Continental expects a “significant recovery” in the global car market this year despite the pandemic and the chips shortage, as the German car parts maker scrapped its dividend following a year of deep losses.
The group, which makes components found in four out of five cars globally, posted a €718m pre-tax loss for 2020, on sales that fell 15 per cent to €37.7bn.
It also scrapped its dividend for 2020; last year Continental was criticised for paying €600m in dividends despite having taken German government money to put thousands of workers on furlough.
But chief financial officer Wolfgang Schäfer said the final quarter of the year, when the company made a profit after six months of deep losses, “has shown that we have passed the low point”.
“The economic environment is gaining momentum,” he added.
He said this year would be “challenging” for carmakers because of the global semiconductor shortage, but that a “substantial increase” in global car production is expected.
A shortage of chips has caused the world’s largest carmakers to halt or reduce production, with the industry not expecting the situation to recover fully until the second half of the year.
“We nevertheless anticipate that the market will recover significantly compared to 2020,” Schäfer said.
However the group has previously said it doesn’t expect the global car market to recover to its 2017 peak of 95m vehicles until 2025.
Continental expects its own sales to rise to €40.5-€42.5bn this year, and is targeting a profit margin of 5-6 per cent, with a long term aim of hitting 11 per cent after the industry’s transition to electric cars.
The company is shedding 30,000 jobs to save billions, though has ruled out further cuts despite coming under pressure as the shift towards electric vehicles shakes up large parts of the traditional automotive supply chain.
Three auto-themed products to splurge on this week
The Tread 2 wristwatch is made by former British specialty-car builder Devon Motor Works, which is now called Devonworks. The timepiece, available in several colours and models, uses four miniature motors attached to a series of drive belts that control the hour, minute and second readouts. All of the action, which is visible through the watch’s bulletproof-glass casing, is controlled by a battery-powered microprocessor. The cost of the watch starts at $12,500 (U.S.) and is available at devonworks.com.
A tent above
Montana-based Go Fast Campers claims its 35-kilogram hard-shell (both roof and floor) pop-up style Superlite Roof Tent is the lightest on the market. The 50- by- 90-inch (127- by- 238-centimetre) interior dimensions provide space for two adults and the side curtains that cover the interior mesh screens are made from polyester. When the tent is not needed, the quick-connect latches are designed for easy removal from the vehicle. The tent retails for $1,300, with $100 for the optional ladder and $299 for the mattress. More details can be found at gofastcampers.com.
Gearheads will love this Ford engine model kit from Makerhaus. This 1:3 scale model of the high-performance 289-cubic-inch V-8 that Ford installed in the first Mustangs moves via three AA batteries (not included). The cooling fan spins, the crankshaft turns, the pistons move up and down and the spark plugs appear to fire using red-tipped LED lights. There is even an electric sound module that produces a simulated engine growl. A collector’s manual covering the history of the Mustang V-8 is also included with the 200-piece kit. The model retails for $185.95 at makerhaus.biz.
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How do I create an emergency kit for my car?
Having an emergency kit in your vehicle that you can rely on in an accident or roadside emergency should not be an afterthought, said Stephan LaLonde, a senior sales manager at CARFAX Canada. “Speaking for myself and my family, and it is a must. We always have an emergency kit in our vehicles,” he said. An emergency kit should include items related to your vehicle’s operation, the weather conditions you may encounter and your own safety. “A kit should be a year-round concern, but there will be seasonal additions to the kit,” LaLonde said. He added those items should remain in your vehicle throughout the year but if you do remove something you should replace it before the seasons change.
Among the kit items CARFAX recommends for your vehicle’s operation are jumper cables and a tire puncture seal and inflator. It is also suggested your kit include a folding shovel, ice scrapper, duct tape, road flares or a warning light, a road map, fire extinguisher and dry sand or kitty litter. “Kitty litter or sand is one of those things that will help you if you are in a situation where you need traction, like you are stuck in snow,” Lalonde explained.
Items to ensure your personal safety include blankets, winter hats and gloves, a flashlight and extra batteries, pen and paper, bottled water and energy bars or non-perishable food. A first-aid kit, whistle, roll of paper towels and a candle in a deep can with matches is also recommended. “If you are in your car, and it is 40-degrees below outside, that candle will create a little bit of heat,” Lalonde said. He added that people often forget to include a blanket. “When you get in an accident, if shock sets in, you want to keep warm.”
Lalonde said to store your kit where it makes sense for the type of vehicle you drive. It should also be accessible. “Most cars today have a folding back seat, so the trunk is accessible should there be an incident,” he said.
Many companies and organizations, including Home Depot, Canadian Tire and the Canadian Red Cross, sell pre-packaged kits. Each might include a slight variation on what is recommended as well as optional items, such as a seat belt cutter, tow rope or even an extra cellphone.
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The bright spot in strained bond markets
Troubled companies are thin on the ground these days. That has been good news for investors in an important corner of the financial system.
Owning the debt of the riskiest companies in the US and Europe has provided positive returns so far this year for fixed income investors, a rare bright spot in the vast universe of publicly traded debt.
By contrast, holders of higher quality bonds sold by governments and companies have experienced negative returns during 2021. That has been driven by expectations of higher interest rates as inflation and economic growth pick up. As rates rise, existing bonds are less attractive to investors compared with new debt offerings.
The disparity in performance between high and lower quality debt may appear strange given that the overall rise in bond yields this year might be expected to hit strained companies more. An explanation rests in how markets behave once an economic recovery is under way.
As corporate default risk abates, shares and debt sold by so-called “junk-rated” companies with lower quality balance sheets rally sharply — as was seen in 2009 and 2003 when high yield appreciated sharply in value in the wake of defaults peaking and recessions ending.
“Default rates have fallen a lot and companies have refinanced their debt at lower rates and if we get the expected rebound in profits, high yield can hold up into next year,” says Adrian Miller, chief market strategist at Concise Capital, an asset manager specialising in small company debt.
Indeed, this week, Fitch Ratings forecast a decline in the expected rate of speculative rated company defaults this year to 2 per cent from 3.5 per cent in 2021. The pace of defaults has eased markedly from a projected 5.2 per cent a year ago and is nowhere near the peak of 14 per cent seen in 2009.
With reduced fear of default, the higher fixed rates of borrowing that are paid by lower quality companies suddenly look attractive compared with the relatively meagre offerings by blue-chip rated bonds.
This week, BlackRock said demand for income in the high-yield market from investors contributed to their strong client flows during an impressive first-quarter performance by the asset manager.
The need for income helps explain another oddity about the current high-yield market. The risk premium or spread associated with owning the lowest quality credit has shrunk markedly versus that of US government bonds.
The spread has eased towards the lowest levels seen during the post financial crisis decade. Moreover, it has occurred after a record $140bn of junk bond debt was sold during the first three months of the year. Bank of America forecasts $475bn of debt sales in 2021, a 10 per cent increase from a record-breaking 2020.
The ability of companies to raise debt in such amounts and not send interest rates markedly higher reflects the seemingly insatiable demand for income by investors betting on defaults staying low with a robust global economic recovery in the wake of the pandemic.
Still, the speed and extent of the rally in high yield debt does little to allay long term concerns that the credit market has run well ahead of underlying fundamentals for low quality companies.
It comes amid a low rate of capacity utilisation by US companies. In previous decades, this reflected plenty of slack in the economy and thereby indicated mounting challenges for companies.
Marty Fridson, chief investment officer at Lehmann Livian Fridson Advisors, says there is hidden distress in the high-yield debt market. He says that even better rated companies have been pushed beyond fair value on the back of the huge support by the US Federal Reserve for markets and the flow of credit.
That Fed intervention should leave investors wary about the eventual longer term consequences. There remains considerable doubt as to the extent of the post-pandemic recovery beyond this year for indebted companies.
Fitch, for example, has a slightly higher 2022 default rate forecast than this year, “reflecting uncertainty around the sustainability of the demand recovery for some sectors”. This is partly due to the persistence of digital trends that has challenged a number of sectors.
Tracy Chen, portfolio manager at Brandywine Global, an investment boutique of Franklin Resources, says: “Business models will change after Covid and there are still a lot of companies being supported by accommodative policies.
“Stimulus and infrastructure spending is good for certain sectors. Longer term we are less bullish on high yield.”
This view reflects doubts as to whether stimulus provides some companies with a new lease of life, or delays an eventual debt reckoning.
“Prior to Covid, investors were very cautious about credit and talking about the end of the cycle,” says Chen.
“There is a case that a bigger default cycle has been delayed and that it occurs over the next 12 to 18 months, once the stimulus measures have ended.”
Dalton Kellett entering 2021 IndyCar season with a new attitude
To do just about anything well in life, be it journalism, politics or long-haul trucking, you need confidence that you can do the job well.
Dalton Kellett of Stouffville races cars for a living, Indy cars specifically. He is starting his second year in the big league, the NTT IndyCar Series, which opens its season tomorrow at Barber Motorsports Park outside Birmingham, Ala.
And, as he told me during a telephone interview recently, he’s got a whole new attitude going into 2021. “I feel like an IndyCar driver now,” Kellett said. “I’m in a position now to know what I want out of the car. I needed the experience I gained last year to get to that point. I’m excited.”
Last year, he knew he was the new kid on the block at A.J. Foyt Racing team and didn’t make waves. He kept his mouth shut and listened and — except for the Indianapolis 500 — didn’t crash the car, which is what’s expected of rookies.
And the fact he survived and made a good enough impression on the Foyt team for them to offer him a full-time ride for 2021 (he shared the car with veteran Tony Kanaan last year) has given him the confidence to start making his presence felt.
Having a new teammate isn’t hurting either, particularly since said teammate happens to be one of the best racing drivers in the world, Sebastien Bourdais. More about all that in a moment.
First, for those of you not familiar with Kellett, he’s 27, came up through karting and the Road to Indy minor-league series, and has done some sports car racing in addition to the single seaters he’s concentrating on now. And while he was climbing the racing ladder, he graduated from Queen’s University in Kingston with a degree in engineering physics.
The highlight of his apprenticeship years came in 2018 when he won the pole for the Indy Lights Freedom 100 race at the Indianapolis Motor Speedway. This was no small task, as the driver he edged out for the coveted starting position was none other than fellow IndyCar racer Pato O’Ward.
Last year — his first with the Foyt team — he only raced on the road and street courses, the one exception being the Indianapolis 500. Which was a shame because his strength to date has been on oval tracks. He qualified 24th (out of 33) for last year’s “Greatest Spectacle in Racing,” outqualifying veteran drivers like three-time winner Helio Castroneves, Simon Pagenaud and F1 star Fernando Alonso. He was heading for a potential Top Ten finish when unknown racer Ben Hanley forced him to back out of a pass attempt and that put him up the track and into the wall. His best finishes the rest of the season came at a Detroit double-header where he was 20th both times.
Kellett is determined to do better this year and is expecting that Bourdais will be a big help.
“He joined our team at the end of last season,” Kellett said, “and he made his presence felt immediately. He was very exacting from a setup standpoint and it was interesting to watch how he pushed the team to give him what he wanted. He’s got 15 years of experience (in Indy cars, sports cars, F1) to draw on.
“As a result, I’ve found myself more assertive. While giving feedback to engineers (during tests), I find that I’m definitely more confident and able to say, ‘This is what I want.’”
Kellett not being a rookie anymore is probably a good thing, because two of the most famous racing drivers in the word are first-timers and will likely hog most of the IndyCar publicity this year. Seven-time NASCAR Cup champion Jimmie Johnston, who’s padding his CV by driving a part-time schedule in IndyCar for Chip Ganassi, and Romain Grosjean, who moved to IndyCar from Formula One after his employer, Haas F1, didn’t renew his contract.
Has Kellett bumped into them yet?
“I haven’t met Grosjean,” he said, “but I’ve been around Jimmy and I know him enough to say, ‘Hi.’ I think both of them have the will and the experience to drive the car to the point of being competitive. I think Grosjean will have a bit of an easier time because of his open-wheel experience in Europe; the F1-to-IndyCar jump is probably easier than NASCAR-to-IndyCar.
“I hope Jimmie does well, though. He’s certainly putting in the effort. All-power to him,” Kellett said. “They’re both world-class drivers and I think it’s great for the series and it will be great racing against them, that’s for sure. I’m looking forward to that and I hope I beat them.”
And how does Kellett expect to do this season, overall. Can he win a race?
“I’ll be trying but you have to be realistic. I think in terms of milestones and benchmarks. The first milestone would be to start off in at least the Top 20 in the series and stay there. As I climb higher, I want to stay there rather than falling back. I want to be consistent,” he said. “As a race driver, though, your first benchmark is your teammate, particularly on the road courses. If I can be on pace, within a couple of tenths of Sebastien’s times, with his experience, I’ll be pretty happy.”
And what about the Indianapolis 500?
“Indy is the one race that everybody wants to win. But it’s still important to focus on the process (where you work up to speed gradually) and not get caught up in all that. I’d like to qualify a little better – we probably should have trimmed a little more than we did last year but when you’re a rookie, you don’t want to take too many big swings.
“But to qualify in the Top 10 or Top 15 would be an improvement from last year and I’d like to put myself in a position to be fighting for a good finish at the end. I’d be happy with that.”
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City regulation: robocops can create post-Brexit advantage
The City of London needs to up its game to compensate for Brexit losses. That is one reason to welcome Friday’s push for more “RegTech” — regulatory technology — by the Square Mile’s governing body. Technological advances involving data science, machine learning and cloud computing have opened up new approaches to dealing with regulatory risk.
The predicted Brexodus of financial assets and jobs is under way. Banks and insurers have transferred £900bn of assets, just under 10 per cent of the UK’s total. Staff moves have so far reached 7,400, according to consultancy New Financial. It is not all one way. Up to 500 EU-based firms are expected to open a UK office. But the toll on the City is likely to increase in coming years.
Lingering hopes that the UK would be granted more market access in return for an agreement on supervisory “equivalence” have largely faded. That creates an opportunity, as well as a cost. There is some room for manoeuvre.
The UK wants to make its approach to regulation a competitive advantage. It aims to strike a balance between the EU’s detailed, prescriptive approach and the patchy US one, shown up by the Archegos Capital blow-up. Advocates of RegTech claim that it can play a part by enabling real-time market surveillance and helping to predict where risks will emerge. That could make supervision more preventive and less reactive.
Such claims should be treated with caution. The UK’s “light touch” financial regulation in the noughties did not end well. But RegTech can reduce risks and improve efficiency. It could also result in a modest reduction in compliance costs — about £500m, or 0.05 per cent of the annual total, for Britain’s top five banks, according to RT Associates.
There is no silver bullet to deal with Brexit woes. RegTech will not transform demand by itself. But the City needs to consider all possible ways that it might boost its appeal.
The Lex team is interested in hearing more from readers. Please tell us what you think of “RegTech” and the post-Brexit City in the comments section below.
Ask a Mechanic: The safety and convenience of a professional oil change
Every week, we take your questions about what is going on under the hood of your vehicle and pose them to a knowledgeable mechanic in the Greater Toronto Area. In today’s column, we learn about machining rotors and safely completing an oil change.
Dear Ask a Mechanic,
I drive a Toyota Corolla. On occasion the dealership tells me I need to have the rotors machined as there is rust on them. I am very reluctant to machine the rotors. I don’t drive a lot and am easy on the braking. I worry about the machining as it removes the rotors surface, then the next thing is I have to get new rotors. Does regularly braking clean up the rotors and should I have them machined when the dealership recommends it? — Clean Brake
Andrew Le, co-owner of 1 Four 0 Nine Inc. in Toronto, sees this two ways. If rotors are rusty from customers not driving their vehicle, he does recommend getting them machined. The process involves restoring the metal on the rotors to a smooth, flat service, to allow for some of the friction required for brakes to properly work to be restored. However, this may not be possible if the rotors have substantial corrosion.
Before taking your vehicle to a dealership it might be best to drive it around a little. Le said if your car is sitting for a couple of days and the rotors gather minor surface rust, driving and using your brakes will help get rid of this rust.
But in his opinion, if the rotors need work, he recommended getting them replaced because it’s inexpensive and easy to do so, especially for popular vehicles, like a Toyota Corolla. “I don’t believe in machining anymore because rotors are just so cheap,” he said. His opinion changes if the vehicle is rare or very expensive, as parts would be harder to find and costlier.
Keep in mind, the corrosion on the rotors can cause uneven wear on the brake pads, so they should also be inspected and replaced if needed.
Dear Ask a Mechanic,
I always see people doing their own oil changes and I’ve noticed oil is readily available in many stores that sell car goods. I want to change my own oil as means of saving money. Why should I see a mechanic for this instead of doing it myself? Is there some sort of benefit?
— Oil Changer
The availability of products to complete the task does make it easy to be done at home but the biggest benefit, Le said, is safety. Vehicles have plugs that require tools to remove. Located underneath the vehicle, the process requires a car to be hoisted into the air. Those doing this task at home would likely use a jack and jack stands to achieve this.
“You can do it but it’s very risky, especially if you’re jacking up the car, and there’s no support,” Le said. “One sudden move and it could fall down and possibly kill you.” Bringing it to a mechanic allows them to use a hoist, making the process safer, he said. “It’s worth it to spend that money and have it done safely and professionally.”
There is also a major convenience factor to having your oil changed professionally. In addition to having to select the correct type and quantity of oil, and choose the right filter, you also need to dispose of the used oil and filter. They must either be taken to an appropriate hazardous waste facility or disposal centre that accepts them. A mechanic will do that as part of the services they offer.
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