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  1. Analysis
January 21, 2011

BRIEFING: US, Europe and Japan vehicle market outlooks

In this month's management briefing series we take a look at prospects for the auto industry in 2011. Dave Leggett surveys major market forecasts, prospects for companies and reveals the results of a survey of just-auto's global readership. The first instalment considers the global outlook with particular reference to the US, European and Japanese vehicle markets.

By David Leggett

In this month’s management briefing series we take a look at prospects for the auto industry in 2011.  Dave Leggett surveys major market forecasts, prospects for companies and reveals the results of a survey of just-auto’s global readership. The first instalment considers the global outlook with particular reference to the US, European and Japanese vehicle markets.

You may not realise this, but it’s quite a stat: more vehicles were made in the world in 2010 than in any other year in history. Light vehicle assembly is variously estimated at over 70m units in 2010, just pipping the previous pre-crisis peak of 2007. Market trends were by no means universally positive, but one trend sums up the year more than any other: by far the big story of the global auto industry in 2010 was the strength of emerging markets.

If you don’t know about the booming vehicle market in China, well, where have you been? If you work in the industry in North America or Western Europe, these perhaps don’t feel like ‘good times’ even if 2010 has seen business stabilisation or improvement. But many firms in the West are also benefiting from boom in the East and the auto industry has been transformed by Asia’s (and especially China’s) rapid growth in recent years. This is new demand, motorisation of the population driven by big gains to real incomes.

Meanwhile, the US vehicle market – so long the world’s largest by quite a margin – is now significantly smaller than China’s and General Motors sells more vehicles in China than it does in the US.

With the economic recession felt more acutely in the advanced economies of the world, vehicle markets there are at historical low points and only slowly recovering. Maybe Australia’s car market stands out as an exception, but then the ‘lucky country’ has an economy been benefiting from surging demands for its mineral exports from China.

But it wasn’t just China that led the way in 2010, India also posted strong growth. And the Brazilian economy was strong enough to lift sales there.

How are things shaping up for 2011?

In a nutshell, there’s enough momentum in the high-growth emerging markets coupled with ongoing recovery in developed markets to carry the overall vehicle market and industry output to a new record level. PwC Autofacts forecasts that the 2011 light vehicle production total for the world will rise to 75.3m units from 70.9m in 2010.

The global outlook in 2011, it says, will also be shaped by the following three factors: US light vehicles sales recovery, Chinese market dynamics, and global premium vehicle growth (a consequence of rising real incomes in emerging markets, especially China and still low penetration rates for premium marques).

There are of course risks attached to any forecast. In the case of vehicle markets, these are mainly associated with developments in the macroeconomic and financial markets areas and how they may impact new vehicle demand via changes to real incomes or through impacts to consumer or business confidence which will influence the purchase decision.

Recent economic forecasts continue to focus on the pace of economic recovery. High unemployment and sluggish growth – as well as the household debt overhang – is a cause for concern in the US and also in Western Europe.

Global Insight says that a two-speed recovery is likely to remain a salient feature of the global economy throughout 2011. The deceleration in growth that manifested itself in the latter half of 2010 will extend into the first half of 2011 for nearly every region and country in the world. However, it says the global recovery should pick up steam in the second half of the year, as some of the worst-hit sectors (housing and autos) rebound and as consumer and business confidence improves.

GI also says that in 2011 the US economy is likely to be firing on more cylinders – especially during the second half. In particular, the housing ‘correction’ will be far enough along that the sector will no longer be a drag on GDP growth, and is likely to make a positive contribution. A weaker dollar also points to export-led growth. Europe and Japan will also see slightly stronger GDP growth in the second half of 2011. It says that the pace of growth in Europe is slowing, mostly because of fiscal tightening and jitters about sovereign debt, but it still foresees a strengthening in the second half, provided there is no euro-related financial crisis.

The World Bank forecasts economic growth this year in China of 8.7% and in India of 8.5%. This compares with a forecast of 2.4% for rich countries collectively. Emerging markets will drive global growth in 2011, it said, despite continuing issues in developed economies. These include high household debt, unemployment, weak banking sectors and high government debt levels, particularly in Europe.

United States – fragile economic recovery underpins gradual market rebound

According to Ward’s, US light vehicle sales volume in 2010 reached nearly 11.6m, some 11.1% up on 2009. The market us still way down on the 16m-17m pre-crisis ‘norm’ but it is moving in the right direction. The position for the US vehicle market is one of gradual recovery in a slowly improving economy. From an economy point of view, it’s looking like a low-growth environment in 2011, ‘double-dip’ or not. Households and businesses are still adjusting to the post-crisis landscape, with a debt overhang ensuring subdued spending and investment levels. Unemployment remains high and the housing market, as well as the construction sector, depressed. Fiscal support continues to be substantial, but the effect of the stimulus on growth is diminishing and is assumed to turn negative in future quarters.

The pace of the recovery is projected to remain moderate through 2011-2012 as households continue to rebuild net worth and the unemployment rate declines slowly. The OECD forecasts that US GDP growth will slow to 2.2% in 2011 (against 2.7% in 2010) and rise to 3.1% in 2012.

But while concerns remain over macroeconomic developments, some of that concern may yet be over done. Growth of the market is expected to continue this year as the US economy continues to improve. PwC Autofacts maintains that 12.5m units of US light vehicle sales is a realistic scenario for 2011 ‘even without substantially improved employment figures, a major upturn in housing, or rapid credit expansion’.

Some analysts argue that pent up retail demand for new cars and trucks in North America will be  giving the automobile market a substantial lift over the next two years. Consulting firm AT Kearney predicts that US light vehicle sales will move back to historical levels (about 16m) by 2012. Key indicators are on track for a “robust US automotive industry recovery” says Kearney.

Analysts’ projections for 2011 are grouped around a market of 12.5m-13.5m (representing growth between around 8%  to 16%). Where the market ends up depends on how much pent-up demand there is in the retail market and just how well the economy performs to produce a ‘feel-good factor’ that encourages purchases. The calendar year could capture an acceleration to demand in the second half if all is going well. Some are talking about a stronger 2012 when the economic situation is clearer and recovery more established.

With reference to auto sales in the US, the price of oil could be a significant factor. Commentators have noted that the last time the gasoline price went over $3 a gallon at the pump, car buying behaviour changed. There was a marked downsizing trend in vehicle sales and a shift towards hybrids – albeit a trend that reversed when the price of oil went down. The price of gasoline has gone through the psychologically significant $3 level again. Look out for a similar reaction in the market in 2011 if the price of oil stays high or continues to rise – if it happens it could be expected to impact market segmentation, OEM shares and profitability.

US light vehicle market (millions)

2005 17.02006 16.52007 16.12008 13.22009 10.42010 11.62011F 12.8

Europe – slight market decline in prospect for 2011; nerves frayed on economy

Data released by JD Power Automotive Forecasting shows that car sales in Western Europe declined by 5.4% in December to leave the market for the year down 5.2% on 2009 at just under 13m units. Crucially, the December result  saw the German market turn positive again, holding out hope of underlying improvement as 2011 progresses. However, JD Power forecasts that the West European car market will register a slight fall in 2011 with sales of  12.7m units, 2% below the 2010 tally.

JD Power said that while the underlying economic drivers for car demand in Europe should continue to pick up this year, it is forecasting a 2% decline versus 2010. The reason is that the 2011 full year market will compare to a 2010 market that still benefited from government scrappage support, especially in the first half.

JD Power analyst Jonathan Poskitt warned that there remains great uncertainty over the impact of the austerity measures adopted by European governments and the ongoing sovereign debt worries. Nerves are a little frayed across the continent and especially at the European Central Bank, where there are worries about whether the euro currency can survive the pressures that have already brought bailouts for Greece and Ireland. Portugal could be next in line and if a big economy like Spain’s gets into trouble and becomes a target of the sovereign debt speculators, the stakes are raised much further.

The OECD says that a gradual economic recovery is underway in the eurozone area, driven by strong exports and a rise in consumption and investment. Confidence has rebounded and financial conditions have improved. However, the pace of recovery is likely to be muted, due to on-going private sector balance sheet adjustments, necessary fiscal consolidation and prolonged adjustment to large imbalances in some peripheral countries (ie the so-called ‘PIGS’). Unemployment has stabilised at a high level, the organisation notes and considerable slack will keep inflation low.

“This recovery to the West European car market is still fragile and these things could further hamper economic recovery and that would hit car demand,” JD Power’s Poskitt told just-auto.

“We are perhaps over the worst with underlying improvement to demand becoming more evident in the year ahead and becoming more established as the European economy strengthens, especially in the second half and beyond. But it is important to bear in mind that this is a very gradual recovery by historical standards and still subject to significant risks associated with the macroeconomic environment.” 

The biggest market in Europe – Germany – will be crucial to the European picture. Its economy has performed strongly in 2010 – especially in manufacturing and exports – to lift business and consumer confidence. The 2010 car market in Germany reached 2.92m units – down 23% on scrappage inflated 2009, as widely expected. But some improvement is forecast for 2011 with a 3.1m unit car market forecast by the VDA and others close to the German auto industry.

The VDA prognosis for the German car market in 2011 is shared by the professional forecasters. JD Power Automotive Forecasting also goes with a 3.1m car market forecast.

“We’ll see a picture of gradual improvement,” says Jonathan Poskitt. “Now that the distortion caused by scrappage has worked through, we’re seeing where the market really is in terms of underlying demand – and the improvement to sales in Germany is being underpinned by the strong performance of the German economy, especially the manufacturing sector.”

IHS Automotive also sees a return to organic growth in 2011 and is also forecasting a 3.1m unit car market.

“Moving into 2011 the German passenger car market should be able to look forward to a period of relative stability following the huge volatility of the last two years,” says IHS Automotive analyst Tim Urquhart.

Across the continent the picture is generally one of weak sales recovery or post-scrappage depression in 2011 – with the second half projected to be stronger than the first as the European economy strengthens a little.

The French market rallied in the final month of 2010, with the seasonally adjusted annualised rate of sales (SAAR) climbing to 2.53m units a year, its best result of the year. However, a tougher year is in prospect for the French market for 2011 now that its scrappage scheme has ended. The Italian market also picked up at year-end, though it rounds off a difficult year in Italy.

The Spanish market remains firmly in the doldrums, with the selling rate again coming in below 800,000 units a year a the end of 2010. The signs remain bleak for this market which is suffering the effects of severe recession, illustrated by a stubbornly depressed construction sector and unemployment at 20%.

“The Spanish car market annualised selling rate is hovering at around 800,000 units – which is way down on previous market peaks of around 1.6m units,” Poskitt points out. And the Spanish market is facing further decline. “We forecast a 10% drop to 880,000 units in 2011. It has been a severe downturn in Spain after the ending of a a scrappage scheme and the picture on the economy remains pretty bleak.”

The UK market fell 18% in December, taking the full year number to 2.03m units (+1.8%) and the SMMT has warned of challenging conditions ahead for the UK market. The UK market is forecast by SMMT to decline by 5% in 2011 to 1.93m units as difficult market conditions continue. Other industry analysts and commentators are suggesting that a bigger fall of 10% to 1.8m units is likely given the projected weakness of the UK economy this year and the fact that the market held up better than expected in the post-scrappage environment of 2010.

JD Power said that while the underlying economic drivers for car demand in Europe should continue to pick up this year, it is forecasting a 2% decline versus 2010. The reason is that the 2011 full year market will compare to a 2010 market that still benefited from government scrappage support, especially in the first half.

Poskitt warned that there remains great uncertainty over the impact of the austerity measures adopted by European governments and the ongoing sovereign debt worries.

“This recovery to the West European car market is still fragile and these things could further hamper economic recovery and that would hit car demand,” he said.

“We are perhaps over the worst with underlying improvement to demand becoming more evident in the year ahead and becoming more established as the European economy strengthens, especially in the second half and beyond. But it is important to bear in mind that this is a very gradual recovery by historical standards and still subject to significant risks associated with the macroeconomic environment.” 

Japan – ending of subsidies sparks market reversal

Domestic sales of new vehicles in Japan, including minicars, in 2010 logged their first year-on-year rise in six years thanks to subsidies and tax breaks for environmentally friendly cars (the Toyota Prius was Japan’s top selling model last year). Overall sales of new vehicles in 2010 rose 7.5% from the previous year to 4.96m units.

However, the ending of subsidies is causing the market to go into reverse. In December, sales of cars, trucks and buses plunged 28.3% from a year earlier to 179,666 vehicles, representing the sharpest drop for the month of December since comparable records were first kept in 1968.

It was the third consecutive month the figure marked its sharpest year-on-year decline. The government’s subsidy program ended in early September, but the tax breaks will continue until spring 2012.

Analysts expect the first part of the year to see the steepest declines against last year, with the market trend bottoming before the middle of the year and some improvement thereafter – provided the economy improves. The high yen is making it difficult for exporters and fading fiscal stimulus will be dampening economic growth. Price deflation has not gone away, either. Much depends on the performance of Japan’s private sector and big corporations through the year. Japan’s economy I dependent on global economic rebound, with special emphasis on the Asian region.

A flat vehicle market is probably the best that the industry in Japan can hope for in 2011. A decline of 5-10% is more likely. If things go badly, the market fall could be much bigger.

COMING NEXT WEEK: Outlook for BRICs and other emerging markets

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