What’s The Deal? | Driving Forward: Adapting to the Rapidly Evolving Auto Industry
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Evan Junek: Hello, listeners, and welcome to the What's The Deal? podcast. I'm today's host, Evan Junek, from J.P. Morgan's Corporate Finance Advisory Team, and I'm excited to be joined by Mark Pinsky, global head of Auto and Equipment Investment Banking here at J.P. Morgan. Mark, welcome to the podcast.
Mark Pinsky: Thanks, Evan. Thanks for having me.
Evan Junek: I'd love to hear a little more about your career, how you ended up in this role at J.P. Morgan and in investment banking, and what brought you into this area of auto and corresponding equipment business.
Mark Pinsky: Well, Evan, I wish I could say this was my grand design from the start of my career at J.P. Morgan. This is my 24th year at J.P. Morgan. And the truth is I showed up, and the first day my staffer called me in and said, "Would you wanna work on a project for Ford?" And I said, "Sure. My parents have owned Fords forever so happy to be part of that. And a couple weeks later, I got assigned on an automotive supplier transaction that the firm was working on. And so I started doing that. And then couple months later, you kinda wake up and realize you're on the auto team. And I've now been running the auto team for the last, gosh, 9 years at this point.
Evan Junek: Amazing. Well, you're the perfect guest to dive into some of these questions with us. Let's jump right into it. I can think of very few areas of the economy that have probably been impacted more than the auto sector over the last few years. Supply chain issues, energy prices, just the general transformation of transportation that I think we're arguably living through. How are you advising clients? What are the things you've been working through? What are the things ahead? Love to hear a little bit about the kinds of issues you're dealing with today with your clients.
Mark Pinsky: Yeah, look it's a great question, Evan. And bluntly, it has been a time of massive change within the automotive sector. If you think about rolling the clock back five years ago, and what we anticipated to happen around the electrification of vehicles, about the growth of autonomous vehicles, we at least priced some of those things in as we thought about our plans last decade. What we didn't anticipate was just the massive amount of onshoring that's gonna have to be required or has been required with the supply chain. And I think probably equally as importantly, the ability of suppliers and really the full value chain to navigate a world of rapid evolution. And so, we've been spending a lot of our time with clients doing things like figuring out how to vertically integrate themselves, something that they'd spent decades moving away from.
Evan Junek: Hmm.
Mark Pinsky: We've been spending a lot of time with clients helping them think through the technology evolution and where to put their dollars, not just consolidation M&A dollars, but also the future of the automobile and not just five years out, but 10 and 20 years. Finally, it is thinking about it a bit more holistically, which is to say in the whole auto value chain, so whether it is the auto retail channel, the auto services channel, the rental car channel, all of these things have been tremendously impacted by the evolution and technology that we're sort of experiencing real time.
Evan Junek: Again, hard to understate how much change this industry is going through. But maybe we can drill down a little bit into the supply chain topic. 'Cause I think this is an area where arguably people listening to this may have felt this acutely in their own experience. Certainly, if you've tried to buy a car in the last three years, I think it's been a very different experience than it's probably been for much of the rest of our lifetimes. It’s obviously a contributing factor to some of the inflationary pressures that consumers are dealing with. You know, where are we in that sort of arc of supply chain issues? Do many of your clients feel like we're through the supply chain issues? Or is it almost gonna reemerge as something we're kind of creating ourselves as a result of some of the onshoring topics you raised in your previous comments?
Mark Pinsky: Let me tackle that a couple different ways.
Evan Junek: Hmm.
Mark Pinsky: So the good news first, if you think about the supply chain to manufacture the vehicles and all the shortages we experienced and all the long shipping times from Asia and Europe and a lot of different places. I think we are most of our way through that chaos. If you talk to OEMs today, if you talk to suppliers today, what they would probably tell you is we haven't resolved everything. But the problems that we face now are more garden variety not existential. And so although the supply chain is brittle, it is functioning at at least a decent level at this point and feel like we've identified most of the weaknesses and addressed it. So that's the good news.
Mark Pinsky: But now let's kind of move down to the secondary effects of all this. I think you said it, and I've certainly felt it having recently purchased a car. New car prices are up about 30% versus before COVID. Used car prices are up almost 40%. I mean, just unbelievable inflation, nothing of which we've ever experienced before. New car production was down about 25% from pre-COVID levels. That doesn't go away, right?
Evan Junek: Hmm.
Mark Pinsky: We can't make up for those cars that were never produced. And so I think we're living in a world now where you have a lot of demand for new cars. Just people, you know, like new things. No surprise there. And even at these high prices, they're still for the most part selling well. What I think is gonna create challenges is there was a whole constituency of people who liked to buy relatively late-model used vehicles. And those just don't exist. They're not on the road. And so I think it's gonna keep the prices of used vehicles stubbornly high for a while. You couple that with higher interest rates. And it does make car affordability more difficult that it was three, four years ago.
Evan Junek: As a car purchaser in the last three years who very much feels like I'm part of that constituency that you mentioned. My family and I went out in March of 2020 and bought our first car as city dwellers.
Mark Pinsky: Really good timing.
Evan Junek: Good timing. We got our car. That's great. We went onto a lease for three years. We just rolled it over and said, "This makes no sense for us to do anything except to buy the car we had." So, of course, the car that we would have been putting back onto the market as a late-model used car is now, you know, sitting in our garage so to speak. But the other thing we're feeling is just the rapid transformation of the technology in these cars, right? They're starting to feel a lot more like the next version of your iPhone or something like that, right, relative to maybe where we were 10 or 15 years ago where we felt like as long as it was getting us from place A to B, three years plus wasn't a big leap in terms of the kind of functionality you were getting out of your car. So I'd love to hear a little bit about how your clients are thinking about this rapid transformation. It feels like we're really in an inflection point.
Mark Pinsky: You're absolutely right about us being in an inflection point. The iPhone analogy is the perfect one because the standard auto companies, manufacturers used to hold themself is, "Yeah, we'll refresh a platform every five years and really redo a platform every 10 years” and because everyone else is doing it, that was okay. That was reasonably competitive. If you think about the world today where people just expect their technology to evolve rapidly, they want the latest in infotainment systems. They want the latest in traffic information. Everybody wants it on their screen so that it's delivered to customers in a safe way, in an effective way. And so it really has just upped the game meaningfully. And, you know, that's probably the next big battle that we're likely to experience is who controls the data within the vehicle. Is it gonna be Apple and Google and folks like that who have some of the infotainment system? Is it gonna be Ford and GM and Mercedes who are gonna, keep that data to themselves? But that battle, make no mistake it's been sort of in a skirmish phase for five years. The next 10 years are really gonna decide who gets to monetize all of that information flow into cars. And you could really foresee a set of circumstances where the car price itself comes down or stays relatively stable, when it's obviously been pretty inflationary. It stays stable, but I'm gonna be selling you all sorts of things while you're in the vehicle, whether that is access to music, access to traffic data, heated seats, ability to go 120 miles an hour. There's all sorts of things that are gonna be sold to you on a subscription basis as opposed to you buy the car once and everything in the car is in the car. So that evolution or that battle, if you wanna think about it that way, early days.
Evan Junek: I'll mirror my personal experience. The end of our three-year lease came up. And low and behold, I hadn't even realized that I'd been paying for a lot of services. And at the end of this three years, you sort of get an email that says, "Hey, would you like to continue to have your-
Mark Pinsky: Satellite radio.
Evan Junek: …full, your satellite radio and all these other things?"
Mark Pinsky: Yeah, infotainment, yeah.
Evan Junek: You sort of assumed were working. And low and behold, you know there's actually sort of a subscription model that has emerged. To your very good point around, the core functionality, especially as we think about it as consumers interacting with the car itself.
Mark Pinsky: And, Evan, this has been one of my side hustles the last couple years. I get a lot of calls saying, "You know, my car's coming off lease. I think this value is this and this, so what should I do?" And invariably look, I guess if you want good news is I would bet you're probably far better served buying the car. And you can turn around and sell it at a profit. So there's been in some ways consumers have earned an enormous profit, I suppose at the-
Evan Junek: Yeah.
Mark Pinsky: ...expense of the auto OEMs. So that's good news.
Evan Junek: As long as you don't need a car, (laughs) right?
Mark Pinsky: As long as you don't need a car.
Evan Junek: As long as you don't need the utility of being able to drive your family somewhere.
Evan Junek: You could make a good trade.
Mark Pinsky: You know, that's actually one of the more fascinating things and COVID played a role in this. But there's something like 275, 280 million cars on the road in North America against the population of 350, 375. So people like that option of mobility, and whether it's-
Evan Junek: Mm-hmm.
Mark Pinsky: ...commuting to work or getting the kids to school or soccer practice or just being able to drive out some place in the country. That need for mobility, personal mobility doesn't seem to be changing, that's kind of the universal concept. And what's more, we've had that in the US for a lot of years, but that is growing in places like China at an incredibly rapid rate.
Evan Junek: Maybe I could change topics slightly and talk about autonomous vehicles. This has clearly been something that's grabbed a lot of attention in terms of tangible changes, it certainly feels like maybe not a fully autonomous experience is yet here. Absent some notable OEMs would have you believe that it is. But adaptive cruise control, collision detection, these sort of, incremental steps towards levels of autonomous driving clearly are becoming more real, even frankly in the rental cars you're getting, right? A lot of this has become all standard features. How are your clients dealing with this rapid transformation especially on the equipment side. It obviously creates all sorts of aspects of what goes into a car that are just so different than what it was 5, 10, or 15 years ago.
Mark Pinsky: Let me know how many hours you have to discuss this topic 'cause it is a fascinating one to me and to my clients. What I would say first of all, and let's just ground ourselves in reality. Whereas electric vehicles are revolutionary and are really gonna change how we think about mobility. Autonomous or the different levels of autonomy is much more of an evolutionary technology. So, I guess I would say part one, sorry to disappoint you, but it will be a while until you are in a fully autonomous vehicle in Manhattan on a Tuesday night when it's raining and there's construction and people on bikes. That remains sort of the Holy Grail of autonomy. But I think realistically, we are a decade or more away from really jumping that barrier.But I think you said it very well. There's a lot of steps along the way, whether it is ADAS systems or dynamic cruise control, or even lane departure system that will make driving, not just safer but easier, right? That you'll have at least more flexibility. And I think there's another important component of this that people miss. The fastest growing constituency of drivers isn't people in their teens or in their 20s. It's people in their 80s. And so the hope is that people like my mom are gonna be able to drive their car much later in life safely because of all the enhancements and technology in the vehicles over the last five, six years.So look, in some ways we're gonna be working with this journey to autonomy over the next decade plus. At the same time, I think, it will meaningfully make our lives better, safer, getting places faster, having a lot better sense for how to manage traffic and time our own lives better. So I'm excited about this evolution. But I don't want everybody expecting to take the steering wheel out of their car tomorrow.
Evan Junek: Well, maybe that's a good place to sort of bring in this idea. It's actually a question I've been asking a lot of the guests I've interviewed on the podcast which is, as we look forward, we're almost halfway through the year. What are the let's say the three things that you see taking place strategically in this industry over the remaining part of the year or maybe in the next year? Is it consolidation? Is it corporate clarity? Is it just heads down, heavy capital investment? What are the themes that you see as being top of mind to many of your clients in the sector?
Mark Pinsky: So interesting question, Evan. And something I ask myself on a daily basis. Part one is that consolidation point that you raised. And there's sort of two elements of that. Number one is, think about we've talked about electric vehicles and all the excitement around that. But 96% of the new vehicles sold last year had internal combustion engines. That's a technology that's gonna be with us for a long time to come. However, with each passing year, there's gonna be less and less new vehicles that are gonna have engines and transmissions and fuel pumps and all those things. What I expect to happen, what I've been spending a lot of my time on is helping people consolidate those industries. That maybe the world doesn't need six suppliers. Maybe it needs three.
Mark Pinsky: And so the OEMs ultimately want this 'cause hopefully will lower their costs. Suppliers need this, right? They have to rationalize what is today a very expensive and atrophying manufacturing base. And so, there's gonna be work that has been and will continue to need to be done there. I think secondarily is what I'll call the vertical integration trend. We've seen this with OEMs. I've covered these guys for a couple decades at this point. Nobody ever asked us, "How do we get into lithium mining and cobalt mining? How do we get into recycling batteries?" and so all sorts of questions frankly we've never been asked before as bankers are now becoming incredibly relevant for our customer base. And then the last point is the second and third order derivative effects of theses technological breakthroughs, which is to say if you think about the automotive service channel, for example. Well, over time, maybe we need less QuickLubes because less cars are gonna need engine oil. Conversely, all these cars are gonna need to be recalibrated constantly. And what does that mean? Is that a whole new service channel that's gonna evolve just to make sure your ADAS system is working the right way? 'Cause these are very sensitive technologies. And tires is another one that people don't talk about a lot. Electric vehicles burn through tires much more quickly than conventional internal combustion vehicles. And so what does that mean for the entire tire ecosystem, not just service but the prices of tires and how all that evolves? So we've been spending a lot of our time just really trying to help clients think through these issues and hopefully position ourselves to monetize some of those ideas.
Evan Junek: Mark, I think we could do this for an hour easily. And suspect many of our listeners would happily spend the time with us. But I think we may end it there. Really appreciate the time today and the insights, fascinating sector, fascinating times. And again, really appreciate you taking the time to share some of that with us.
Mark Pinsky: Thank you, Evan. This has been great.
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