Across the Pond: Getting back into the fast lane
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It's a great pleasure to welcome you to the first episode of our brand new podcast, Across the Pond, Perspectives from Europe. In this series, we'll be discussing the big stories and top investment ideas from the Eurozone and Switzerland out of the UBS headquarters here in Zurich.

Of course, it's been hard to take your eyes off the US markets recently. As we enter 2025, the S&P is coming off two years of more than 20% gains, the best run since the 1990s. And that has left European markets trailing. So you might wonder why you should invest anywhere else. In this series, we'll be aiming to convince you that there are plenty of compelling investment themes here across the pond. I'm Christopher Swan.

And I'm Belinda Peters. This week, we are going to be discussing the European and especially the German auto sector. You may have noticed that Donald Trump has had some very critical words to say about Germany's auto sector. The returning president has threatened very substantial tariffs and said that he wants German car companies to become U.S. car companies. And those menacing comments come at a time when Europe is facing stiffer competition from Chinese carmakers.

But despite these headwinds, are there still opportunities to invest in European autos? Keep listening for the answer. So this week for our first episode, we're joined by Ralf Ganta, the CIO's veteran auto expert, who also heads up European equity coverage. Thanks for taking the time, Ralf. I hope you don't mind me calling you veteran. No problem, Chris. And hi, Belinda.

Yeah, so basically, like we've just had this deluge of pretty gloomy news out of the European auto sector, hard to escape. Talk of job losses, plant closures, the threat of tariffs, Chinese competition. But I guess given that we're sort of just entering the early stages of the Trump administration, what do you think this portends for the German auto sector? What is likely to be happening? How can the sector react?

How much time do we have, Chris? We have plenty of time. All the time you need. I think there are plenty of things and I think you rightly mentioned all these challenges we are facing right now here, especially in the German but in general also the European auto industry. Now, step by step. Okay. You know, I grew up with cars and motorbikes for the last 50 years. I'm not a typical banker. I worked twice for a German premium manufacturer. A lot of songs have been sung about. I worked for one of the top two auto suppliers in research and development, my bachelor thesis.

And you know, it's always the same. First we ignore it and then we get, oh God, the world is going under. And the same is happening here right now. And you just gave me the hint here, right? Clearly, yeah, Mr. Trump, he talks a lot about tariffs, Chinese competition, all things. You know, this industry has certainly some big advantage. They are used to restructure and they are really, really agile.

When I say that, it's like when it comes to production, they go there anyway where the end markets are, right? So that is clear. For example, we have certain German auto companies, their biggest production plant is not in Germany, but it's in the US. So they already arranged for that many, many years ago because you're not building a plant here overnight. So it takes some serious planning.

And so clearly, you know, this has been already the strategy there that companies go that route. And that's clear. I mean, if we see, let's say, the tariff threat or a really, really a tariff hitting them, you know, the question is, how will it hit them? All right, let's take an example of a famous German car manufacturer who is very active in, you know, in the U.S. They're actually exporting more cars out of the U.S. than they import. Now,

Are we going to put the tariffs just around the net? In this case, it would be even a positive effect, so no net effect. Or are we just hitting the imports? So, you know, the jury is out there on what we're going to do. And also, you know, it's a complicated game at the end. And we should also not forget, I mean, just check out what's happening right now with the U.S. dollar, right? It went really to strengths. Hey, it really helps and mitigates that. So what I want to say is like, look, at the end,

If really high level of tariffs would hit them, it's clearly a negative. So you could easily shave off if let's say you put 10% on tariffs on all the imports not being netted, you could take off perhaps 5 to 10% of EBIT, but then companies will adjust, right? They will put certain production in the US and perhaps shift certain things which going out from the US back to Germany, other locations.

These companies are, you know, restructuring as that all the time. And, you know, it's just more of the temporary effect, the short-term effect, which is going to hit them. I think when we were talking before and we were talking about tariffs, you were thinking about the impact of sort of Mexico and the role that that plays in sort of U.S. auto production and the competitive landscape. I mean, maybe you can expand on that a little. Yeah, I mean, some of my German auto colleagues clearly, right, they have strong production footprint in Mexico.

But so does the US industry. So if you assign some curtain tariffs, I mean, their names in the US, they also send their things back and forth between Mexico and US or Canada and US. So you're hitting also your established companies literally into the face, if I may say so. So does it make sense?

So probably not. And I'm sure, I mean, we faced that situation in the first period. So I'm sure we find some kind of a suitable solution because I think Mr. Trump has no interest to hit his own companies who also have like thousands and thousands of employees in the U.S. So clearly I see that not as negative as perhaps the market right now sees in some instances. It's very interesting. So it's also well known that German car makers are,

have been the car makers of the past era. So what about the broader issue that German car makers are kind of being left out of the race for electric vehicles? Is it then also fair to say that Germany built its industry on its ability to find the internal combustion engine along with its well-known design flair? And now the premium is on battery production, electronics and software. So can German and European car makers compete in that sense?

I think they can. I mean, we're talking nowadays about so-called software-defined vehicles, right? So a lot of it is in, as you correctly said, batteries, software, all the electronics, all, you know, autonomous driving technology, which, you know, is around the corner as well. And I'll just give you a hint, right? I mean, people, and I hear that, by the way, a lot, right? You know, Germany or European, you know, they did not really, they really slept too long. Well, at the end, they always wanted to earn money with their products, right, which worked successfully. Now the world has changed.

But now let's check out who has right now level three conditional automation. Who has the authority to drive on German autobahns? And I don't know if you've ever been to Germany. I mean, it's quite an experience, right? Well, actually, it's a German car manufacturer. It's not a Japanese, not a Korean, not a Chinese, and not a U.S. one. So what does level three mean? Actually, conditional automation means you can drive, let's say, in Germany around 60 miles an hour on a German autobahn. You take your hands off.

And actually the liability is taken by the car, the car manufacturer. So you can literally, really, you can check your email, you can watch TV, you can read your newspaper, right? So this is really what's happening there.

And also when I look, and I said before, right, I worked in research and development where you developed stuff 10 years in advance. Okay, I know it's roughly 30 years ago, but nevertheless, right, it's still the same in a way. You know, it's clear. I mean, the engineers, they are as good in a way, and they also talk to each other. They know what's out there. And so therefore, you know, I do not think we are behind the technology.

Clearly, we have now the new kids, if I may say, on the block, the Chinese manufacturer, who are really much faster in terms of development, etc. And that is quite a challenge then as well. But, you know, they have access to technology. They work with the right companies on the technology. And here, for example, they link up with the American tech companies on various names. I'm not mentioning them, but I think everybody knows them to get their vehicles to the level what they need. So,

I think they are also there. You did mention that issue of partnerships. I mean, isn't there, though, the risk, and we were talking about this before you said that there was a slight risk that a lot of the higher value-added aspect of the car production, the battery, the software, is bad?

produced by, say, Chinese or American partners, and then that leaves the Germans producing the chassis and very nice leather seats or something like that. I mean, how big a danger is that? Yeah, and I think that's one of the concerns, right? I mean, you don't want to end up just being the pure hardware provider and then all the value added is in the software, a little bit like what happened in the IT space. I mean, one previous CEO of a large German premium manufacturer once mentioned, you know, they consider the tech companies as frenemies.

A mix between friend and enemies, right? You need them, but...

You don't want to be too close to them, you know, in a way. But, you know, it seems like those companies have now found a really suitable working relationship with tech companies when it comes to data, when it comes to how they get compensated, etc. And so that comes back to what you raised earlier. So they're really on top of that. They recognize it doesn't make sense to spend billions of dollars, euros, whatever, to go their own route, but use the technology which is out there. And so clearly at the end, they want to produce

a product clients want to buy and they're also willing to pay for the content and the technology they provide. And for that you need really still premium content and you know the look and feel and the handling what you would expect from a premium product. Right, so it's not that gloomy it seems like. So are there parts of the European car industry that are still doing well and that could also be of interest to our investors?

Sure. I mean, the way I look at it, I mean, I clearly look at some really, really high end. And when I say high end, I mean really high end, right? Because if you're willing to pay $400,000, $500,000 for a vehicle, well, okay, do tariffs really matter?

If he, you know, I said a little bit like more, you know, if I see adult men, and I'm just sorry I'm saying about men, right? If I see adult men crying that they're allowed to order such a high-end luxury vehicles, that they're allowed to order, not when they pick it up, right?

That shows me if you keep your pricing tight, your supply tight, then you really control the destiny of your company, right? That's, for example, high-end luxury in the automotive space is something we like or I like because that really shows you, you know, you're not overproducing, you're not selling the other price, but with the consumer experience you offer, the look, the feel, the, you know, just exclusivity. And that's, for example, one of the things I really put in focus.

Is that a big expanding area? I mean, obviously, like every year we produce the sort of wealth reports and obviously that's a growing segment of people who have a lot of income to spare. Yeah, I think it's the income and the wealth clearly, right? I mean, I have the pleasure as part of my job here at UBS to meet a lot of entrepreneurs, right? Successful people who bank with UBS and clearly look at the end, I mean,

I think a lot of, you know, men, and I'm sure with women it's the same, they have something, a nice poster when they grow up in their room, what they look at, what they inspire, what they want to have later on, right? And clearly, probably some of the brands are out there, right? If you're a car fanatic and they really, you know, when they're successful, they fulfill their dream and this is where they spend the money. And yeah, this is always fascinating. Before we carry on with the good news, I forgot about one of my other gloomy questions.

which goes on the political side, which is, you know, we have the German elections coming up. I noticed that when, you know, certain car companies have talked about plant closures, there's been a lot of pushback from

I mean, how much political resistance do you see to cost cutting? Obviously, the industry is probably going to have to cut costs and it might have to move more production overseas. Is politics a big barrier to that? It is. I mean, it really depends on the company because we have even some companies where the state has some, let's say, interest in there, really an equity stake. But clearly, I mean, you see that probably the last thing where they really restructure big time will be in Germany.

But you know, it's an ongoing process, right? They started already abroad. There were also certain agreements and expect to hear more in, you know, we have certain capital market days in just in front of us the next couple of weeks where companies, CEOs, CFOs going through and say, dear capital market, dear investors, look, we're looking at doing ABC. As I said earlier, right, they're used to restructure.

they use to really bring production, for example, from Germany to Eastern European countries, just there's a big cost benefit, right? But also don't forget, it's not always about labor costs. A lot of it is also CapEx related and because it's a lot of automation and robotics involved. But, you know, they look, what is the overall, where's the attractive place we want to go? Where do we want to sell our products? And they localize more. I mean, one of the things we say is like,

deglobalization, right? One of the things we identified at UBS there as well. And this is just an ongoing process for them. And as you just correctly said, Chris, right, there's a lot of pressure clearly, especially in front of now the elections, right, in Germany on the 23rd of February, not to announce big things, but

It will happen. It will happen. And this is just an ongoing process. And are there particular locations within Europe where you think that there's promise in terms of relocating production? I mean, Eastern Europe is clearly benefiting from that. I mean, you see that, for example, in Hungary as an example where some of the German premium names but also the newcomers out of China built their presence there.

then they're part of the European Union, then this means you can no longer apply tariffs to, you know, when stuff is produced or to perhaps to components, but, you know, it will change the picture for them because then the vehicles are produced here within the European Union and within the European Union, you can then also in a way freely sell, right? So that's clearly where companies have been there already for a while, further intensifying their investment opportunities. But for example, in Germany,

no new car plants will be built anymore. The last one was clearly from an American company in the EV space, but there's not a lot happening anymore.

Okay, and a bit on the restructuring side, there are also some companies that are working on what we might call self-improvement. So they can deliver strong returns despite the industry headwinds that we previously mentioned. I know we can't go into company specifics, but could you give us a little teaser of what this kind of self-improvement could look like? I mean, I like really companies who really, you know, to self-help themselves.

Because you can be driven by, let's say, Mr. Trump assigning tariffs or some kind of regulations, I think, by the European Union or German government. But I like companies who can really drive their own destiny, i.e. we have companies where they talk about like spinoff of or splitting their business, right, in Europe.

supposed to be an attractive and non-attractive part. But we also saw in the part, it's like when some of the parts suddenly is being realized because certain companies have been punished for parts of their business and the market didn't like it. And so they separated and they have then assigned a value to one business and a value to the other one. And that's clearly value accretive. And so these kinds of companies are, for example, also names I put into focus because this is where you crystallize value, where you do something for the shareholder value. And this is what I like. And yeah, performance is key for us.

I guess it's also like, you know, we talk a lot about the autos, but there's also parts. And reading some of your research, you were talking about sort of innovation and areas like autonomous driving. I wasn't quite sure what digital solutions were, but perhaps you can tell us about some of the areas where, you know, there's room to be improved.

Yeah, I mean, let's start. The easy one is autonomous driving. I mean, I had the pleasure once to drive, you know, level four. Level four means really you have still, you know, a steering wheel, but nobody's sitting there anymore, right? So you're in the passenger seat, so I'm a risk taker, right? So I'm sitting there, my family is sat in the back seat, and you really enjoy and you feel really safe, right? Because, you know, you have certain radar, LiDAR, ultrasonic camera technologies, and you really enjoy

Much better than every taxi driver can drive you. You should feel really safe, right? And companies investing a lot of time, efforts and money to get there. But it's more regulatory thing. Now about the digital technology. I mean, I have two teenagers at home, right?

All right. I'm a car guy. I love the German autobahns, I have to say. But for me, probably, and for my kids, it's more important. When they enter the car, does their smartphone connect? Will they have access to their apps, right? Can they, you know, can they really act like they act in their daily lives? And so clearly, this is what we...

and depending on the market. I mean, for example, in China, right, if you're a lot in the traffic jam or in some other, you know, in a condensed area, you probably want some good entertainment. You want to, you know, starting from the air condition, from the light, depending on your, let's say, style, the way you act,

And then, for example, I'll give you the latest thing, right? People measure perhaps your plot pressure with the steering wheel and see, oh, you're excited, you're too much stressed, then let's put some more soft, some chill-out music in or dampen the lightning a little bit. And this is the things where...

It's just you can make the difference, right? And it's also technology, right? And that's more the parts makers rather than the auto companies or it's like hand in hand? I think it's hand in hand, but you clearly see a lot of the innovations come from part makers, right?

So a lot, and by the way, there's differences between the companies, certain Chinese names, but also certain US names. They have much more, you know, having the hands on everything. They're much more integrated and some other traditional names here, they work very closely with a broad supplier base. But, you know, a lot of innovation is happening there.

and specifically perhaps for launch customer, which could be one of the premium layers. And then, you know, it gets rolled out to the different segments and the different brands, right? But there's a lot of collaboration between suppliers and they're also part very early in the process when you develop a car.

Yeah, and I guess the other sort of potential positive is that some of these automakers, particularly on the mass market side, now do look pretty beaten up. I was reading some of the valuations. I think I saw P ratios, forward P's of three to four times. I'm not sure if I read that correctly. It's correct. There's no zero missing behind, I tell you, Chris. But it's really true. I mean, and also when you look a little bit at price book value, right? We have here in Europe names, they traded 0.2 to 0.3 times book value.

which is like literally telling you these guys are going out of business, right? And this is, as I said, this is not the case. I mean, I think PE is always a little bit difficult in the automotive space. It's a cyclical industry. Normally, I always claim you buy auto companies when PE is high. And you say, wait a second,

this is not what the textbooks tell us, but when is PE high? When E is low, right? When the earnings are depressed, then PE automatically is a little bit higher. But looking or coming back to the valuation, I think the market has really given up pretty much hope on that. So what the market is right now waiting is, okay, more clarity what's happening on the tariff front and also potential retaliation from other countries.

But then clearly, you know, not everything is really dark here, right? Because at the end, the companies are still nicely cash generative. They pay a decent dividend. They have still brands. And just go one step back. Why did people buy, consumers across the world, buy whatever a beautiful German premium product or luxury product? A cheap product would have brought them from A to B.

I wouldn't say the same way, but you know, perhaps not in the same style, not in the same comfort, but still consumers were willing to pay X times more for that product. The same is true for handbags, for watches, you know, all the true. So,

Consumers are willing to assign a value for that because they just love it. They love the design. They love the power. They love the heritage. And I think this is where really I think also the European players still build on. And that's why I have not given up hope. It's not the place right now to jump on the European names, but there are certainly some selections, I think, which is also interesting for our international clients to look at. Thanks, Charles. That's a really nice positive statement.

affirming way to end the podcast. I mean, I was going to ask you as a sort of final point, is it a sort of trade secret which car you drive or is it many? Do you have a big selection? Well, you know, normally I always claim, Chris, you cannot have enough cars in your garage, not necessarily in your custody account, in your wealth management account, but

Clearly, on a more serious note, I'm a big believer in six-in-line engines, turbocharged, out of German production. I don't know what that is. But I also have a really down-to-earth family van, which does its great job every day. Very evasive.

All right. So thanks to our listeners. Thanks to Rolf for joining us today. I know that we can delve into specific securities on these podcasts, but you can explore some of these with your UBS representative. And we also very much recommend our equity compass, which goes into full detail about where we see the most value.

But just to sum up what we discussed here previously, we think investors should be looking for automakers with highly prestigious brands and strong pricing power. We like auto or parts makers that have a compelling plan to restructure or innovate in areas like autonomous driving and electric mobility. And we also think that even for some mass market brands, too much bad news has now been priced into the stocks.

So we'll be back soon with another installment of Across the Pond. In the meantime, have a great week.

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