There are currently three key issues to the production outlook; SupplierBusiness discussed these with key industry forecasters around the world.
In Europe, will the growing German business confidence help the production outlook? Or, is this merely a short-term effect, holding the real position somewhat flat?
According to Ulrich Winzen, chief analyst, forecasting and consulting at R L Polk Marketing Systems, the slight increase in German business confidence indicators is no more than a reaction to the early elections on 18 September. There are no realistic signals for an unexpected economic growth in the next 18 months. The consumer confidence indicators are still decreasing and/or on a very low level in most West European countries. Therefore, for West European passenger vehicle production Polk forecast a decrease of about one percent this year and a recovery of two percent next year.
Arthur Maher, head of European forecasting at J D Power-LMC comments that 2005 is turning out to be another difficult year for assembly. During the first six months of this year West European passenger car build was down by 120K and build is forecast to fall by a further 290K in the second half of 2005.
In particular, we are seeing OEMs extending the summer shutdown in order to bring build into line with demand. J D Power-LMC forecasts growth in central and eastern Europe of 180K in the second half of 2005 on top of the 100K build up in the first six months. With the exception of Turkey, all countries in central and eastern Europe are forecast to show strong growth in Q3. West European build is forecast to contract by 7% in Q3 with Spain, the UK, Italy, the Netherlands and France all seeing production fall back sharply.
Michael McKenzie of PriceWaterhouseCoopers Global Automotive Practice maintains that in the EU there are a number of factors in play that suggest the sales cycle is at its nadir, implying the return to some market and assembly growth in 2006/7. He comments that activity in the medium and heavy-commercial vehicle sector has been increasing - a proven lead indicator of future car demand as it reflects building economic and business sentiment. More importantly, with the UK's car market now entering a downward cycle, the German and French CV markets have posted positive gains in 2004 and H1 2005, auguring well for future levels of car demand in those markets, and consequently, given their comparative weighting, the rest of the EU.
The markets of the accession states, particularly Poland and the Czech Republic, represent an opportunity for growth. The Polish market, for example, is currently at less than half the level it peaked at in the 1990s. From these factors, the 2005 Q3 PwC Autofacts EU light vehicle assembly forecast sees marginal growth of 0.1% in 2005, with stronger growth of 1% for 2006 and accelerating to some 3.7% in 2007.
At CSM Worldwide, Mark Fulthorpe, director, European vehicle forecasts makes the point that the recent upturn in German business confidence as reported by IFO is a welcome development but similar ratings at the end of 2004 and in the first 2 months of 2005 were not sustained. German car buyers continue to be more susceptible to fears over unemployment. Official estimates put the number of unemployed at over 5 million, while unofficially there may be another 3 million to consider. Therefore, production levels are not likely to react to the short-term improvement in the business climate.
CSM expects a 5% increase in output of cars and light commercial vehicles to 5.27 million units, which continues to be shaped by new product launches and ramp up effects at BMW and VW in particular. In North America was July's surge in US sales really a turning point? Or was this demand being pulled forward through the continued use of incentives? Participants now seem to be locked in a competitive "game of chicken" to see who will lift off the incentive pedal first.
Polk's Ulrich Winzen comments that July sales were driven by very high incentives from the manufacturers and forecasts that with the beginning of the new model year these incentives will be reduced. Polk expect for this year about 16.93 million light vehicle new registrations and a little bit less for next year (16.9 million). At CSM Worldwide Mark Fulthorpe expects surging US sales over the last two months to slow over the balance of the year. Employee pricing programs, which sparked demand in June and July, to be phased out as 2005 model inventory is replaced with new 2006 models. CSM estimates more than 200,000 units of demand was pull ahead in June and July and is anticipating sporadic payback over the next five months, and is therefore maintaining its sales forecast of 16.95 million units.
Ryan Robinson of PwC Autofacts comments that while recent automotive sales promotions undoubt-edly did bring some new buyers into the North American market, the heavily discounted sales resulted in a significant number of "pull-ahead" transactions that ordinarily would have taken place in the fourth quarter of 2005 and first quarter of 2006. As a result, there will be downward pressure on demand in both these periods despite the introduction of new model year vehicles and the success of employee discounting programs will be only slightly accretive over the longer term. Carmakers are demonstrably preparing for such a scenario. Although sales in July rocketed ahead to a record 1.8 million units (20.6 million SAAR), GM and Ford announced further production cuts in August and September. Only DaimlerChrysler is forecast to increase assembly over this timeframe. PwC expect fourth quarter light vehicle production on the part of these OEMs to be roughly flat with year-ago results.
Is China really showing signs of a recovery? With over 130 brands elbowing for market share, if growth is to remain positive in the near-term, who will be the winners and losers as this highly competitive market evolves? Polk's Ulrich Winzen comments that the strong positive development of recent months is expected to be only temporarily due to stock effects (low new registrations last year). Concerns are growing regarding an economic slowdown and for 2005 Polk expect about 3 million passenger vehicle new registrations (2.49 last year) and something between 3.3 and 3.5 million in 2006, depending on economic development.
CSM's Mark Fulthorpe, says that sales have turned around and from April to July the average passenger car sales remain at 260,000 units. Based on official statistics, year-to-date July passenger car sales volume already hit 1.65 million, 14% growth over the same period last year. CSM believe that the market is indeed recovering and maintaining a very stable pace. If there is no major price war again later this year, this stable demand will continue till end of the year.
At PriceWaterhouseCoopers, Michael McKenzie makes the point that a combination of stricter vehicle finance controls, soaring fuel prices, and uncertainty in vehicle pricing caused growth to stagnate during the first quarter of 2005, with February actually posting a year-on-year decline. Unlike in the US where price cuts spark demand from consumers, in China classic deflationary psychology is to blame: after seeing retail prices drop an average of 14% annually for the past three years, consumers became unwilling to enter the market until it was clear that pricing was bottoming out. Year to date, pricing is down a more modest 3% and carmakers have sold off excess inventory, bringing supply more in line with demand. Looking ahead, however, with capacity investments now coming online, the market may again be left with an overabundance of redundant capacity that could undermine the current period of relative pricing stability.
PwC expect growth to remain resilient throughout the remaining two quarters of the year, with the Chinese market likely realizing an annual growth rate of 14% for light vehicle output, surpassing that of 2004. However, not all players will rebound as 2005 progresses. While GM and Honda saw sales rise 18.9% and 41.1%, respectively, through June, the VW brand saw sales decline 14% between its two joint ventures, and its market share tumble from over 50% three years ago, to 18%.