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Industry News, Issue 48 - Spring 2013

Automotive Industry Overview – Q1, 2013

After what has seemed like an unusually long winter in Britain, spring has finally arrived. The birds can nest, the bees can buzz and the human population of this crowded isle can emerge from a kind of hibernation. Spirits are naturally lifted. The great outdoors, to be enjoyed in kinder weather accompanied by a warm sun and days of longer daylight duration, beckons. The cricket season has even begun. A pint of warm beer in a pub garden can’t be far away.

Similarly, those of us who have been around a while in the auto industry know that day follows night, however bleak things look just before the dawn. Economic recessions eventually give way to recovery.

But just as each winter is unique, each recession and the changes wrought on industries (including automotive) is different from the last. The current travails for the global economy are bound up in some pretty deep-rooted financial problems, rather than, say, the oil-shocks and inflationary spirals and responses of yesteryear.

We’re still very much feeling the aftershocks and knock-on effects of the banking sector crisis that began in earnest in late 2008 (after the ‘credit crunch’ that commenced around a year earlier). However, the recovery from this recession is, across the world, far from even.

North America and Asia in relatively good shape

From an automotive industry perspective, North America and Asia are in relatively good shape. The US light vehicle market is heading over 15 million units this year.

That’s still not quite back where it was pre-crisis, but it’s not that far off and it’s a big improvement on where it was in the dark days of early 2009 when General Motors went into Chapter 11 and the North American auto industry was staring into an abyss. The slimmed down Detroit ‘Big 3’ have been on something of a roll, as have North America-based Tier 1 suppliers.  Restructuring in North America has meant that higher volumes have quickly translated to higher profits. Leaner and meaner.

Asia, too, remains generally upbeat even if growth in China is not quite as dramatic as it was. China  has been delivering strong profitability for Western makers with major joint venture (JV) operations there, most notably Volkswagen Group and General Motors. China’s emerging middle-classes are increasingly attracted to Western brands. They are seen as better in terms of quality and design. It is the domestic brands who have been struggling.

The German premium brands have also been making hay in China, Chinese buyers tending to want specced up cars that boost profits.

So far this year, China’s car market – the world’s largest by a considerable margin now (light vehicle sales there this year could top a mind-boggling 21 milion units) – has been growing. That’s reassuring. The hope for the global economy has to be that China’s population continues to buy goods and services. If Western households are still a little bit reluctant to spend, Chinese consumers could be a rising source of demand for the global economy.

But Asian demand growth is not just about China though. Thailand’s vehicle market enjoyed 80 percent growth in 2012. Okay, that was exceptional (it was a bounce-back from the low of 2011 and was also fuelled by incentives) but underlying demand looks strong. Thailand is also developing an industry specialising in ‘eco-cars’ as well as pick-ups. Other markets in southeast Asia look to have good prospects, also. Indonesia’s car market should (on the basis of that country’s population size) become the ASEAN’s biggest later on this decade and it is starting to attract more investment from both OEMs and suppliers.

The Japanese carmakers have been through a lot over the last few years, but relief is a prospect in the shape of domestic politics and its currency. Japan’s government has moved decisively to bring about a weakening of the yen and that is already supporting bottom lines. Emerging wrangles over the conditions for international trade and proposed free trade agreements will likely rumble on though, with the automotive industry at the heart of that.

Western Europe stands out for its current problems

If there are some bright spots for the auto industry in the Americas and Asia, Western Europe stands out for its current problems. The car market is still shrinking as austerity budgets bite across the region. In 2007 Western Europe’s car market was 14.8 million units. This year it will not be much over 11 million units. That’s a lot of market volume, demand, taken away. What has it meant for the industry?

Some OEMs have been impacted more than others but it has led to general discounting and very, very low rates of capacity utilisation. Sergio Marchionne of Fiat has described the West European car market as a ‘bloodbath’. While there have been some announcements of plant closures, it looks like there is more to do given where plant capacity utilisation rates are, way under what is healthy, and given the prognosis for the European car market, i.e. still going down with a weak economic recovery in prospect, at best, from next year. Industry sources tell me that stock levels have been trending up for some in recent months, something that could make plant capacity utilisation rates look even worse later this year, perhaps in combination with even softer new car prices in the marketplace.

The overall economic situation remains weak. Austerity budgets are biting across the continent, the eurozone crisis may be calmer as the ECB has taken actions to calm the bond markets down, but as we have just seen in Cyprus, it can blow up from time to time. Consumers across Western Europe remain very wary. Even German consumers, who have an economy with unemployment at a 20-year low, are most definitely not in the mood to spend while big uncertainties persist.

The ‘squeezed middle’ gets squeezed further

Who is suffering most? The answer is the European volume makers are all suffering in terms of European operations, but pressures are being felt especially acutely by Fiat, GM, PSA Peugeot-Citroen and Renault. Even Ford, which is in relatively good shape, is expecting to make a USD 2bn loss in Europe this year.

Besides the current unhelpful developments in overall market conditions, there’s also a long-term loss of share evident for what some have termed the ‘squeezed middle’. These traditional European volume players are being squeezed by more aggressive premiums – guys like BMW and Audi who have added many niche models and moved into smaller car segments. BMW Group’s MINI brand, with its small premium cars, is one example.

We have also seen Asians growing share in Europe over the past decade, not just the Japanese, but now the Koreans in the shape of Hyundai and Kia.

The European volume players are all in a tight spot: losing share and money. The big question right now is overcapacity. Capacity can be a complicated thing to measure, but as a rule of thumb, vehicle assembly/production plants should operate at around 80 percent capacity utilisation to break even. Some plants in Europe are at nearer 20 percent. That’s a lot of unproductive overhead to carry.

There is still a general reluctance to shut capacity, especially during a severe recession. Opposition can be strong and potentially even more damaging than keeping a plant ticking over for a while longer or until the market picks up. Wait for the tide to come in and everyone will get some ‘re-flotation’ benefit, the thinking goes.

The big problem is the duration of this slump in Europe. If you are losing money and operating plants at a loss, a big question is how long can you do that if the market recovery is being pushed back further? And if you are losing money and cutting back on new product development to save cost, the competitive implications of that are pretty serious too.

Will tough decisions be fudged?

Will the European players, the ‘squeezed middle’, shut more plants? Or will they fudge it? Renault, for example, has just done a productivity deal with labour unions in France and said that it will not shut any plants there. That seems like quite a concession from Renault.

There is also talk of making Nissan and maybe some Daimler Group cars in Renault plants. Opel plants might make Chevrolets to soak up some of its unused capacity. And there’s also talk of trimming capacity, looking at model-mix and shift patterns, at some plants to avoid outright plant closures.

Many in Europe think things will be fudged, that the capacity surgery that should happen probably won’t – at least not to the extent that it should. There is also a cynicism about the role of governments, somehow contriving to keep some plants going. Witness the political furore in France over PSA’s plans to shutter the Aulnay plant. Politicians seem to have accepted that as a done deal and a government sponsored report was cooked up that said Aulnay has to close, pinning the blame for PSA’s troubles on its strategic governance over past decades.

More difficult decisions on capacity seem to lay ahead, at least while the West European car market languishes in the region of 11 million units. One consolation: it probably won’t go much lower. The first quarter market was around 10 percent down on last year, but the remainder of the year will see the comparison versus last year against a weaker base. At some point, as we have seen in the UK car market (‘defying gravity’ and still showing some growth), buyers putting off replacement purchases come back to the market. 2014 may well see some pent-up demand in Europe coming back after such a prolonged and deep slump in sales, assuming that the powers that be in Brussels and Frankfurt (home of the European Central Bank) can combine to steady financial markets and keep the European economy in a state of reasonable stability.

As the recent crisis in Cyprus showed, some serious uncertainties remain and the crisis for the eurozone remains far from resolved.

The global pie is expanding

One point that is worth remembering: the global automotive pie is continuing to grow. Market growth outweighs contraction and global light vehicle sales are forecast to accelerate to over 81 million units in 2013.

There is also much new product and technological innovation to get the pulses racing. For example, I recently drove Renault’s Zoe electric vehicle and I was very impressed with the experience as well as the price point. It will find a market niche. As well as being a technological tour de force in its own right, that car and its technical underpinnings are very much the product of that company’s highly successful alliance with Nissan. They can share investment costs where appropriate and make big savings on parts procurement and in manufacturing. Such alliances between automotive companies will become increasingly important in the future.

Carlos Ghosn also made a good point when I met him for breakfast at the launch hotel on the outskirts of Lisbon. Electric cars can make a valid contribution on the environmental front, along with other powertrain technologies, even if battery electric vehicles are not a silver bullet that solves everything immediately. It’s a valid step in the right direction. Renault is a company that faces big challenges, but its situation is far from hopeless while it can innovate and achieve that innovation in the context of a global strategic alliance that, besides Nissan, also involves AvtoVAZ of Russia and some cooperation with Daimler.

While it may seem that the ‘automotive spring’ is taking its time to appear in some parts of the world, there are plenty of positives. You just have to know where to look.

Writer: David Leggett, Editor – just-auto.com

About lotusproactive

Lotus proActive is an e-magazine published quarterly by Lotus Engineering, covering engineering articles, industry news and articles from within Group Lotus (Cars, Engineering, Originals and Racing).

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