The auto industry is pivoting from big spending to capital discipline. Our analyst highlights possible areas where investors may find opportunities this year.

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Welcome to Thoughts on the Market. I'm Adam Jonas, Morgan Stanley's Head of the Global Autos and Shared Mobility Team. Today I'll be talking about our U.S. autos outlook for 2024. It's Tuesday, January 2nd at 10 a.m. in New York. 

Heading into 2024, we remain concerned about the future of the U.S. auto industry, in some ways, even more so than during the great financial crisis of 2008 and 2009. But as the auto industry pivots away from big spending on EVs and autonomous vehicles to a relatively more parsimonious era of capital discipline, we see significant upside value unlock for investors. 

It's been a good run for the automakers. Just think how supportive the overall macroeconomic environment has been for the U.S. auto industry since 2010. U.S. GDP growth averaged well over 2%. Historically low interest rates helped consumers afford big ticket auto purchases. The Chinese auto consumers snapped up Western brands funding rich dividend streams for U.S. automakers. Used car prices were mostly stable or rising, supporting the auto lending complex. And COVID driven inventory scarcity lifted average transaction prices to all time highs, buoying auto companies margins. 

Looking back, the relatively strong performance of auto companies contributed to ever growing levels of CapEx and R&D in increasingly unfamiliar areas, ranging from battery cell development to software and A.I inference chips, to fully autonomous robotaxis. For years, investors largely supported Detroit's investments in Auto 2.0, with a glass half-full view of legacy car companies' ability to venture into profitable electric vehicle territory. But we're reaching a critical juncture now, and we believe the decisions that will be made over the next 12 months with respect to capital allocation and spending discipline will determine the overall industry and individual automakers performance. 

We forecast U.S. new car sales to reach 16 million units in 2024, an increase of around 2% from the November 2023 run rate of 15.7 million units. To achieve this growth, we believe car and truck prices need to fall materially. Given stubbornly high interest rates hampering affordability, a 16 million unit seasonally adjusted annual selling rate may require a combination of price cuts and transaction prices down on the order of 5% year-on-year, leaving the value of U.S. auto sales relatively stable year-on-year. 

We expect a continued melting in used car prices, but not a very sharp fall from here, owing to a continued low supply of certified pre-owned inventory in good condition coming off lease as we approach the third anniversary of the COVID lows. As new inventory continues to recover, we expect steady downward pressure on used prices on the order of 5 or 10% from December 23 to December 24. 

In terms of EV demand, we expect growth on the order of 15 to 20% in the U.S., keeping penetration in the 8% range. We continue to expect legacy automakers to pull back on EV offerings due largely to a lack of profitability. Startup EV carmakers will likely see constrained production, including by their own choice, into a slowing demand environment where we expect to see hybrid and plug-in hybrid volume making a comeback, potentially rising 40 to 50%. 

So what themes do we think investors should prepare for? First in an accelerating EV penetration world, we believe internal combustion exposed companies and suppliers may outperform EV exposed suppliers categorically. Secondly, we believe many companies in our coverage have an opportunity to greatly improve capital allocation and efficiency as they dial back expansionary CapEx and prioritize cash generating parts of the portfolio. And finally, we would be increasingly selective on picking winners exposed to long term secular trends like electrification and autonomy, focusing on those firms that can scale such technologies profitably. 

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