Analysis from LMC Automotive shows that the global light vehicle market remained strong in April, although forecasts for further growth are tempered by some significant risks around the world.
The global light vehicle market was running at a seasonally adjusted annualised rate of sales of 86.6m units a year in April. That was slightly up on March and reflects still strong demand in the US and China. The picture is also one of rising car sales in Western Europe, even if that rise is off a low base.
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Speaking at an LMC event in London last week, LMC analyst Pete Kelly told delegates that the global light vehicle market in 2014 is heading for around or slightly above 87m units this year, which would be another record.
“The US market is continuing to show some growth,” he said. “It should exceed 16m units in 2014. And so far this year Chinese demand has been solid. These markets, added to by a steady recovery in Western Europe, are helping to offset some weakening in Japan and Eastern Europe.”
The US auto industry is continuing to benefit from higher capacity utilisation as higher demand feeds through to higher production. LMC estimates that capacity utilisation for the OEMs in North America averaged out at 90% in 2013 compared with 80% in 2007. There has been some onshoring of what were previously imports to the US as well as a major capacity shakeout in 2009 and 2010. “We are seeing much higher levels of capacity utilisation and this is underlined in the strong financial performance of manufacturers and suppliers in North America,” Kelly maintains.
And Europe seems, at least, to have hit a shallow market recovery phase. April’s car sales were up again in Western Europe by 4.6%, the eighth successive month of growth. Structural problems for future demand remain as car markets remain hampered by deeper economic problems, but overall market growth looks like a fair bet for this year and next. April annualised selling rate for Western Europe of 13.6m units a year puts the market back on a level with that in early 2012, before the very weak performance of 2013. “The slowly improving economic backdrop points to further steady gains this year,” says Kelly.
Forecast risks significant in emerging markets
The picture is not so positive in Eastern Europe where the unstable situation in Ukraine is likely to lead to a setback in the region in 2014. The outlook for Russia’s car market has deteriorated significantly. LMC forecasts that the Russian car market will decline by 10% in 2014 to 2.33m units and stay at around 2.3m units in 2015. This year’s forecast car market decline follows a 5% drop in 2013.
Russia is not the only emerging markets area of the world’s car market displaying adverse trends or downside risk. Much depends on macro trends in the global economy, but we have already seen nervous investors engage in rapid capital flight that can have major implications for emerging market economies (Russia, India, Argentina and Turkey spring to mind as examples over the last twelve months).
Overcapacity warning for Brazil
In Brazil, sales rebounded strongly in April after a weak holiday-distorted March. Yet, sales remain weak, hampered by higher interest rates and rising household debt. Already high inflation is expected to rise further due to the severe drought in the country and a planned hike in utility tariffs. A weakening job market is another concern.
In Argentina, LMC notes that the peso and foreign reserves have stabilised somewhat, but the risk of a financial crisis has not abated. In the face of rampant inflation and falling real wages, vehicle sales plunged by 35% (on a year-on-year basis) for the second straight month in April, with no sign of improvement in sight.
“In global terms, people have often talked about South America and Brazil becoming an export hub for low-cost cars. That hasn’t really materialised,” notes Kelly. “We don’t see the region being globally competitive enough for that to happen. So, what happens to local demand mainly determines production. There is softness of demand this year, some persistent negative risks remaining, not much improvement in prospect for 2015 and then a gradual improvement thereafter.”
Kelly sounds a warning on capacity utilisation for vehicle manufacturers in South America. “There is a lot of new capacity being added in Brazil over the next couple of years. Rates of capacity utilisation are forecast to fall below 65%. It’s going to be hard for some manufacturers to make money in that environment, limited scope for exports, and given the capacity expansion plans announced.
“Some OEMs have built in some flexibility to their production plans, but nevertheless, it’s not an ideal position looked at in overall terms.”
Asia: India and Thailand see hits to confidence
While LMC remains convinced that the long-term picture for India’s auto sector and for car demand remains fundamentally positive, the economic situation has worsened over the past year. Kelly points out that finance for car purchase is less readily available than it was and that the economic slowdown is proving deeper and longer than originally forecast. “That’s causing confidence to get weaker,” he says.
“Vehicle sales this year in India are looking pretty flat. The problem for India is when this near-term malaise will change and when we are going to see recovery. When it comes, it will be strong, with double-digit growth in India’s car market, but just when we get that inflection point is very uncertain given the economic situation right now. One positive thing could be the impact of a new government and everyone will be watching that closely and whether actions are taken that can help restore business and consumer confidence quickly.”
India’s light vehicle market is forecast by LMC at 3m units (+3%) in 2014 rising to 3.45m units in 2015 and 7.3m units by 2020. The long-term big picture remains pretty positive for a country of India’s size (population number comparable to China, but a 3m vehicle market versus 23m). However, the near-term and medium-term recovery trajectory for India’s currently troubled economy is uncertain. “India is very much ‘on-watch’,” says Kelly.
Turning to south-east Asia, Thailand’s current constitutional crisis and its impact on the economy is now presenting cause for concern. Kelly dismisses some of the more pessimistic views on how investment in Thailand could be held back, plans cancelled. “To some degree, people have got used to the political situation in Thailand,” he says. “It is still seen as a good place to do business, but we may see a little bit more hesitancy from some.”
The car market in Thailand is turning down quite sharply due to the end of a rebate scheme and ‘payback effect’. LMC forecasts that the Thai light vehicle market will decline by 27% to under 1m units in 2014 although exports help to support production (forecast at 13% down, at just over 2m units).
The big plus market in south-east Asia is Indonesia, which is being seen as a new growth story in Asia. “There is plenty of demand potential in the big population centres,” says Kelly. “There are some risks, but the economic situation looks very positive. Low-Cost Green Cars (LCGC) are set to be a focal point for future vehicle production growth (approaching 300,000 units a year by 2017 versus around 150,000 units this year). Indonesia’s light vehicle market should also be approaching 2m units a year by then, according to LMC.
China cools to ‘new normal’
Advance data indicates that China’s market has maintained a robust pace, with the April selling rate reaching 23.2m units a year, up 1.2% from a downwardly revised 23m units a year in March. LMC analyst John Zeng notes that since major cities are announcing restrictions on vehicle purchases in order to curb air pollution, “panic buying” is spreading among China’s consumers and may continue to boost sales in the near term.
“On the other hand,” Zeng says, “the medium-term sales outlook is becoming more uncertain owing to the pull-ahead effect of the ‘panic buying’ and a slowing economy.” China’s Q1 GDP growth of 7.4% (YoY) was weaker than expected and the government has recently announced mini-stimulus measures to boost the economy.
Zeng maintains that China’s vehicle industry is facing what he terms a ‘new normal’. The days of easy sales may be disappearing and manufacturers have to be aware of where the growth points are – geographically and in terms of segments, and also how demand will be moving in the future. Zeng says there is plenty of car demand potential in China’s inland cities where motorisation rates (cars per thousand population) are much lower than in the more affluent eastern cities.
Another change is a forecast move towards greener vehicles as China looks to have emission standards at EU levels by 2020. That will trigger faster growth for alternative powertrains, more emphasis on fuel economy (more turbocharged engines) and – combined with incentives – greater electrification (‘new energy vehicles’ or NEVs). By 2020, he believes that NEVs will comprise 2.5% of the Chinese vehicle market. That’s still over 700,000 units a year though from almost a standing start currently. Plug-in hybrid electric vehicles (PHEVs) could be a growth pole. Zeng notes that BYD is off to a strong start with its recently introduced Qin PHEV. It sold over 2,300 units in Q1 2014.
Zeng also points to certain vehicle segments that are very hot in China. “SUVs are very strong, along with luxury and MPV segments,” he says. “If you are an OEM and you want to do well in China, you have to be present with successful product in these segments.” And he says that having a hit product in a hot segment can transform a company’s position in the Chinese market. “Ford grew by over 60% last year in China,” he says. “They did that because of the Kuga and then the EcoSport. Two SUVs changed the situation [for Ford]. GM, on the other hand, has struggled in China over the past few years because they don’t have successful product in this fast growing and highly competitive segment.”
Zeng says that sales growth in China will remain robust, but the market will remain highly competitive and demand will be constrained by rising vehicle ownership costs. OEM product strategies in China will increasingly be informed by stricter emission and fuel efficiency standards. And spreading sales to cities inland will provide challenges in distribution and in marketing to these new consumers. It all adds up to the “new normal”.
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