Where will they be heading in 2012? As we enter 2012, there is much uncertainty over where the global vehicle market is heading. Dave Leggett considers some of the issues and talks to the professional forecasters.
Carlos Ghosn got it right late last year when he said that the automotive industry was heading for record sales in 2011. That’s right, the final numbers have yet to be crunched, but it is sure to have been a record year. You might be surprised that is the case given the doom and gloom in the press, but it is largely explained by the contrary movements of the US and Chinese car markets in recent years. Just as the US market was collapsing in 2009, the Chinese market was more than taking up the slack as it displaced the US as the world’s biggest national vehicle market. And the global total is also benefiting now from US sales that are coming back from the nadir of 2009, as well as yet higher sales in China. And there are other places around the world that have logged substantial growth – like Russia, for example (again coming off a low base) and ASEAN at a time when the car market in Western Europe is struggling due to anaemic economic growth and post-scrappage ‘payback’. The net result of all that is an expanding global market.
And production has been rising particularly strongly in emerging markets. PwC-Autofacts estimated global vehicle assembly at around 74 million units in 2011, with a further expansion in 2012 to a baseline total of 79.2 million units.
Although many market uncertainties will carry over into 2012, Autofacts remains optimistic that the global automotive industry outlook will be positive, assuming that a policy resolution in the European Union materialises in the near-term.
“A lot depends on how the situation in Europe with sovereign debt pans out,” said Autofacts analyst Calum MacRae speaking to just-auto. There are risks, particularly associated with Europe.
“China, in particular, has been a major positive from a global volume perspective, and we expect Asia-Pacific to continue to be positive in 2012, but the global scenario planning range is weighted firmly on the downside. A lot depends on what happens in Europe and on the scale of any financial instability, the effects of which could be felt across the world. Overall growth of vehicle assembly next year could slow to nearer 1%.”
And that’s a key point. The 2012 outlook comes with a high degree of uncertainty due to problems in Europe. Early last year, it looked like the global economy – and automotive markets – were bouncing back quite strongly from the unprecedented recession of 2009. As volumes picked up in North America – alongside still healthy growth in the BRICs and other emerging markets – OEMs and suppliers experienced a surge in volumes which, combined with leaner post-recession restructured cost bases, quickly fed into better healthier bottom lines.
By the summer of last year it was becoming clear that Europe has a very serious structural problem, associated with large national debts and a single currency, that has potentially severe implications for economic growth prospects. The money markets wobbled with the realisation that economic growth prospects were deteriorating, not helped either by the continuing impact of higher energy prices on real incomes. While Germany’s economy has experienced an export-led boom driven by strong demand in Asia and a highly competitive euro currency, cumulative national debt problems have piled up elsewhere, exacerbated by emergency bank bailouts from governments in 2009. Sovereign debt continues to loom large as a constraint to Europe’s projected economic performance. A region-wide fiscal contraction with ‘austerity budgets’ in many countries will inevitably reduce economic activity, and consumer demand for goods, this year.
The big fear is that a disorderly default on sovereign debt in Europe could turn into a bigger financial crisis that would hit the international financial system again. And Europe does not exist in isolation. If demand for goods and services in Europe falls, export sectors in other regions of the world will feel some consequences, meaning that the global economy is impacted. Moreover, the fiscal stimulus levers that offset the impact of recession in 2009 (for example through scrappage incentives on cars in Europe) won’t be available this time round, given the state of public finances.
What’s the worst that could happen?
What’s the worst that could happen? That’s a rather big unknown and depends on the nature and depth of any highly adverse economic events. Let’s say the eurozone starts to break up and that leads to a general banking crisis and a sharp economic recession. The crisis of 2008/09 gives us some assistance in terms of benchmarks.
“If a disorderly default were to happen, a much more severe drop in the car market would be unavoidable,” says Jonathan Poskitt of LMC Automotive. “But there’s a big range of outcomes in terms of the immediate event, its knock-on impacts – for example on the banks and liquidity generally and the government policy responses that might follow.”
Poskitt refers to the sharp drop in demand when the financial crisis and recession kicked in late 2008 and into 2009. “We saw the West European car market suddenly collapse to a running rate of around 11 million units,” he says. “That gives us a guide to the kind of thing that might result if Europe’s crisis takes a sudden turn for the worse. A disorderly default in the eurozone might produce something similar if its effects weren’t contained and spread quickly into a broader regional financial crisis.”
But the picture need not be as bleak as some of the worst scenarios suggest. A European economy bumping along but with the broader crisis for the euro currency being effectively managed would probably serve to gradually reassure the markets and bring about the conditions for a modest economic upturn in 2013. Interest rates will remain low. Inflationary pressures are generally subsiding (oil price key though) and cooled down wholesale banking markets will warm up again over time, the longer we go without a Lehman-style lurch and as confidence gradually returns. As the US experience shows, rising pent-up demand after dramatically reduced markets and put-off replacement will eventually turn into new vehicle sales.
Europe’s automotive supply situation not as bad as 2008/2009
There’s also some comfort to be derived from the lessons learned after the 2008/09 experience. Inventory is much more in line with demand. The resultant downturn for the industry will be much less severe than that of late 2008 and early 2009 because there is less of a surplus stock problem this time round. Back then production was running way over the suddenly sharply reduced market, forcing dramatic actions – such as plant furloughs – to reduce inventory.
LMC Automotive analyst Arthur Maher believes that the economic crisis in Europe will inevitably lead to lower car sales across the region next year. “The eurozone continues to struggle to manage the sovereign debt crisis,” he points out. “And governments are also moving pretty aggressively to tighten fiscal balances and for a number of EU states that could prove to be a vicious circle. It’s a low growth economic environment and against that background we forecast that West European car sales will fall back by 5% in 2012.”
With the market down next year, Maher says there will be an accompanying adjustment for the region’s vehicle manufacturing sector with a drop to Europe’s light vehicle production total of 6.5% forecast (to 19.1m units in 2012). Within that total, higher demand in Eastern Europe supports output there to produce a small gain (0.6% to 6.5 million units) while Western Europe’s production is forecast to fall by 9.7% to 12.6 million units.
“That is serious, of course,” Maher acknowledges. “But it’s less severe than what we saw in the last big downturn of late 2008 and 2009 when the industry was burdened with around 2 million units of excess stock and we saw output contract by 20%. Without that stock problem, output then would have fallen by more like 10% – half of the collapse to production that occurred was therefore down to destocking.
“Currently, industry stockholdings are fairly well managed and, depending on the severity of the downturn to demand predicted for 2012, the industry is not starting with a major stock overhang.”
Maher notes that Ford, PSA, Renault, Toyota and Opel have all announced plans to trim production and that some new model programmes are also slipping. And some premium OEMs are still working hard to meet strong orders from Asia, he says. “From an industry point of view, it’s a very different situation from that which we were faced with in late 2008,” he says. “We believe that the industry will continue to work hard to avoid a repeat of the 2009 stock crisis. In general, we expect OEMs to remove individual lines and thus capacity as and when new models are introduced – politically this is much more achievable in Europe.”
German market to run out of steam?
What about the German powerhouse? Germany was the only major European car market registering any sort of gain for 2011 over 2010 – it was 9% up. That compares, for example, with 11% down in Italy. At almost 3.2 million units for 2011, the market is not far from levels achieved last decade (pre-recession). However, the second half of the year saw the German market weaken and analysts see it losing momentum as the German economy slows further in 2012. Consumer confidence surveys already reflect rising concerns over the implications of the eurozone crisis for the German economy.
“The German market is losing momentum,” Poskitt maintains. “We’re currently assuming a 2% drop.”
Elsewhere in Europe, demand seems likely to be depressed with markets bumping along the bottom after big drops in 2011 to yield an overall drop for Western Europe of around 5%. The UK car market will likely turn out 1.8 -1.9 million depending on how severe the economic slowdown turns out. Fleet sales have been supporting the market in 2011, an indication that underlying demand cycles as well as how the economy tracks have a role to play.
A year ago, the French market was flying as buyers looked to take advantage of the remainder of the government scrappage incentive support, with last month’s result certainly being put in the shade. The Spanish and French markets continue to reflect the very trying economic conditions in those countries.
Of the five major West European markets, the Spanish market is certainly struggling the most, with the December selling rate once again under 800,000 units/year, leaving the full year market down 18%. Any form of significant improvement in this market appears some time away. Italian registrations continue to be a cause of concern as well. The selling rate for the final quarter of 2011 stood at 1.7 million units/year and with the economy continuing to struggle, the market could slip further in 2012.
While the UK market was down by 4.4% last year, the revealing statistic is private retail sales, which was down by a staggering 14.1% and clearly highlights a retail driven recession. This retail slump is not just a concern for overall volumes but also for profit margins.
By contrast, the position in the US is relatively upbeat. The market remains well down on the 16-17 million annual norms before 2008, but it is coming back. December was quite merry for automakers. US light vehicle sales rose 8.9% to an estimated 1.24 million units, producing a seasonally adjusted annualised rate (SAAR) of 13.56 million, down slightly from November’s 13.63 million mark but still the second best reading of the year. Full year sales came in somewhat above 12.7 million, in line with just-auto estimates.
Forecasts for 2012 are split, but there is generally a view that another increase is coming, driven by strong retail: Morgan Stanley recently raised its projection to 14 million sales though most other analysts are looking for results in the mid-to-upper 13 million range. Recent sales have been robust but some worry the good results were driven by pent-up demand that may have been mostly satisfied. The US economy is recovering, albeit slowly, but there are still many factors that could throw a spanner into the works
The US vehicle market, analyst Polk says, will experience single digit growth, primarily due to the relatively strong year for sales in 2011, and the effects of the weak economy that will continue to impact new vehicle demand through most of 2012. Light vehicle sales are expected to grow at a moderate pace, with a 7.3% increase to 13.7 million vehicles, according to Polk analysts, but they do not expect the US market to achieve pre-recession levels of greater than 16 million vehicles per year until 2015.
Other analysts are in the same ballpark. North American industry outlook remains positive although volumes are not expected to achieve prior peaks. Autofacts predicts an 860,000 year-over-year increase in North America production predicated on healthier inventory, export growth, and US light vehicle sales of 13.6 million units in 2012.
“The US region’s automotive sector is poised for continued growth in 2012,” said Rick Hanna, global automotive leader, PwC. “Automotive companies have ramped up vehicle inventories and growth markets are easing monetary policy. Although uncertainty persists, we anticipate the global automotive industry will run on all cylinders toward another record year as long as Europe’s issues don’t spill over to other regions.”
The luxury segment in the U.S. market in 2012 is expected to be the fastest growing segment, with more than 14% growth, according to Polk.
“More affluent buyers are returning to the market for new vehicles, after three years of spending reductions,” said Anthony Pratt, director of forecasting for the Americas at Polk. “The luxury segment also offers a wide variety of product options for consumers across all segments, ranging from small cars to SUVs,” he said.
Polk says that leasing penetration will continue to be higher in the luxury segment in the US and will continue to lift transactions in all segments, as elevated residual values reduce the monthly lease payments, attracting consumers to showrooms who often make purchase decisions on the monthly payments that fit their budget.
An estimated 13.6 million new cars and trucks will be sold in 2012, according to
Edmunds.com. “With annual sales still far below the level achieved prior to the last recession, there’s plenty of indication that pent-up demand is far from spent,” says Edmunds Chief Economist Dr. Lacey Plache. “Improved selection and loosening credit conditions are helping to entice the millions of buyers that are waiting to jump back into the market.”
Next year won’t be without obstacles, though. Dr. Plache says that the continued slow pace of the economic recovery and uncertainty in the months leading up to the US Presidential election may constrain sales growth. Threats of a European recession and a Chinese economic slowdown will also pose a risk to growth in the auto market, and if these or other negative events shake the marketplace, new vehicle sales momentum could weaken.
Emerging markets continue to grow, led by Asia
Elsewhere around the world, the 2012 picture is far from bleak – though much depends on stability being achieved in the global economy. Inflation has been a problem and prompted monetary tightening and other policy shifts in Brazil, India, and China caused slower growth in 2011. But, with inflationary fears in these markets subsiding (prompting correspondingly looser monetary policy), these markets could be poised for substantial growth once again, according to the analysts at Autofacts. There is clearly plenty of potential for further motorisation in places where car density remains low.
Polk maintains that growth in the other BRIC countries will outpace many mature markets over the next few years. As an example, Polk expects Brazil to surpass Germany as 2011 sales results are finalised, and new vehicle sales in India are expected to surpass those sold in Germany by 2014. Sales in Russia will outpace Germany by the year 2015, Polk believes.
Russia is also positioned for another year of strong local demand. BRIC growth is likely to reach double digits (12%) in 2012 following only five percent growth in 2011, Autofacts says.
The analysts there also say that potential exists for strong output recovery in Japan and Thailand as the auto sectors in both countries work to satisfy pent-up demand, clear product backlogs, and rebuild inventory in the wake of 2011’s natural disasters. Thailand’s eco-car program is also likely to provide assembly upside in 2012, Autofacts adds.
What about the chronic traffic congestion in major urban centres in China and India, I hear you ask? It’s an issue, of course. But the automakers seem convinced that there is a ‘cascading’ effect as economic growth and rising real incomes spread out from initial hotspots. In China’s case, it is spreading away from the hitherto high-growth and congested cities such as Shanghai and Beijing to inland population centres where manufacturing activity continues to be strong.
After two years of massive expansion, China’s auto market is returning to a more subdued growth pattern. The cooling has been attributed to the termination of government tax incentives and local government initiatives aimed at easing ever-worsening traffic congestion. This, some observers say, is expected to hit local car makers more than overseas players which have superior fuel-saving technologies.
Analysts looking at China are still generally upbeat about 2012. Growth is expected to come from solid demand in tier 2 and tier 3 cities, capacity expansion, easing monetary and fiscal policy and possible new investment programmes after the change in government leadership due in 2012. Industry observers expect market growth in 2012 to be between 5% and 10%.
Like China, the Indian car market is also being adversely impacted by rising interest rates, higher car prices and more expensive fuel. But again, the outlook remains positive for vehicle sales providing inflationary pressures are kept under control and economic growth maintained.
Author: Dave Leggett
Management consulting firm Ernst & Young says that five themes are likely to be critical for the auto sector in 2012:
- The cooling of emerging markets growth is likely to be an area of concern for the industry in 2012. However, long-term outlook remains positive.
- Developed automotive markets in Europe are likely to witness weak sales as a result of the sovereign debt crisis and the sales growth in the US is likely to remain uncertain. While these markets were forecast to recover to 2007 levels of production and sales by 2012, this is now likely to be delayed until the middle of the decade.
- The intensifying competition for a market share among OEMs globally is likely to create pressures on the supply chain. Emerging economies, especially China, are becoming the largest markets for a number of global OEMs. As a result, these OEMs face the challenge of not only defending their share in their home markets, but also leveraging the growth in emerging markets. The competitive environment will place operational and financial pressures on suppliers.
- The auto industry is expected to fully recover from the impact of the two natural disasters, the Japanese earthquake and the Thai floods, that caused severe vehicle and parts shortage in the past few months. These disasters led to a reduction in automotive inventories and offer companies a unique opportunity to evaluate production footprint and put in place processes to respond to future supply chain disruptions.
- The uncertainty of raw material prices is likely to be a key concern for suppliers and they need to look at various options from structuring pricing contracts to joint sourcing strategies.