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00:00JUST EXPLAIN YOUR DECISION TO LOWER YOUR FORECAST AROUND PRODUCTION AND VOLUMES. AND WHEN DO YOU SEE THINGS TURNING AROUND? GEORGE: SO, THE PRIMARY DRIVER OF OUR CUTS REMAINS THE SUPPLY CHAIN CONSTRAINTS WHICH CONTINUES TO WEIGH ON MOTOR PRODUCTION GLOBALLY, NOTABLY IN THE SECOND QUARTER. WE EXPECT SEQUENTIAL IMPROVEMENT IN THE SECOND HALF, THE TRANSPARENCY REMAINS LOW AND THAT LACK OF TRANSPARENCY STRETCHES INTO 2023. FROM A SALES PERSPECTIVE, WE ARE NOT BLIND TO THE CONSUMER. THE MACRO DATA POINT WITH THE STRONGEST CORRELATION TO AUTO SALES IS CONSUMER CONFIDENCE, AND WE HAVE SEEN A HUGE DROP-OFF IN BOTH NORTH AMERICA AND EUROPE. FRANCINE: GEORGE, IS THERE SOME AUTOS THAT WILL DO THE BEST. NOT ALL AUTOMAKERS ARE CREATED EQUAL. DO EV ' S NEED TO GET CHEAPER BEFORE THERE IS REAL MASS DEMAND? GEORGE: EV ' S ARE ARGUABLY THE ONE BRIGHT SPOT AT THE MOMENT. WHILE SALES ARE DOWN GENERALLY ACROSS GLOBAL REGIONS, WITH RESPECT TO BATTERY ELECTRIC VEHICLES, VOLUMES ARE UP 71% YEAR-TO-DATE IN THE U.K. JUST OVER 60% WHEN YOU LOOK AT EURO MORE BROADLY. PART OF THE REASON IS THEY ARE BEING PRIORITIZED. COMPANIES ARE ALLOCATING SEMICONDUCTORS AND THINKING ABOUT PRODUCTION. WE ARE ALSO SEEING TREMENDOUS STRENGTH FROM THE CONSUMER. AS WE LOOK OUT, THE LANDSCAPER EV ' S IN EUROPE IS LARGELY GOING TO BE CAUSED BY THE REGULATIONS. THERE IS A PROPOSAL THAT VEHICLES WITH COMBUSTION ENGINES WILL NO LONGER BE ALLOWED TO BE SOLD IN EUROPE. TOM: WE CAN ' T TALK ABOUT EV ' S WITHOUT TALKING ABOUT THE NUMBER OF CHIPS THEY REQUIRE. WHERE ARE WE IN TERMS OF THE SEMICONDUCTOR SPACE, CONSTRICTION IN THE U.S. AND ASIA ON THE CONCERN THAT YOU MAY GET A GLUT, WHERE ARE WE IN UNFOLDING KINKS IN THE SEMICONDUCTOR SUPPLY CHAIN? GEORGE: THE COMMENTARY WE HEAR FROM THE MANUFACTURERS IS THAT THINGS ARE STEADILY IMPROVING SEQUENTIALLY. HOWEVER AS WE LOOK THROUGH TO 2023, IT ' S NOT CLEAR WE WILL HAVE A FULLY EASING WITH RESPECT TO THE SUPPLY CHAIN. ONE OF THE COMPLEXITIES IS THAT THERE ARE MANY DIFFERENT VARIANCES IN SEMICONDUCTORS ACROSS THE AUTOMOTIVE INDUSTRY. ONE OF THE TIER ONE SUPPLIERS CITED THERE WERE AROUND 20,000 DIFFERENT SEMICONDUCTORS WITHIN THEIR PRODUCT PORTFOLIO. WE MIGHT SEE SOME EASING AND AVAILABILITY OF CERTAIN SEMICONDUCTORS. YOU ARE ONLY AS STRONG AS YOUR WEAKEST LINK WHEN YOU BUILD A CAR, THEREFORE WE NEED A COMPLETE EASING UP THE ENTIRE SUPPLY CHAIN. FRANCINE: AND HOW FAST CAN THAT HAPPEN? BECAUSE SEMICONDUCTORS HAVE BEEN SUCH A PROBLEM, ARE WE GOING TO BE AWASH WITH THEM IN 18 OR 24 MONTHS, WHAT DOES THAT MEAN FOR THE GLOBAL SUPPLY CHAIN? GEORGE: WITH RESPECT TO THE SEMICONDUCTOR SUPPLY CHAIN MORE BROADLY, MY FOCUS IS THE AUTOMOTIVE SECTOR. BUT I THINK FROM AN AUTOMOTIVE PERSPECTIVE, WE ARE EXPECTING A SIGNIFICANT EASING IN 2023. AND WE ARE HOPEFUL BY 2024, WE SHOULD BE BACK TO NORMALIZED PRODUCTION FROM AN AUTOMOTIVE STANDPOINT. TOM: WHAT ARE YOU SEEING IN TERMS OF PRICE DISCIPLINE FROM THE AUTOMAKERS, THEIR ABILITY TO MAINTAIN MARGINS AS RECESSION CONCERNS GROW AND PRESSURE WE ARE SEEING ON CONSUMERS? GEORGE: IT IS CURRENTLY STRONG AT THE MOMENT. IF WE LOOK AT THE INDUSTRY AS A WHOLE, PROFITS ARE AROUND 19% BELOW PEAK. THIS IS CONSISTENT WITH A RECESSION. SO, PER DUTCHMAN -- PRODUCTION IS RUNNING AT RECESSIONARY LEVELS. WE SEE THE CONSUMER IN A SLIGHTLY BETTER PLACE THAN THAT, WHICH IS LEADING TO DEMAND PRICING. IF WE LOOK AT COMMODITY COST INFLATION FOR OEM ' S, WE APPROXIMATE 300 BASIS POINTS OF HEADWINDS. OEM ' S ARE COMMUNICATING THEY ARE ABLE TO PRICE THIS THROUGH TO CONSUMERS. WHEN WE LOOK AT THE DATA FOR PRICES, WE ARE SEEING IMPROVEMENTS NOT JUST YEAR-OVER-YEAR, BUT Q2 PRICING LOOKS TO BE IN THE MAGNITUDE OF 20% LOWER DISCOUNTS RELATIVE TO WHAT WE SAW IN QANON -- Q1 FOR THE COMPANIES WE COVER. AS A REMINDER, DEALER INVENTORIES IN BOTH EUROPE AND AMERICA ARE RUNNING AT ALL-TIME LOWS WITH RESPECT TO NEW CARS.

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Goldman Sachs' Galliers on Auto Sector Outlook

George Galliers, auto analyst at Goldman Sachs, discusses the future of the electric vehicle (EV) market and broader auto sector. He speaks with Bloomberg's Tom Mackenzie and Francine Lacqua on "Bloomberg Markets: European Open." (Source: Bloomberg)

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