurious vehicles, remove the i brand and call them BMW and consequently make their A team manage them, they have zero chance to compete with Tesla. Look at how many 7 series they sell compared to Model S or many reservations the 3 series has compared to Model 3...

I hear you. I've been disappointed with Nissan as well. I guess as managers lose market share, they may also lose A team status too. Not sure an aspiring executed would want to manage a line that loses revenue year after year. If that's what it takes, Tesla will keep pushing to that point.

 

[Olle]

I hear you. I've been disappointed with Nissan as well. I guess as managers lose market share, they may also lose A team status too. Not sure an aspiring executed would want to manage a line that loses revenue year after year. If that's what it takes, Tesla will keep pushing to that point.

Agreed. This will happen to Nissan, BMW and even more so to the ones who haven't really begun with EVs. But by the time the A-teams feel the hurt of losing market, you had the B teams managing the EV divisions for all those years, not gaining much against Tesla. (See how poorly Bolt is doing against Model 3. Although on paper they have similar specs. B team... btw its not a coincidence that they call them Chevy not Caddy. Caddy name is reserved for nice cars not some goddamn EVs...) Once their EV divisions have painfully morphed into A teams, it will be too late.

 

[Bangor Bob]

Until they truly consider their own EVs to be their most desirable cars, remove the ICE engines on the most coveted and luxurious vehicles, remove the i brand and call them BMW and consequently make their A team manage them, they have zero chance to compete with Tesla.

There's a saying about how creative destruction will either change the managers' minds, or change the managers. In my own industry, I'm forever allowing my mind to be changed...

 

[theschnell]

Somewhat related, I think the time may be right, unless you think the train already left the station, to short autoparts stores. Think about it, they had massive profits from 2009 forward because people were driving old junky cars they were trying to keep running. Fast forward to the past 3 years and new car sales have been through the roof, used car prices getting lower, so folks can upgrade a better used car, and junkers finally going to the junk yard instead of being repaired. Autozone, Advance auto, O'Reilly auto all down 15 - 20 % over the last 6 months. But why would the downtrend be temporary? Even if a recession looms, it takes several years for the car market to age again. And I don't anticipate a recession too soon. Then as electric vehicles become mainstream, their fate is sealed. I need to research which one is the most highly leveraged. I think this could be a very good play. What do you guys think?

Advance Auto Parts was in the low $130s when I made this post. Less than 3 months later, mid $80s. Literally there was only three things that prevented me from acting this idea.

1) The hassle of transferring money to brokerage account. I had already maxed out on TSLA and was not about to sell any of that, so needed to transfer more in and had not set up a bank transfer so would have to send check.

2) It was such a similar play as being long TSLA and since I'm already arguably overleveraged in Tesla, this strategy provided very little diversity.

3) My wife is totally afraid of short-selling and told me not to.

I was very confident that it would eventually play out this way, but was not sure of the timing. Played out a lot sooner than I thought. There is a lot of support for AAP in the low $80s, so I'm not going to touch it now. I am really disappointed I missed this one though. Oh well, just waiting for the next TSLA pullback and I'll put more there and over the long-term that will be a much better investment.

 

[ValueAnalyst]

I wouldn't move capital from TSLA long to ICE short, and I don't short anyway, but if I did, I would take a closer look to BMW.

They're priced high, and their margins (or market share) are about to take a tumble.

They can't expand BEVs quickly enough without battery supply (no one can).

They have high balance sheet leverage.

 

[neroden]

3) My wife is totally afraid of short-selling and told me not to.

Well, she's wise. The saying about short-selling is "the market can remain irrational longer than you can remain solvent". This time it played out right, but what if Advance Auto Parts has bubbled to $260 before sinking back to $80? In addition, you often have to pay interest to carry the short position.

For safety, to insure against the most catastrophic scenarios, experienced short-sellers buy "protective calls" (for instance, if you short-sold Advance Auto Parts at $130, you might buy protective calls to give you the option to buy it at $200, to limit your losses). Of course, as these expire, you have to replace them, so there's a continuous "insurance" cost if you're short-selling competently.

On top of that (!!!) the best possible return on investment simply isn't that great, compared to a long trade. I looked up the collateral requirements. If you short-sold one share of Advance at $130, you would have to have an additional $65 in your account in margin capacity. (On top of the cash received for the short sale.) If it drops to $85 and you close the trade there, you made $50 off your tied-up margin of $65, which is really a return of 50/65 = 77%.

That's without considering the costs of protective calls or interest on borrowing. And the risk is higher -- if the stock bubbles upward and you used a protective call at $200 as I described, you could still lose $70 on your initial tied-up-margin of $65, which is a greater-than-100% loss -- and in the interim, you would have to put more cash in or use up more margin capacity. If you win, it's a good return, but it's not Tesla, and the downside if you're wrong is much higher (since the worst possible downside on a long stock purchase is 100%).

Oh well, just waiting for the next TSLA pullback and I'll put more there and over the long-term that will be a much better investment.

Yeah.

 

[ValueAnalyst]

I expect Roadster 2.0 to hit Ferrari's stock, which by the way, is trading at 50x P/E.

 

[Olle]

Personally I believe that the heavy trucking industry will transition faster to electric than the passenger car industry, since trucking is based more on profit, less on emotions, compared to personal cars. There is a lot of old culture in truck manufacturing. Therefore I think that when Tesla Semi comes out, it might be a good idea to short the biggest oldest truck manufacturers, Volvo VOLV-B.ST : Summary for Volvo, AB ser. B - Yahoo Finance for example.

Did anybody here short Volvo? I didn't get around to, but saw how they tanked Friday after Tesla Semi reveal

 

[TheTalkingMule]

What's going to happen to the new ICE car market in the US when consumers realize the residual value of their purchase is 50% after 1-2 years? Who in their right mind will buy a brand new ICE car in 2023?

OK for $35k I can buy a 350mi range Model 3 with superior performance and no fuel cost, a similar EV from a legacy company, or a nice ICE Camry knowing it loses all resale value immediately. Very few consumers will opt for the new ICE 5 years from now and NOBODY will 7 years from now. We'll just run all these cash-for-clunkers era vehicles into the ground.

So I wonder.....we keep talking about auto parts stores getting hit first as EVs don't need nearly the maintenance. But won't we have a fairly long period where the lowest 60% income bracket hangs on to their old ICE even longer than they normally would? Yes, auto manufacturers without viable EV products will be doomed by 2021, but ICE auto parts might hang on for quite a while if there's enough cheap consolidation. It'll be like Mad Max, hold em together as long as we can.

 

[ValueAnalyst]

This marks the end of ICE: GM dips after U.S. sales fall more than anticipated - General Motors Company (NYSE:GM) | Seeking Alpha

Expect GM's losses to increase going forward and P/E ratio to surge in the next three to six months.

 

[neroden]

What's going to happen to the new ICE car market in the US when consumers realize the residual value of their purchase is 50% after 1-2 years? Who in their right mind will buy a brand new ICE car in 2023?

The depreciation / residual value hit is one I've been thinking about for a long time, but I haven't been able to quantify it or the behavioral response -- it's still a "wild card" in my analysis, albeit one which benefits EVs and hurts ICEs.

OK for $35k I can buy a 350mi range Model 3 with superior performance and no fuel cost, a similar EV from a legacy company, or a nice ICE Camry knowing it loses all resale value immediately. Very few consumers will opt for the new ICE 5 years from now and NOBODY will 7 years from now. We'll just run all these cash-for-clunkers era vehicles into the ground.

Makes sense. Even after people spot the instantly disappearing residual value of ICE cars, there won't be enough new EVs to meet demand, still. So people will extend the life of old ICE cars and buy used EVs (meaning that EV residual values will go *up*). This will create a positive feedback loop, at least among people who pay attention to residual value at all.

There is a serious question regarding what percentage of people pay any attention to resale value at all, of course. In the *truck* market I think nearly everyone pays attention to resale value and TCO. But in the private car market, people often make financially irrational purchases for prestige value, conspicuous-consumption Veblen type stuff, the same way people will pay for designer clothes, and they ignore TCO and resale value. Of course, Tesla's moving in on them too, by becoming the only car brand name with real prestige.

So I wonder.....we keep talking about auto parts stores getting hit first as EVs don't need nearly the maintenance. But won't we have a fairly long period where the lowest 60% income bracket hangs on to their old ICE even longer than they normally would? Yes, auto manufacturers without viable EV products will be doomed by 2021, but ICE auto parts might hang on for quite a while if there's enough cheap consolidation. It'll be like Mad Max, hold em together as long as we can.

 

[ValueAnalyst]

Note that GM's debt level has grown by an order of magnitude since taxpayer bailout and its quarterly free cash flow just turned negative.

Not a good combo.

 

[Esme Es Mejor]

I’m assuming that, by 2030, the auto industry will be dominated by autonomous EV fleets. ICE ownership will surely still exist, probably in larger numbers than horse ownership today, but it’s hard to imagine it as anything other than a niche activity.

Private EV ownership will surely still exist, probably in much larger numbers than ICE ownership, but probably marginal uses (families with young children, rural, luxury).

Most autos should be autonomous EV fleets— but I don’t have a good sense of whether “most” will mean 50+% or 90+%.

 

[TheTalkingMule]

In the short term I think autonomous EVs will actually keep ownership high. For every logical advantage of a public/private fleet, there's also an advantage to private vehicle ownership. I mean....living in a city and having a car that can be summoned and park itself? The ownership mentality is going to take a while to unwind. We're too deeply programed.

 

[Esme Es Mejor]

Under these assumptions, it seems that Ford, Fiat, Mazda, and (probably) Honda are doomed— even if they get serious now, they’re probably too far behind to survive.

Among the rest of the traditional automakers, who is most likely to survive the disruption? As uninspiring as GM is, at least they’ve put out a credible EV. Nissan has put out an almost-credible EV, as long as your climate is neither too hot nor too cold.

Among the rest, Daimler and BMW seem most vulnerable. Their high-end luxury has taken a beating from Model S & X, and their low-end luxury is poised to take an even worse beating from Model 3 & Y. And Daimler trucking is about to come under pressure. I don’t think either is doomed, but they’ll need to figure it out quickly.

Finally, Toyota, VW, Kia, and Hyundai seem to have the best chance to survive. They excel at low-cost, low-margin cars— a segment Tesla isn’t interested in until all other segments have been conquered. Which isn’t to say they won’t fail, too, just that they have the most time to figure it out.

 

[renim]

In the short term I think autonomous EVs will actually keep ownership high. For every logical advantage of a public/private fleet, there's also an advantage to private vehicle ownership. I mean....living in a city and having a car that can be summoned and park itself? The ownership mentality is going to take a while to unwind. We're too deeply programed.

for the next 100 years I agree, autonomy is the app for cars. for every citizen in the dying cities who losses car ownership because of it, 3 or so in the growing cities will get car ownership because of autonomy.

Private owned electric autonomous cars will be banned in progressive European capitals.
but globally, they are a must, people want their own kitchen as well as eating out.
people want their own couch, as well as the hotels
people want their own toilet, as well as public toilets.

people will want their own private autonomous EV, in addition to public autonomous EV services.

 

[theschnell]

Hi All,

Looking to revive this thread as I think the opportunity to start shorting ICE is coming up soon (6 -12 months) with the ramp up of Model Y.

My current thinking is to use long-term puts and start building a position about 6 or so months from now, but who to short? My first choice is BMW. I'm extremely confident that their sales in North America are about to take a major blow. And they seem to be delaying / abandoning their electric vehicle rollout rather than ramping it.

But there is a blindspot in that strategy. China is by far their largest market. While I'd like to assume demand in China will also fall similar to other regions, I can't safely make that assumption without more data as I don't hardly have any clue as to what drives demand for BMWs in China. In other words, if its purely for the prestige, will demand remain strong even when when the Model Y is significantly cheaper to both purchase and operate?

The other challenge with shorting BMW is that I don't know how to buy long-term puts on stock not traded on a U.S. exchange.

Would love feedback on this strategy.

I do plan to short Toyota eventually as well, if they continue on the trend of ignoring the shift to electric vehicles. However, I think the timing on that is still further out...

 

[TheTalkingMule]

We tend to focus on the death of BMW or VW and ignore the $220B behemoth who is STILL actively resisting BEV transition. What would you look for as a trigger to start shorting Toyota?