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Credit quarterly newsletter: A turbulent time for the automotive sector – but one that is also creating investment opportunities

07 April 2020

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Kempen’s Euro Credit team runs over EUR 5 billion of assets in a range of strategies, and their outstanding track records illustrate the team’s ability to generate alpha in all kinds of market conditions. Its capabilities have also been recognised by external experts: in March 2019 our Euro Credit team and its flagship fund, Kempen (Lux) Euro Credit Fund, were awarded a Morningstar Gold rating for the quality of their investment process and the strength of the team.

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A turbulent time for the automotive sector

We are in the midst of a very difficult period for the automotive sector, which is facing a number of major challenges:

  • COVID-19: the coronavirus outbreak is having an enormous impact on auto producers and suppliers around the world. The containment measures taken by governments across the globe have led to a slump in demand for cars, while factory closures are resulting in unprecedented disruptions to production and supply chains.
  • Trade barriers: the imposition of trade barriers is threatening global supply chains, which need to run perfectly smoothly to avoid production delays. 
  • Brexit: along similar lines, the terms of any Brexit deal still need to be agreed – failure to do so would result in a hard Brexit, which could have a major negative effect on car manufacturers exporting out of the UK or exporting to the UK. 
  • Car sharing: the rise of car sharing in the future could see manufacturers sell fewer cars as the model of car ownership changes – going forward, it may be about how a car is used rather than who owns it.
  • Emissions limits: most pressingly of all, manufacturers are going to have to deal with increasingly stringent emissions limits that will force them to move towards electric vehicles or face punitive fines.

Below we consider some of the trends affecting the sector – and the opportunities that are arising as a result – in more detail.

The impact of COVID-19
The COVID-19 outbreak is hitting global demand and supply in a way never seen before. In areas that have been put under lockdown, car sales have fallen by 80% or more in some cases. Factories have been closed, resulting in significant disruptions to production for all the major car manufacturers and suppliers. As a result, global car sales are expected to fall by at least 10–15% this year. This will have serious financial consequences for the sector. 

Most car companies have responded by reducing production levels (insofar as they can still produce) and taking far-reaching measures to boost liquidity and cut costs. The magnitude of the impact on manufacturers will depend on the duration of the virus outbreak. They will suffer from lower sales volumes, reduced margins and profitability, weaker or even negative cashflow generation, and increasing leverage. A rise in unemployment will hit consumers’ ability to service their car loans and result in higher credit losses in manufacturers’ financing units.

All this will have a negative impact on the automotive sector’s credit quality, and rating agencies have already started downgrading the credit ratings of auto companies and suppliers in response. These downgrades will continue as long we do not see any normalisation in activity. 

The electrification of the auto industry

The most profound fundamental change affecting the sector is the shift away from vehicles based on the internal combustion engine to hybrid and electric vehicles as the world seeks to reduce its reliance on fossil fuels. There are big differences in terms of firms’ response to this trend.

The automotive sector is a major emitter of CO2. More and more car companies are committing to be CO2-neutral by 2050, but to get there they need to make lots of electric vehicles and ensure their production processes are also CO2-neutral.

What’s more, regulators are enforcing ever-tighter emissions restrictions: for example, the EU has set a target of 95g/km of CO2 emissions for 2021, but that will get more stringent every year so cars will have to continuously become cleaner. Regulators in the US and China are setting similar targets. If car makers fail to reach them, they will have costly fines to pay. 

Firms that may struggle in this regard include Fiat Chrysler, which has been very slow to get involved in electric vehicles, and Daimler, which produces lots of cars with big engines with high emissions.  We are avoiding investing in such firms as their long-term prospects look uncertain given the move towards electrification.

However, there are also winners from this trend. The most obvious example is Tesla, which wasn’t even a car producer until ten years ago and is now the benchmark when it comes to electric vehicles. Another interesting name in this regard is Volkswagen, which, despite the Dieselgate scandal in 2015, has made ambitious strides away from the internal combustion engine and towards electrification, as we discuss below.

The benefits of engagement in the auto sector

Many automotive firms are shifting towards electrification, but at Kempen we believe it’s vital to use our influence to encourage them to make bigger moves, and more quickly. With this in mind, in recent years we have worked alongside other asset managers in an intense engagement with Volkswagen. Our engagement has focused on two issues: the company’s culture, which we believed was instrumental in the Dieselgate scandal, and the need to electrify its product range. Volkswagen has made significant steps on both fronts. It has produced a detailed programme to improve compliance and integrity at the company, and it is aggressively moving towards electrification. It has set out a budget of EUR 50 billion for R&D into electric vehicle technologies with the aim of launching 27 fully electric models by 2025. This represents a major U-turn in its strategy, and means it has adopted the most ambitious course of electrification of all the major car manufacturers. This shows how engagement efforts can encourage firms to make significant improvements to their practices, especially when carried out collectively with other investors.

Shift from car ownership to car usage 

Currently, the average car is only used around 10% of the time. Car sharing, in which people rent cars for a short period of time (even by the hour) would involve vehicles being used much more efficiently, but fewer cars would be sold (even though they would be driven more so replacements would be needed more regularly). 

The advent of car-sharing services involves a lot of threats for autos companies, but also opportunities. Whereas in the past all manufacturers have needed to think about is the design and production of cars, now they also need to think about a high-quality tech platform, which should include a good app, software to connect supply and demand (people with a car and those that need to use one), maps and data. Manufacturers also need to make sure that their cars are being used on a particular sharing platform.

Car makers have responded by investing in their own technology or acquiring small firms that have the technology they need. In several cases, they have shared the costs with other manufacturers.

Car sharing may be the next big thing – or it may not. There’s still a question whether it will ever be profitable, and some manufacturers have already left the market – Daimler and BMW, which had been working together, recently exited the market in the UK and US, citing high costs as one of the reasons

Opportunities and threats for suppliers
There’s also a lot of scope for winners and losers to emerge among the firms that provide supplies to auto manufacturers. Suppliers focusing on traditional technologies for internal combustion engine drivetrains – the group of components that deliver power to the driving wheels – that add relatively little value are likely to feel the pinch over time as their volumes and margins will go down.

We like technologically advanced global autos suppliers such as Schaeffler, Valeo and ZF Friedrichshafen as they are benefiting from trends such as electrification, autonomous driving and other driving assistance measures. That said, this is coming at a cost in the form of high R&D and capex spending in the coming years. 

Many suppliers are now focusing on electric drivetrains and technological solutions that enable car companies to integrate autonomous driving technologies. Some firms, such as Continental, are looking to dispose of their drivetrain technologies so that they can focus on higher-growth, higher-margin areas in which they have an edge

“We like technologically advanced global auto suppliers as they are benefiting from trends such as electrification, autonomous driving and other driving assistance measures. That said, we’re approaching autos very cautiously at present”

Alain van der Heijden, Head of Credit team

A cautious approach, but looking for opportunities
We’re approaching autos very cautiously at present, and are underweight the sector in our portfolios. Car sales are likely to be weak this year (around 10-15% lower than last year, assuming 1-1.5 months of production and demand disruptions due to coronavirus), and at the same time automotive firms are under pressure to make major investments in new product development and new production capacity to support their new products. With sales struggling, margins will go down as manufacturers are forced to offer discounts. Most manufacturers have high fixed costs, so lower volumes and slightly lower prices will have a big impact on profitability.

And yet it’s not all bad news. Most automotive firms’ balance sheets were in good shape before we entered this very challenging period, with relatively limited debt. This will provide a bit of a cushion for the higher-quality manufacturers. What’s more, the challenges that we refer to above are also opportunities for disruptive firms to exploit. 

Credit selection is more important than ever at a time of high risk for the sector. At Kempen, our job is to identify the future winners within the sector and that are also trading at an attractive price. We look for companies with the flexibility to adjust production and the capacity to deal with environmental challenges. They also need capital and strong balance sheets to support the necessary investments to make the transition towards new technologies, drivetrains and models.

At the same time, we strive to keep away from the laggards and engage with firms we invest in to help them navigate future challenges.



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Risicometer 3Kempen (Lux) Euro Credit Fund (the “Sub-Fund”) is a sub-fund of Kempen International Funds SICAV (the “Fund”), domiciled in Luxembourg. This Fund is authorised in Luxembourg and is regulated by the Commission de Surveillance du Secteur Financier. Kempen Capital Management N.V. (KCM) is the management company of the Fund. KCM is authorised as management company and regulated by the Dutch Authority for the Financial Markets (AFM).

Paying agent and representative in Switzerland is RBC Investor Services Bank S.A., Esch-sur-Alzette, Zurich Branch, Bleicherweg 7, CH-8027 Zurich. The Sub-Fund is registered with the Dutch Authority for the Financial Markets (AFM) under the license of the Fund.

The information in this document provides insufficient information for an investment decision. Please read the Key Investor Document (available in Dutch, English and several other languages, see website) and the prospectus (available in English). These documents as well as annual report, semi-annual report and the articles of incorporation of the Fund are available free of charge at the registered office of the Fund located at 6H, route de Trèves, L-2633 Senningerberg, Luxembourg, at the offices of the representative in Switzerland and on the website of KCM ( The information on the website is (partly) available in Dutch and English.

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This document is prepared by the fund managers of the (Lux) Euro Credit Fund, managed by Kempen Capital Management N.V. (‘KCM’). The (Lux) Euro Credit Fund might currently hold bonds in the subject companies. The views expressed in this document may be subject to change at any given time, without prior notice. KCM has no obligation to update the contents of this document. As asset manager KCM may have investments, generally for the benefit of third parties, in financial instruments mentioned in this document and it may at any time decide to execute buy or sell transactions in these financial instruments. 

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