When Harley Davidson Goes Hipster

When Harley Davidson Goes Hipster

Oh, what a strange dynamic we have at play in the world auto market right now.

This is going to show up in the price of Aussie mining stocks.

Some up, some down!

That’s the market.

Today’s Daily Reckoning Australia will unpick why and offer a suggestion to be on the right side of the trade.

The Wall Street Journal reports that global auto sales are beginning to lose steam after a cracking run for the last decade.

Higher aluminium and steel prices aren’t helping margins. But the issue is bigger than raw material costs.

Long-term strategy and viability are at stake.

How Tesla keeps defying the bears

Self-driving and electrified cars are completely upending this massive market. Reiterating existing models will not satisfy the market’s long-term demand.

But how and where to allocate resources?

We’re not talking small change here, either. There’s trillions of invested capital that could become redundant.

It’s challenging enough to run a business at the best of times.

Now, the men and women running car companies don’t have a clear picture of what their future markets looks like, or on what timeline it all shifts.

They’re also losing leadership to new entrants.

One recent test of Tesla’s Autopilot chip, for example, smacked the competition out of the park.

This means it may have the led in the race for mobility-as-a-service. This is when individual car ownership becomes redundant and moves to instant demand.

This chip is also why Tesla stock has managed to defy the short-sellers. No mean feat when it loses billions, has horrible cash flow and high debts.

We could also say it’s built up an enviable brand in the electric car space. The market is still prepared to price in a big premium for this early lead here.

And no wonder.

It’s no exaggeration to say some of the big auto names we all know might soon be on their way to extinction. Perhaps there’s no better example of this kind of existential crisis than Harley Davidson.

You know the brand even if you’ve never ridden one. It’s American muscle, with riders in black jackets and gangland insignias. It’s also men over 50.

It’s been something like this for a very long time now. It can’t stay that way, though, because Harley sales in the US have never recovered to their previous peak before 2008.

And yet the international market for scooters and motorbikes is enormous.

Bloomberg cited a statistic that says 80% of households in Indonesia, Thailand and Vietnam own a motorcycle or scooter.

Granted, most of the buyers don’t need high handlebars, a bad attitude and the grunt of a Harley engine. They just need to get from A to B at low cost.

And that’s Harley’s problem, in essence.

Harley’s existing core customer base doesn’t want the company to change.

They like having facial hair and tattoos and a grunt. But Harley needs to find the new market of this generation: the urban consumer conscious of their environmental choices.

They call it the innovator’s dilemma.

When the short sellers get it wrong

Big companies usually fail from a niche, fringe idea that blindsides them. They never see the disruption coming because their core customer base never asked or wanted what arrives.

Harley has to do something, and it is.

It’s moving to target the international buyer, and producing smaller and electric motorbikes.

Whether it can hold the appeal of the brand – if there even is appeal for buyers under 40 – remains to be seen.

Because the world’s car fleet is going electric. I’m not saying that — the market is: Sales of electric cars in Europe are up 40% in the first half of this year over the previous one.

They’re strong in China too.

Granted, the figures are still niche, but the raging hot summer in China right now is a reminder that further climate legislation is inevitable. Governments will continue to press on this issue.

Case in point: Argus Media just reported that the Chinese authorities are considering insisting that all new auto factories must produce New Energy Vehicles (NEVS) to get approved. They can use a myriad of carrots and sticks like this to electrify the Chinese fleet.

One motivation is to deal with China’s pollution.

The second is China’s strategic vulnerability to global oil flows, including the choke-point of the South China Sea. The US Navy controls the sea lanes of the world.

Even here, we can pick up clues elsewhere.

Saudi Arabia’s sovereign wealth fund is investing in green technology companies. Clearly, the future of fossil fuels is on borrowed time.

That means stocks related to the electrification of transport are still worth investigating.

For 2018, I’ve steered clear of the explorers. I want to own the stocks producing the required raw materials now.

Not everyone agrees with that assessment.

Lithium producer Orocobre [ASX: ORE] has been one of the most shorted stocks on the market for ages.

The short sellers didn’t get what they’ve been hunting for yesterday: Orocobre rose on a decent earnings result and an upbeat assessment for lithium demand.

That’s a surprise for many.

Much ado has been made of the fall in Chinese spot prices. In my opinion, that’s too narrow a view.

The market for lithium is global, and it’s getting bigger every day.

More soon.

Regards,

Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia