Market report: UK car production in doldrums, Diageo disappoints and Trump’s social rehabilitation

by | Jan 26, 2023

Written by Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown

The repercussions of the semi-conductor chip shortage are reverberating around the world and being felt deeply in the motor manufacturing sector.

UK car production is in the doldrums, dropping to its lowest levels since 1956, in 2022, as production lines slowed drastically, partly due to shortages of components. But underinvestment and a lack of incentives are also being blamed for the slow recovery of the industry. Electric vehicle manufacturing has surged ahead, accounting for a third of cars produced, but supply chains are stretched thin, with only one battery manufacturer currently in operation in the UK. It underlines why the collapse of BritishVolt was so disappointing for the industry. New giga factories closer to car manufacturing hubs are considered important at a time when global supply chains have turned more brittle, but it shows how difficult it is for a battery start-up to enter this space.

There will be hopes a big motor-manufacturing name will sweep in like a knight in shining armour to keep the dream alive, but for now it seems they are holding their horses, although an offer from Australian start-up, Re-charge, is on the table.

Tesla’s results indicate just how competition is charging up across the sector, as manufacturers scramble to capitalize on the surge in demand in the lucrative Chinese market in particular. Its fourth quarter revenue rose 37% to $24.3bn, a record for the group as it sold higher priced models, but margins are tighter as it started to cut prices late last year to compete. There are plenty of rivals vying to knock Tesla from its position but investors were cheered by the results, with shares rising more than 5% in after-hours trading.

Wall Street ended flat, as investors struggled for a sense of direction with a mixed bag of corporate results. Tech lays offs are coming thick and fast, with IBM axing 3900 posts, 1.5% of the workforce, in a restructuring drive. Eliminating over-capacity and streamlining operations has become a rite of passage as tech giants navigate from the profligate pandemic era to more austere times. It appears investors wanted the company to slash headcount more drastically, given that free cash flow targets are being missed, with shares falling back after an initial surge.

Overall sentiment remains fixated on the path of inflation, and where the Fed will go with interest rate policy. All eyes will be on the GDP snapshot, jobs and home sales data out later, indicating whether demand is being squeezed out of the economy and whether more storm clouds are gathering on the horizon.

The FTSE 100 has opened up on a jolt of enthusiasm, following more upbeat trading across Asia as investors played catch up after the Lunar New Year holiday. Optimism about China’s re-opening has returned, leading to expectations of higher demand from the world’s second largest economy. There are hopes the waves of infections are receding, with cases 70% lower than peak levels earlier this month, according to health authority updates. This has helped stabilize oil prices with Brent Crude settling around $86 a barrel, lifting energy stocks on the FTSE 100 in early trade.

It’s glass half empty time for Diageo, which poured out some resilient results showing a surge in super-premium brand drinks, but disappointed in its outlook for the all-important American market. Shares fell by 6.1% as investors eyed up the lack of cheer ahead as Americans tighten their belts amid the downturn. Diageo has been benefiting from ongoing pandemic habits, when people turned to favourite pricier tipples, including the likes of Johnnie Walker and Tanqueray, for lockdown distraction. Big marketing spend has kept its brand power intact in the first half, with sales beating forecasts, rising by 9.4%. Premium plus brands drove 65% of growth in sales generated from existing channels but there is still a risk that its customers will become more cautious as budgets are squeezed. It’s hopeful that wealthier Chinese consumers will return to its brands once the Covid nightmare turns into bad dreams, but there are no guarantees business will snap back to previous levels.’’

Trump is being socially rehabilitated, at least in the digital world. His invitation back onto Meta platforms will be considered a free speech coup, but it is also likely to have been designed as a way to draw back in users lured by TikTok’s Pied Pier tunes. While stemming the flow of eyes on screen may be helpful in the short term, it could be an advertising minefield, given that companies are unlikely to want to see their ads pop up alongside hugely controversial posts. The proviso of specific guardrails may help, but already platforms have been criticized as being too slow in the way feeds are moderated.

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