The Automotive Industry in 2014–an EIU webinar


EIU Webinar—Automotive Industry in 2014

On Thursday, January 16th, the Economic Intelligence Unit sponsored a webinar on their forecasts for the Automotive Industry in 2014, part of a series of six industry-wide webinars that the EIU is putting on based on their industry reports that came out at the end of 2013.  I already did a post on one of those other webinars, the one on the Retail and Consumer Goods Industry in 2014, on January 18th.

This week I intend to do a series of posts on the other 5 industry webinars, starting with this one.  The webinar was presented by Ana Nicholls, a Managing Editor at EIU covering the automotive industry.

1.  INDUSTRY SURVEY

Some of the data that the EIU used to gauge the prevailing sentiment within the industry came from a survey done with respondents from the various industries covered by the series of EIU reports (including the automotive industry).  They were asked about their expectations for 2041 for

  • The global economy in general
  • Their particular industry
  • Their particular company

There were three basic categories, those who felt that the industry would be doing better off in 2014 than in 2013, those that felt that the industry would be doing worse off in 2014 than in 2013, and those that felt that the industry would be doing about the same in 2014 as in 2013.  The EIU took an “index of sentiment” by taking the percentage of respondents that thought the industry would be doing better minus the percentage that thought the industry would be doing worse.

As a point of comparison, let’s take a look at the index of sentiment for the various industries that were asked about in the survey.  These are listed in the chart below in order from those with the most optimistic outlook to those with the least optimistic outlook.

Industry

Index of Sentiment

Telecoms

46

Financial Services

43

Overall (average)

38

Consumer Goods

35

Automotive

32

Energy

23

Healthcare

17

 

Note that the automotive industry, with an index of sentiment, is less positive than some industries and in addition is less positive than the average across all the industries.  However, although less positive than the average, it is still better than a shift from a negative index of sentiment that prevailed last year.  This is a sign of confidence in the global economy as a whole, although you cannot say it is the level of a “ringing endorsement.”

If you look at the index of sentiment for the automotive industry listed above (32), that is the average across the various respondents from different parts of the globe.  If you look at where in the world the index of sentiment was the highest with regard to the automotive industry, that would be the Middle East.  The place in the world with the lowest index of sentiment towards the automotive industry was Latin America, followed by Europe.

Another interesting question that asked in the survey was “which country offers the greatest growth prospects outside the BRIC (Brazil, Russia, India, and China) countries?”  In the previous years, the answer focused on emerging markets, but this year there was a mix between emerging and developed markets; about 2/3 answered that emerging markets would have greater growth prospects, and 1/3 answered that developed markets would.  One of the BRIC countries, China, was receiving a more bearish assessment from the respondents, in that 2/3 of them were worried by an overreliance on the China market, in case the economy overshoots and there is retrenchment.

2.  REASONS TO BE CHEERFUL

The EIU has some reasons to be somewhat cheerful about the automotive industry in 2014.  First of all, 2013 was a record year for global car sales, and it looks like 2014 will be a record year as well.  The world passenger car market will grow by 4.7%, as compared with 3.6% in 2013, with the commercial vehicle market growing by 5.2%, as compared with 1.6% in 2013.

But there are risks that the automotive industry faces in 2014, among which are:

  • The gap between developing and developed markets is narrowing
  • Shift in monetary policy in developed markets
  • Structural problems in developing markets
  • Possible credit bubble in China

One of the underlying reasons for these risks is in the flow of money:  in the past, low interest rates in developing countries caused investment to flow there.  With interest rates there rising, and China deliberately attempting to slow the credit bubble, the funds to the developing countries may be flowing back to the developed countries.

Out of the BRIC countries, in only one of them (China) did automotive sales rise; they fell in the other three (Brazil, Russia, India).

The US automotive market was predicted to be stronger than the China market, but the actual figures show that the sales figures in the US turned out weaker than predicted.  In fact, Asia is no longer the faster growing region:  North America is.

3.  EUROPEAN RECOVERY?

Out of the respondents questioned, 69% felt the European market is likely to stay subdued.  Some European markets are recovering more strongly, but growth even there will still be on the order of 1%.  There may be a few markets like Italy and Portugal that declined so much because of the Euro crisis that they will report strong growth in 2014 by comparison.  In fact, if you look at the performance of all the various countries of Western Europe, the growth figure depends on how far they fell during the Euro crisis.

4.  SHIFTS IN MONETARY POLICY

Since passenger and commercial vehicles are big-ticket items that often require loans to purchase, the automotive industry is strongly effected by shifts in monetary policy because this effects how readily available credit is for those loans.

As mentioned in paragraph 2, money flowed to developing markets because of better returns, but there may be reduced capital flow to the emerging market because of shifts in monetary policy in developed countries.

Another factor which has a big effect on the automotive industry is the price of oil.  46% of the respondents said that rising fuel prices would dampen car sales.  Oil prices will soften in 2014, and fall to US $93/barrel by 2018 (by BRENT measure).  It could fall even faster, as demand is falling and supply constraints are easing.  There has been a trend towards increasing fuel efficiency of vehicles, but the impetus to buy fuel-efficient vehicles dies down as oil prices case.  For example, in the US you can see sales of 4X4s or SUVs are picking up, showing that the American public has less concern about fuel efficiency than before.

In some developing markets, however, oil prices will rise as subsidies are removed by the government.  This is already a factor in the Indian market.

5.  CHINESE PLAYERS

Will Chinese automobile manufacturers such as Geely, Chery, and SAIC follow the successful path of South Korean carmakers such as Hyundai?  The Chinese carmakers are losing market share domestically, and are increasing their exports.  54% disagreed that Chinese and Indian carmakers would start to penetrate developed markets, however.  69% agreed that emissions and safety standards played to the advantage of western carmakers.  Since those standards are not as high in the Middle East and Latin America, those markets are easier to penetrate.  However, one of the notable things that happened in 2013 was a Chinese car got a 5-star rating for safety, the first time this has happened.  Although Chinese players are not yet in a position to make an assault on Europe or North America, it will be interesting to see their performance in the developing countries in the coming year.

As for the European market, however, 69% of the respondents agreed that it would remain subdued, forcing further job cuts and further consolidation.

That is the main portion of the presentation.  The rest was taken up by questions and answers from those attending the webinar.

6.  QUESTIONS AND ANSWERS

1.  What about the high-end market for automobiles?

This has been doing extremely well throughout the slump, with Rolls Royce, Audi, Jaguar, and Land Rover reporting records sales, even in Europe.  It is a mixed picture going forward, however.  There are signs that some luxury brands aren’t doing as well as others.  There is much more worry about branding, and that is particularly noticeable in China.  The Chinese attitude towards luxury brands is changing as more and more people can afford them.  Ferrari is deliberately restraining sales in China to retain the air of exclusivity.

The luxury market will not outperform the regular market as it has in the past few years.  The oil price index may affect this, particularly at the top end of the market, because many of the extremely wealthy derive their income from the energy industry.  As oil prices drop or ease back, therefore, there is less wealth in the Middle East and in Russia to be spent on luxury goods, including luxury automobiles.

2.  What about trends in Indian auto registrations?

The Indian economy as a whole is growing; however auto registrations are on the decline because of other factors holding back the market.

3.  Which car makers are benefiting from the upturn in the global economy?

Carmakers doing the best are the ones doing well in China and US, the largest markets: GM, Ford and Volkswagen.  Volkswagen is doing well in China and has topped GM, although it is not doing as well in the US.  Ford is not as big as GM and Volkswagen in China, but is obviously doing well in the US.

Fiat has suffered in Brazil where the car market is dropping, as it is in Latin America as a whole.  The biggest loser is Peugeot, because it is focused on Europe; in addition, it has not had the product lineup that Renault has.

One of the other factors that affects auto industry is where production is, based on currency shifts and demand shifts.  Toyota has experienced a drop in sales, because they were affected by flooding in Thailand, the tsunami, and strong yen.  As these factors disappear, they will affect all Japanese carmakers, including Toyota.

Given the long-term horizons that production planning has to undergo, it’s a delicate balancing act.  Production in W. Europe will continue to fall; carmakers are heading to production in China, Brazil, and Mexico.

4.  Any data are on which countries have the greatest potential in car sales relative to GDP?

EIU did a study a few years ago, China had the most potential based on forecast for GDP growth and relatively low car stock.  China has caught up a lot of that gap; car stocks are where they should be based on GDP/capita.

There is potential for catch-up growth in Indonesia.  One of the other areas of potential is the US, which has surprisingly low car stocks relative to wealth levels.  That is the reason behind rise in car sales there.

There are some countries where there is greater car stock than needed.  For example, in Malaysia, a lot more people have cars due to local production, and so growth levels won’t be high there.

5.  What is the situation in Central and Eastern Europe?

They had a particularly bad slump after 2008-2009, partly because it had had such a huge surge up to 2007, and pent-up demand had gone.  Car sales in Ukraine are still down 60% compared to 2007.  There is potential for catchup growth in theory, but economies are not particularly strong.  Forecasts for Russia, for example, are not particularly bullish; their economy will grow only slightly in 2014 (it declined in 2013). Central and Eastern Europe should see a recovery based on how far it dropped during the global slump.  The exception is Poland; it will remain relatively strong over the forecast period.

6.  What is the situation in Latin American countries?

One of the biggest surprises recently is that Brazil  has been overshadowed by Mexico, across all figures:  GDP growth, car sales, and car production.  Mexico was extremely strong in 2013, with Brazil turning in a disappointing performance.  The same will be true in 2014.  That is partly due to the relation to the growing US economy through NAFTA, but demand is growing within Mexico itself.  In Brazil, however, demand remains subdued.  The economies that will be strong in Latin America outside of Mexico will be Argentina, Peru, and Venezuela.

7.  What is the biggest differentiator between India and China in terms of car sales and growth?

In terms of wealth alone, China is richer.  There is a much better spread of wealth there than in India, and it has more sustainable growth potential.

Another differentiator is demographics.  China has an aging population. The number of people within car-buying age is shrinking.  India, on the other hand, has a huge under-15 population that is getting close to car-buying age in 5 to 10 years.  India is a stronger one in terms of growth in the medium-term, whereas China is a stronger one in terms of growth in the shorter term.

8.  What is the effect of the investment in infrastructure on car sales?

In developing markets, infrastructure has a powerful effect on car sales.  Commercial vehicles are used in building the roads themselves.

9.  What about the alternative-fuel vehicle market?

The sales of electric vehicles has been relatively poor, perhaps due to the declining oil prices.  The growth was strong in 2013 but from lower levels.  Outside of urban areas, infrastructure is crucial to the growth of purely-electric vehicles (the so-called “chicken-and-egg problem”).

Hyundai is launching the first mass-produced hydrogen fuel-celled vehicle.  Sales will be small.  Toyota will launch theirs 2015.  That is starting to become a real prospect by 2020.  Although they are extremely expensive compared to regular vehicles, these have much more potential than electric vehicles because of their much better range.   You will start to see a shift from electric to hydrogen fuel-celled vehicles by 2020.

NOTE:  Thanks to the EIU for putting on such an informative series.  I appreciate the fact that they take questions from the webinar audience; sometimes the most interesting details of the webinar come from the answers to those questions!

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