- Period of unprecedented innovation in the sector
- Car manufacturers are among the largest investors in R&D worldwide
- Deteriorated credit risk in several region across the world, including the United States and United Kingdom
- Increasingly restrictive anti-pollution standards requiring heavy investments
- High uncertainties notably due to knock-on effects of Brexit and the trade war on the global automotive supply chain
- Higher raw material prices impacting margins
VEHICLE SALES AND REGISTRATIONS
IN CHINA, WESTERN EUROPE AND THE US
Light vehicle sales in the United States dropped by less than 1% during the first 11 months of 2018, despite a strong emphasis toward light trucks (+9.8% year-on-year). The light trucks segment, which is holding up, is allowing carmakers to continue selling their production. Moreover, President Donald Trump threatened car and car parts imports with tariffs, which may pose a significant hurdle to foreign carmakers. It will also penalize domestic carmakers as a lot of specialized parts and steel products are made abroad.
Chinese car sales showed a tiny decrease (-0.1% year-on-year) at end November 2018. Chinese car sales are suffering from a sluggish consumer demand and a slowing economy. Competition between carmakers is also more intense, and might dent profitability. Moreover, Chinese authorities slashed duties on imported cars from 25% to 15%, which may foster foreign made cars sales.
Western Europe registrations experienced a tiny growth at end November 2018 (+0.8% year-on-year). Mixed results were posted across the region: +4.4% in France, +0.4% in Germany, -3.5% in Italy, +8% in Spain, and -6.9% in the UK. The European market is suffering from new testing rules, which have ignited bottlenecks in model homologations.
Demand around the world is less buoyant, with a contraction in the United States, gradual deceleration in China, and a slowdown in Europe. Consumer confidence has deteriorated since June 2018 as the current trade war, notably between the US and China, impacts economic prospects.
Accordingly, Chinese GDP growth is set to fall in 2019 (6.2%, from 6.6% in 2018). Lower online peer-to-peer lending, higher oil prices, and turbulences in the stock market have negatively impacted confidence. The causes of the current turmoil are unlikely to vanish in 2019, and are therefore likely to further push down consumer confidence. Electric vehicle demand is expected to hold in 2019, despite the government’s to cut subsidies by 40%. A new scheme will start in 2019 giving credits to more appealing vehicle via better driving range.
In the United States, GDP growth is expected to slow to 2.3% in 2019, from 2.9% in 2018. Furthermore, raising interest rates in June 2018 have pushed up car loan borrowing costs to around 6%, and the average maturity length was nearly 66.5 months at end June 2018. Credit quality is declining, in part because new car prices are continuing their upward trend – the average cost of a new car was around USD 36,978 in November 2018, according to Cox Automotive –, exacerbating the loss of vehicles’ residual resale value. With the deeply rooted shift toward expensive SUV and pickups, we expect new light vehicle prices to increase over time. Should the Trump Administration implement tariffs on car parts, information company Experian forecasts an additional cost per car ranging between USD 3,000 and USD 5,000.
Deteriorated economic prospects in the largest Eurozone economies, namely Germany, France and in Italy, together with political uncertainty in the UK; are likely to weigh on car registrations. Coface’s GDP growth forecast for Europe is a drop to 1.8% in 2019 after 2.1% in 2018. Although the eurozone’s unemployment rate has been constantly decreasing since 2016 (reaching 8.1% in October 2018, according to Eurostat), consumer confidence is contracting (-3.7 at end November 2018), notably due to deteriorated future global economic prospects. The risks ahead for auto industry, notably in Germany, is likely to have knock on effect on Central and Eastern Europe Region (CER) automotive sector. As Western Europe represents the bulk of CER auto exports, countries like Czechia, Slovenia, and Slovakia will bear the brunt of decelerating registrations. The new homologation (WLTP) is exerting downward pressure on registrations, and it will take time for the market to return to normal.
The changing landscape is forcing automotive manufacturers to adapt. As they continue to face new regulations and competitors, doubts are growing over sales expansion in 2019.
New car sales in China decelerated at end November 2018 (-2%, year-on-year), and 2018 is the first year in decades to post a decrease in car sales. The market is highly dependent on government fiscal policies regarding vehicle tax, and despite predictions that the government will halve VAT on cars, as they have done in the past, slipping consumer confidence is likely to prevent a market comeback. The country is becoming a key player in terms of the production and sales of electric and/or hybrid vehicles, with the central government strongly encouraging these technologies through tax rebates, with the target 5% of all vehicles sales being New Electric Vehicles in 2019. Volkswagen’s announcement to introduce 25 new electric models in the country between 2020 and 2025 and its plans to invest USD 12 billion through its joint-ventures reflects that perception.
Cox Automotives expects a 2.3% drop in light vehicle sales in 2019 in the United States. The shrinking market will enhance competition between carmakers, which is likely to shrink margins, as rising raw material and input prices (steel, aluminium, car parts, etc.) will continue to dent profitability. However, the fall in passenger cars sales is forcing them to close factories and redirect money to e-mobility R&D. Lastly the opening of investigation for national security motives, which is due to be completed by February 2019, is very likely to cause car prices to increase and reduce jobs as carmakers would protect already strained margins.
Registrations in Western Europe are likely to increase in 2019, but only by 1%, according to the market intelligence company, LMC Automotives. As per Coface‘s calculations, the net margin figures of leading carmakers and equipment manufacturers was relatively stable at the end of the third quarter of 2018 (5.8% vs 5.9 in the second quarter). However, the UK’s departure from the EU, scheduled for March 2019, is likely to not only present risks for the UK car industry, but also lead to adjustments in European production organisation, due to the deep industrial interaction. Moreover, President Trump has threatened to implement extra duties on car imports if European allies do not proceed with commercial concessions. This “sword of Damocles” is impacting German carmakers, who are already suffering from blows traded between the US and China. A difficult market both at home and in China – a major contributor to European carmakers profits – will inevitably push them to take hard choices, when considering the huge investment need for e-mobility.
Last update : February 2019