FTSE 350: Overcapacity and utilisation rates dog automakers

Near-term prospects are far from favourable. Macro issues in the form of surging inflation and the prospect of further interest rate rises will stifle consumer demand. Analysis from the Society of Motor Manufacturers and Traders shows that March new vehicle registrations have already fallen to their worst level since 1998 – although supply problems are the overriding factor for the moment.

On the heels of the pandemic, the well-documented global shortage in semiconductors continues to exert a negative influence. The implementation of lockdown provisions, specifically diktats linked to social distancing, undermined sales, production and exports. After an initial bounce-back, volumes have continued to soften, admittedly a partial result of external issues.

It’s sobering to think that UK auto production has halved in just five years. It’s not just the domestic market that is struggling with overcapacity. Utilisation rates for European auto manufacturers have also slumped, undermining margins in the process. To make matters worse on the cost front, the number of job vacancies in the automotive sector is at a multi-year high, with all the attendant implications for wage cost inflation.

Prospects are also bound up with the provision of infrastructure to support the battery electric vehicle (BEV) transition, along with the availability of critical inputs. In March, the government committed to rollong out 300,000 public charge points by 2030.

All of this suggests that stockpickers will need to be nimble to capture growth from the changes under way from a sector in a state of flux. Recourse to pooled funds is probably the preferred option, although investors in Tesla (US:TSLA), an industry player too big to fail, would probably take issue with that view.