What will the automobile industry be in the next decade?

You Might Want To Think Deeper About Owning Auto Industry Stocks

If you’re currently holding on to auto industry stocks and plan on holding them for long term growth, you probably might want to think deeper about it.

For some investors, they actually prefer privately-owned rather than publicly-owned companies (which issues common stock that you can buy from your brokers). The main reasons are as follows:

1. A public company’s CEO may not have a corresponding technical background. Although one may argue that management can still get professional consultations within the company for decision making. Some investors have more confidence in a CEO that knows deeply about the subject matter. After all, they are holding the steering wheel of the company. This is common sense. Take this as an example: if you are going to have a complicated surgery, which surgeon would you let perform surgery? A board-certified medical doctor with 20 years of technical experience, or a computer science-majored MBA assisted by some medical experts?

2. A public company management’s decision making maybe heavily driven by short-term vision. This is because a public company executives’ salary and bonus are partially determined by the company size and the performance in the annual financial report (which technically speaking, may be legally manipulated to suit management’s intentions). For example, a public company can make an unnecessary acquisition of another company, or offer a price higher than the fair market value to buy the company, JUST because the bigger size of the company will lead to an increase in the management’s annual compensation.  A company will sell an important profit-making division just because that will boost the net income in that year’s financial report. So it is possible that a public company’s action may not really benefit the company and its shareholders, but it is just for management’s self-interest.


Private vs Public

For a privately-own company, it has a superior alignment of interests between management and private equity ownership. This is because private companies do not face the scrutiny of shareholders, analysts and the broader market, thus it is highly impossible that the management will get a better compensation/bonus just due to the company size grows bigger, or it gets an unsustainable cash inflow for a particular year; therefore the privately-own company management are more willing to make strategic decisions based on a long term view, and its actions will actually benefit the company and its owners.

In the automobile industry, it heavily depends on the oil industry. We all know oil is not a sustainable energy source and it will finally run out in the very near future. So car makers who are not researching alternative energy resource vehicles will be in a bad situation when that day comes. Cars that do not depends on gas currently can run using electricity, hydrogen fuel cell, and solar power. It is possible that nuclear power can also be a choice. So if you are investing in a car manufacturer who does not have an answer for this question, you may want to consider your investment decision again.


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