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Long-Term Virus Impact: Good For Automakers, Bad For Uber And Lyft

Special To The Auto Channel
From Seeking Alpha
Opinion From Anton Wahlman
Mar. 6, 2020

NOTE: A version of this article was first published on or about March 6, 2020, on my Seeking Alpha Marketplace site.

I need not remind you how unique and unprecedented the current virus situation is, in terms of the ways in which it is, and will be, impacting all areas of society. In the last few days, I have been getting many questions as to how it could impact the automotive industry and transportation more broadly.

This is unchartered territory, and speculation is therefore necessary. Just like it would have made sense to think outside the box about this issue on January 23 from an investor's perspective, it's equally clear that such "outside the box" thinking remains as critical now on March 6. We may still be in the earliest of stages of how the investment gyrations will play out -- temporary as well as permanent ones -- so let's get creative.

With those caveats out of the way, I am about to describe one scenario as to how this will impact automotive sales -- perhaps not this quarter or next, but over the longer term. I am thinking about a generational shift in transportation mindset, that could be the unexpected result of a virus epidemic.

For a few years, we have heard how there will be a shift to collective transport -- trains (subways) and buses -- as well as lower-cost taxis (such as Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT)). The idea here was that people did not care about owning the asset that is a personal vehicle. The sharing economy has reached all sorts of areas, from homes (AirBnB) to women's clothing (Rent The Runway) and even funeral caskets.

The benefit with this rental/sharing economy is that it's simply cheaper. By utilizing an asset more, allowing people to use it relay-style, cost is reduced.

All of those trends were hurting current and future automotive sales already, for obvious reasons. The question was only how fast, and how much, they would build from here. I was of the opinion that it wouldn't go as fast, or as far, as many others had predicted -- but nevertheless the direction of the transportation sharing economy was at least clear.

The argument I am about to make is that the current virus situation may arrest or even reverse this transportation sharing trend -- all other things equal. That last part, about "all other things equal" is critical, as the virus isn't the only thing changing automotive industry conditions in the world right now, or for the next many years. Importantly, other factors include:

With all of those caveats, attempting to isolate the factors that the virus issue could change in the automotive industry longer term, let's focus on the variable that will matter in that context: Personal safety. How will people's perception of personal safety impact their transportation needs and preferences?

Let's start by classifying the three major forms of local/regional transportation:

  1. Buses and trains/subways.

  2. Taxis, including Lyft and Uber.

  3. Your own car.

There are two main paths to analyze what could happen to the relative attractiveness of these forms of transportation, over the longer run, as a result of virus fears. Let's start with the one which assumes that people don't actually move to another (more rural) area.

In this instance, the first and easiest reaction is to switch from using buses and trains/subways, to taking a taxi, including Lyft and Uber. There is simply zero friction in doing this. It may cost more, but it can be done instantly and easily for many people. It's probably happening right now, this week.

So, in that sense, the virus situation is likely to be positive for Uber and Lyft, as an immediate reaction, perhaps counted more in terms of days and weeks, as opposed to months and beyond.

The longer run could be completely different than the short-run reaction, for Lyft and Uber

But the story does not end there. There are two pathways where human behavior would go one step further. Let's start with the scenario in which people have not (yet) moved to another area. Here, people may simply decide that going in a taxi (Lyft, Uber, etc.) isn't good enough. They fear that the driver may have the virus (but isn't yet showing any symptoms), or that the virus is present in the vehicle as a result of a previous passenger.

Here, the longer-term effect may be that the person or household makes the determination that the safest way to proceed going forward, for at least the next few years, is to "go back" to doing what most people had already been doing for decades: Drive your own car. It's a convenient way to work on the phone, be on conference calls, all while not exposing yourself to germs and viruses coming from unknown people.

Here, a household's investments would shift from paying for taxis, buses and trains, to buying a new car instead. This would be positive for the automakers -- and bad for Lyft and Uber.

The "work from home" longer-term scenario: Huge impact on automotive sales

Many companies are now starting to encourage employees to work from home. While this is intended to be only temporary, it may spark a longer-term trend with some dramatic consequences.

Let's say that you are one of those workers in the proverbial skyscraper in Los Angeles, Chicago or New York City. Now you've been told that you can do your work from a remote location, and no need to come into the office anymore. As time goes by, companies realize that this is actually cheaper, not having to own or rent expensive metropolitan area real estate.

For some workers, they now have to question why they live within a commuting distance to those office towers in NYC, Chicago or Los Angeles. If they don't have to be that close, why spend all that extra money on relatively cramped and expensive real estate? Taxes are much higher there too.

I know it won't be easy for many or even most workers, but some would seize this opportunity to leave those areas altogether, and move to a place where they could buy acres of land in beautiful settings, for a fraction of their big city living expenses. Their property taxes would be lower, and the state may not have any income tax at all -- South Dakota, Tennessee, Nevada and Wyoming, for example.

Here's the thing: If you're moving to any of those kinds of places -- Nevada, Tennessee, Wyoming or South Dakota -- you will not only not be taking buses or trains, and you won't be using taxis either, including Lyft and Uber. You will be driving your own car. Actually, it would likely be a large SUV or pickup truck.

And where are those large SUVs and pickup trucks manufactured? Not exclusively by any means, but disproportionately in the U.S., or at least North America.

In fact, all five full-size pickup trucks in the market today -- from Ford (F), General Motors (GM), RAM (FCAU), Toyota (TM) and Nissan (OTCPK:NSANY) are all made in North America, mostly in the U.S. itself. Among the midsize pickup trucks, every single one except Toyota is 100% made in the U.S.A., and that includes Honda (HMC). Toyota makes its Tacoma pickup truck in Texas and Mexico, but will be swapping some production around in the next year, after which the Tacoma will be made exclusively in Mexico, whereas the full-size Tundra will be made exclusively in Texas.

The even broader picture: The long-term Uber/Lyft thesis would take a dent

One of the main parts of the long-term Lyft/Uber thesis is that individual car ownership would be replaced by these taxis. "Thanks" to the virus, aside from a short-term boost as people avoid buses and trains as a first reaction, this development could turn sour shortly thereafter for these two reasons described above:

  1. Metropolitan/suburban people reduce their Lyft/Uber usage in favor of going back to using their own cars, just like the world we knew before just a few years ago anyway.

  2. Metropolitan/suburban people seize the "work from home" moment to move into the far less expensive heartland America, where quality of life is much higher from a "crime and taxes" perspective, and where they absolutely would be relying almost exclusively on driving their own vehicle -- likely disproportionately a "Made in America" SUV or pickup truck.

You wouldn't tell it from the stock market in the last couple of weeks in particular, but this virus crisis may just turn out to be the best thing that happened to the U.S. automotive industry in many years, if not decades. With Americans ditching public transport, followed by shunning Uber and Lyft -- and then in some instances taking "the full step" of moving away from big metropolitan areas altogether -- then the biggest switch in relative demand would be a huge surge in the demand for individually owned vehicles, and disproportionately SUVs and pickup trucks.

It may just be morning in automotive America again, for the strangest of reasons.

Disclosure: I am/we are short TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: At the time of submitting this article for publication, the author was short TSLA. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.