Profit machines

Indeed, after a gruelling period of recession during which even the world’s car capital, Detroit, went belly up, this notoriously cyclical sector is starting to show signs of recovery. Though a cooling economy and rising inventories means China, the biggest automotive buyer, is lagging from the highs seen in recent years, passenger-vehicle sales in that part of the world are still expected to rise about 8 per cent in 2015.

Elsewhere, volumes in the US climbed back to pre-recession peaks in 2014, while Western Europe shows promising signs of an uptick as economic conditions improve. New number plates in March triggered the best car trading this century in the UK, which Mike Hawes, chief executive of the UK Society of Motor Manufacturers and Traders, attributed to growing economic confidence and cheap finance packages.

It’s been a similar story on the continent, as each of the European Union’s big five markets recorded sturdy growth. As of March, sales in France and Germany were up almost 10 per cent year-on-year, Italy by 15 per cent and Spain a whopping 40 per cent, thanks to a multimillion euro scrappage scheme.

Nineteen consecutive months of steady progress has had a positive impact on sentiment towards Europe’s biggest carmakers, with shares in the likes of Volkswagen (DE:VOW3), PSA Peugeot Citroën (FR:UG) and Fiat Chrysler Automobiles (IT:FCA) having risen by a third or more year-to-date. These household names and their suppliers could be in for more good news, too, judging by recent currency movements.

The euro significantly weakening against key trading currencies such as the US dollar will undoubtedly lift exporters operating out of the region. As things produced on the continent become cheaper abroad, this should function as another catalyst for rising sales and volumes.

2015 volume forecasts (growth 2015 over 2014)

Consumer spending boom

Plenty of analysts have also credited ballooning transactions to the plummeting price of oil. According to investment manager Brandywine Global, the collapse of global energy prices has provided a major fillip to household finances by engineering the equivalent of a tax cut of up to $500bn (£333bn).

Analysts at Barclays concur, suggesting that big oil importers such as China stand to save $2.1bn on every $1 drop in the oil price. In spite of its shale gas operations, the US, too, is flagged as a beneficiary, while the eurozone, which spent about $500bn on oil in 2013, has reaped the benefits, even if some cash strapped governments have moved to raise taxes on energy.

A falling oil price has also made it cheaper to drive popular gas-guzzling motors. GKN’s (GKN) chief executive Nigel Stein recently told Investors Chronicle that a strong performance from the car parts supplier core division Driveline was significantly underpinned by the growing popularity of SUVs, simply because they require more products.

Alent (ALNT), too, has emerged victorious. Aside from creating technology that operates car locks, lighting and airbags, its coatings business makes quality chrome bumpers and grilles that appear on big cars and SUVs. Bigger vehicles are also welcomed by Trifast (TRI), as they require additional nuts and bolts to be put together.

Elsewhere, cable management firm Hellermanntyton (HTY), chassis and power solution engineer IMI (IMI), catalytic converter superpower Johnson Matthey (JMAT) and flexible automotive component player Senior (SNR) have each benefited from resurgent US truck sales. Numbers may have petered out to their lowest level in the past year in March, but that followed a 25 month consecutive streak of year-on-year monthly increases, according to figures from commercial vehicle analyst ACT Research.

Improving macro data across the pond also triggered a revival for premium brands, whose higher specifications and functionality are well-received in the manufacturing supply chain because they generally require more expensive parts.

But a move to high-end cars hasn’t just taken precedence in the US. Soaring disposable incomes in Asia mean they are more popular than ever in China and increasingly so in India, where luxury vehicle sales have grown eightfold since 2007. Plastic specialist Carclo (CAR) will be pleased with these developments, as its specialist LED lighting is used on all the big brands like Aston Martin, Bentley, McLaren, Porsche and Rolls-Royce.

Growing appetite for cars that require extra parts and sophisticated innovation spells good news for a wide range of other companies, too. For example, those more focused on the development stages like AB Dynamics (ABDP), Ricardo (RCDO) and Spectris (SXS) have already been reaping the benefits of R&D spend, which Strategy& says is up 50 per cent on 2005.

Research from the consultancy firm confirmed that carmakers splashed out $105bn in 2014, making the industry the third-biggest R&D spender behind healthcare and technology hardware. Most of this growth reportedly stems from shifts in consumer demand, increasing availability of data and information and greater regulatory requirements for safety and fuel economy.

Technology takeover

For many, an upturn in innovation is closely tied to increasing competition from Silicon Valley tech names, amid an anticipated shift to electronically-run cars. That’s already having a huge impact on R&D spend – analysts at Barclays point out that while the timeframe for new vehicle launches is generally every three to four years, the cycle for new vehicle software is measured in months.

The likelihood of software and communications becoming as integral to new generation vehicles as hardware is becoming increasingly high, too, as all kinds of previously unthinkable companies seek to get in on the act. This flurry of activity has been sparked by tech innovators like Google (US:GOOG) and Apple (US:AAPL). While the internet search engine superpower has been working on a self-driving car that uses Bosch’s sensors, computer behemoth Apple has been developing its highly secretive electric car project known as ‘Titan’.

Further evidence of change was evident at the all-important Geneva Motor show in March. Alongside the trumpeted launch of new Ferrari and McLaren supercars came a host of alternatively powered, wirelessly connected vehicles that hint at the growing possibility that technology could one day overtake metal.

But there’s also been controversy surrounding the viability of breakthroughs such as driverless cars. Just weeks after business secretary Vince Cable ploughed £19m of government funding into what he believes can potentially be transformed into a £900bn industry, a study from the University of Michigan threw cold water over this romantic vision.

According to its findings, letting a computer take the wheel in autonomous cars could stir a 27 per cent rise in people suffering from nausea, dizziness and vomiting. Professor Neville Jackson, chief technology officer at green car parts manufacturer Ricardo, is also sceptical. Often referred to as a leading expert on vehicle technology, he reckons driverless cars are unlikely to be an on-road reality for at least 20 to 30 years, due to safety concerns about relying solely on automation.

Instead, Mr Jackson sees driverless car technology being gradually unleashed in stages, firstly via electronic features such as anti-lock braking systems (ABS), followed by automated collision avoidance, lane change correction and deceleration for passing schools or village centres.

Legislation could play a part in standardising that kind of technology, since tools that help drivers to navigate roads - for example, advanced driver assistance systems - have swiftly been heralded for potentially increasing car and road safety. Analysts at Liberum say these benefits and general demand for more comfort mean semiconductor content in cars should grow at about 4 per cent per annum.

Should those projections come true then power-semiconductor specialists Infineon (DE:IFXX), STMicroelectronics (FR:STM) and Arm Holdings (ARM) will be advantageously placed to profit. Other trends, meanwhile, such as rising requests for internet connectivity and infotainment could also boost the latter two names, together with protective casings manufacturer Laird (LRD) and smartphone player Imagination Technologies (IMG). Infotainment, one of many tech-orientated buzzwords, refers to hardware products and systems built to enhance driver and passenger experience.

Although Imagination only generates about 5 per cent of revenue from autos, growing electronic content in cars could change that. Its range of processors offers solutions to steering and suspension control, airbag and ABS braking, advanced collision warning systems, engine management and transmission control, multimedia convergence and centralised cockpit control.

The group also boasts key camera technology that enables advanced driver assistance functions such as collision avoidance, lane detection, enhanced night vision and automatic parking. But it’ll face competition for its wide list of electrical services, as there are plenty of other European names, including those already mentioned, queueing up to steal a march.

One of its competitors in the ABS space is Victrex (VCT). The maker of high-strength, heat-resistant plastics featured in cars, aircraft and hip replacements has made a killing from its PEEK materials. Not only is this innovative plastic used to lighten vehicles, but also in braking to help stop rushing vehicles on slippery roads.

What’s particularly interesting here for both Victrex and Imagination is that ABS is due to be introduced as standard equipment on motorcycles of 125cc or over from 2016. Motorbike accidents are a regular occurrence, prompting the European Union to take action.

That isn’t likely to be the last we hear from the growing motorcycle sector either. The good thing about two-wheelers is that volumes are high and electronics content low, leaving plenty of opportunities for those companies that furnish them with technology. Global sales for bikes actually match cars at about 66m annually and, given growing demand in nations where they are more common like India, China and Brazil, the market is expected to expand by about 10.1 per cent over the next six years.

Fuelling growth

Aside from the lure of extra comfort, efficiency and safety, one of the key appeals of electric cars is to reduce fuel consumption. As global warming concerns heighten, governments across the world have moved to enforce legislation to reduce the number of emissions emitted into the atmosphere.

Those of us who drive plain old mechanical cars may be familiar with European legislation targeting a reduction in carbon dioxide levels. This initially kicked off with Euro 1 back in 1993, marking the beginning of a new regularly evolving set of rules applied to cars and vans sold in the EU market, such as the compulsory introduction of particle filters for diesel vehicles.

One of the biggest beneficiaries of this drive to cut air pollution is Johnson Matthey and European names Umicore (BE:UMI) and BASF (DE:BASX.N). Catalyst companies generate a lot of money from diesel cars under this legislation because tailpipe emissions treatment is more complex and the catalyst washcoat covers a filter as well as a substrate.

A push to cleanse dirty diesels brought in profits for a host of other names as well. For example, IMI’s precision engineering unit specialises in power-train solutions designed to deliver fuel efficiency and reduce emissions. That’s similarly the objective for Senior’s fuel injection systems, EGR coolers and exhaust pipe components.

Then there’s Ricardo, the company behind greener, more fuel efficient transmissions and engines. The engineer offers an array of environmentally friendly services to passenger cars, commercial vehicles and motorcycles and even helped Johnson Matthey develop catalytic converters suitable for mass-produced road cars.

Another important trend that has emerged to reduce fuel consumption is ‘lightweighting’. Victrex’s PEEK solutions have come up trumps here, as has Hellermanntyton, whose plastic fixings have been replacing metal ones to significantly reduce the weight of cars and Trifast, who has started supplying lighter plastic fasteners.

But not everyone has been able to maximise profits from European emission standards. Castings (CGS), for example, which makes chassis components and parts for transmissions and car engines by pouring molten metal or other materials into a mould, struggled to deal with surging last minute demand for new exhaust systems.

A cast in point: Castings struggled to deal with surging last minute demand for new exhaust systems

Although the latest Euro 6 regulation was rolled out several years in advance, an eleventh-hour panic forced Castings to recruit new staff and splash out on additional manufacturing and transport at short notice to facilitate a hike in orders. Those frustrations were then compounded by vehicle manufacturers swiftly slashing their order volumes.

Slumping demand isn’t a concern for Johnson Matthey, though. The specialist chemical group’s chief executive Robert MacLeod is confident that legislators will continue to view the benefits of higher air quality as outweighing the fairly small installation costs, and also point to similar regulations in China and the US as sturdy indicators of appetite.

Are diesels doomed?

But those with a foothold in diesel car sales will perhaps be concerned by a growing number of commentators predicting their demise. “Having long been seen as a ‘clean fuel’ diesel is now seeing something of a backlash in Europe,” says Stuart Pearson, analyst at Exane BNP Paribas. Greg Archer, clean vehicles manager at Transport & Environment, a Brussels-based think-tank, agrees that European manufacturers have backed the wrong technology and doubts that take-up will be as strong in other parts of the world.

This vast change in sentiment has undoubtedly been aggravated by the French government’s pledge to progressively ban diesel vehicles, a bold call that could leave household names BMW (DE:BMW), Daimler (DE:DAIX.N), Renault (FR:RNO), Peugeot and Volvo (SE:VOLV) in serious trouble. That view marks a rapid shift after a decade or more of policy makers offering tax breaks to motorists buying diesel cars because they were perceived to produce lower levels of carbon dioxide.

Fueling the fire: A ban on diesel vehicles in France could be serious trouble for household names such as Daimler

Yet now the focus has turned to air quality and the fact that diesels emit harmful pollutants such as nitrogen oxide that can cause serious respiratory problems. To add to these worries, a recent study from the International Council on Clean Transportation and King’s College highlighted that emissions from diesel vehicles in the UK can be linked to as many as 60,000 deaths a year.

As Johnson Matthey, for example, generates about six times more profit from diesel cars than regular ones it will be looking to divert this negative attention. But while Adam Collins, an analyst at Liberum, foresees a “complex picture” for autocatalyst companies, he reckons they will be buoyed by a low oil price increasing demand for bigger engines, the hedge of lithium battery exposure and the replacement of diesel with direct-injection gasoline engines.

In Europe sales of these are expected to double to 60 per cent by 2017, with Mr Collins noting that they have similar operating and emission characteristics to diesel engines and therefore offer potentially higher catalyst value than indirect gasoline injection.

Indeed, with air pollution continuing to make headlines and various legislative measures being introduced throughout the world, we expect companies to carry on finding new and innovative ways to combat these concerns. Air pollution isn’t a problem that’s going to vanish, and, as even more conservative governments across the world begin to take green issues seriously, these various engineers should have the necessary tools and expertise to offer practical solutions.

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