The automotive industry is currently facing a period of extraordinary uncertainty on the back of economic recession worries that follow the events of September 11. How long and how deep will the downturn in the auto industry be? Which regions and which markets will be most affected? How strong will the recovery be? Last week, analysts from DRI-WEFA presented their latest forecasts for the global auto industry at a conference in Munich. Just-auto.com Managing Editor Dave Leggett was there and provided this report on selected elements of the proceedings.
The last two months has been a testing time for all of us. After getting over the shock of the terrorist attacks of September 11, there’s been a need to try to understand the consequences and adjust to the new realities that have followed. Uncertainties are larger than ever and the job of the forecaster has been made even more difficult by the unprecedented and open-ended nature of the events that are impacting consumer and business confidence across the world.
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Risk analysis and scenario generation has clearly become much more important to planning for the future.
My overall sense from the conference was that things could be a lot worse. Things are far from hunky-dory, but it’s not the end of the world as we know it. Business goes on. A recession was coming anyway and 9/11 has given it added impetus, but let’s not forget that the demand downturn is coming off a historically high base. Moreover, there are positive steps being taken to support demand and industry volume. A steady relaxation of monetary policy on both sides of the Atlantic is probably the most obvious external factor. Within the industry, cheap finance has kick-started the market in a big way, especially in the United States. In some emerging markets, most notably China, it’s very definitely business as usual.
Of course there are risks and the health of the industry will continue to take a pummelling from the cheap deals that are around. But the industry has not collapsed the way some feared it might a month ago. There is a feeling too that the worst of the recession in the industry will be felt in the first half of 2002. A strong bounce-back for the industry could be in prospect for the second half of next year.
| I ECONOMIC FORECASTS |
Confidence to bounce-back after 3-4 months?
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By GlobalDataIn presenting DRI-WEFA’s latest global economic assessment, Nariman Behravesh (Chief Economist) set out a number of assumptions to the baseline forecast. These included:
o No more terrorist attacks in the near future;
o Coalition counter attack has a positive impact on confidence;
o Consumer and business confidence recovers after 3-4 months;
o Oil prices remain weak (around $20 per barrel);
o More fiscal and monetary stimulus is in the pipeline.
The 3-4 months assumption on consumer and business confidence has been arrived at by looking at the impact of previous one-off cataclysmic events on confidence (for example, the assassination of President John F. Kennedy).
Given those assumptions, the global economy is expected to slow to +1.2% growth in 2001 (versus pre-9/11 +2%) and +2% in 2002 (versus pre-9/11 +2.8%). The important point is that there was a slowdown coming anyway and that in the United States, action by the Federal Reserve Bank on interest rates has kept the deterioration into recession relatively mild (-0.8% peak to trough). A further 25 to 50 basis points interest rates reduction by the Fed is assumed for the remainder of this year and real GDP growth for the US is forecast at 1.2% in 2002 followed by 4.3% in 2003 (2003 being stronger than in the pre-9/11 forecast).
European economy faces short-term weakness
The projections for the Western European economy show a similar pattern: weakness this year and next followed by ‘back on track’ in 2003. The European Central Bank has now followed the Fed’s lead on interest rates. However, there is an uneven national mix, with Germany looking notably weak and the countries of Spain, Italy and Greece particularly affected by a fall-off in tourism.
The projected steady appreciation of the euro versus the dollar over the next few years hits export earnings, but helps to keep dollar denominated energy prices down. Real GDP growth in Western Europe slips to 1.5% in 2001 (pre-9/11 1.9%) and 1.7% in 2002 (pre-9-11 2.5%).
Japan’s economy – slow strangulation?
The structural problems facing the Japanese economy – deflation and a financial crisis – weighed heavily upon it prior to 9/11. It was already facing recession. Now, the recession will be even worse as export markets slow. The economy is projected to decline by 1.2% in 2001 and a further 1% in 2002.
In the rest of Asia, the picture is mixed. China’s highly insulated economy carries on growing at around 7% per annum, buoyed by growing domestic demand (and China also has the Olympics boost too). It is a similar story in India (5-6% growth per annum). South Korean economic growth slips sharply to around 2% this year (pre-9/11 4%). Elsewhere in Asia, there is on-going political turmoil in Indonesia and a general slowdown caused by lower exports.
Argentina’s crisis surprisingly severe
In Latin America, the downward spiral of Argentina stands out as particularly acute. Default on debt or devaluation of the currency is looking highly probable early next year. Argentina’s economic problems though were already serious enough for 9/11 to have had little additional effect. A decline to the economy of almost 3% this year is followed by a further contraction of around 5% in 2002. Mexico is heading for recession while the region’s powerhouse economy – Brazil – faces a slowdown accentuated by an energy crisis (hydro electricity generation being impeded by the effects of drought).
For emerging markets generally, the prognosis is not good, as capital flows – including Foreign Direct Investment – have slowed considerably. The adverse impact of the external environment is compounded by reduced trade flows and higher risk aversion.
Downside and upside scenarios
In the downside scenario to the above baseline forecasts the assumptions are:
o There are further terrorist attacks and/or an unsuccessful US retaliation;
o Consumer and business confidence fall further and don’t recover as quickly;
o Oil prices spike again;
o The US and global recessions are deeper and longer (-2.3% peak to trough in the US)
Downside scenario probability: 35%
In the upside scenario to the above baseline forecasts the assumptions are:
o US retaliation is seen to be a success;
o Consumer and business confidence rebounds quickly;
o Very mild recession in the US and rest of the world (-0.2% peak to trough in the US)
Upside scenario probability: 15%
Recovery forces ‘in place and powerful’
Nariman concluded that the range of uncertainty has widened considerably since 9/11. However, he maintained that powerful recovery forces were in place even before the attack and they should limit the depth and duration of the downturn. These forces include declining energy prices, the inventory cycle and monetary policy.
| II PASSENGER CARS: WESTERN EUROPE |
Colin Couchman (Senior Market Analyst) presented the latest DRI-WEFA forecasts for the Western European passenger car market. In essence, the market is expected to decline below trend in 2002 before growth resumes again. Real new car prices are low and falling (estimated at about 4% lower than 5 years ago and in terms of disposable income, up to 10% cheaper). The market is reinforced in the outlook by an acceleration of new model activity – especially in the supermini B Segment.
Germany already depressed
The German car market is not expected to fall dramatically post-9/11 on the weakness that was already there. The 2001 market forecast is forecast at 3.3 million units, a 2.5% decline on 2000. In 2002, a market of 3.26 million is forecast (-1%).
UK has had a price boost
The UK car market is expected to avoid a serious slump. It stays at a high level this year and next. A relatively favourable economic backdrop has brought private buyers (as opposed to corporate) back to the market to yield a 2001 market that is close to record levels. The 2001 market is forecast at 2.29 million units (+2.9%) with 2002 declining by 3.9% to 2.2 million units. One of the big volume pluses in the UK market is falling prices, although it is reckoned that this factor may have levelled out.
French market looks safe
Similarly, the French market is not projected to see plummeting sales and 2002 ‘looks safe’. An important factor in France is a high level of product action from the French manufacturers (the domestics take around 60% of the market) as well as tax cuts. Also, the French car parc is relatively old, creating higher than (European) average replacement demand. The 2001 forecast is for a new car market of 2.22 million units (+4%) with 2002 seeing a 3% reduction to 2.15 million units.
Italy’s young parc presages market weakness
Italy has a very young car parc in contrast with the position five years ago. This reflects the impact of artificial market boosting incentives to new car purchase over the past five years. One consequence of such a young parc is that new car purchases can easily be put off. The Italian car market is expected to decline to 2.38 million units in 2001 (-1.1%) and to fall by a further 6.8% in 2002 to 2.22 million units.
Forecasts vary
Colin introduced some caution to the total Western Europe picture by pointing out that DRI-WEFA’s forecast 4% reduction for 2002 (13.9 million units) is in the middle of a relatively wide range of forecast assessments from other analysts and researchers. And let’s not forget that the market declined by 17% in 1993, so large drops are possible if economic assumptions are changed. However, even in the ‘zero US growth scenario’ (2002 US GDP growth of 0.5%) the impact on the European car market is relatively mild – a 6% (rather than 4%) to 13.7 million units.
Mini-MPVs point the way
Looking at the European segment picture, some useful insight and extrapolation was derived from the success of the mini-MPV ‘Scenic’ segment. The defection of European buyers to these concepts (and away from segment D) is now well documented, but the manufacturers are also now adapting some of the compact MPV’s attributes – high ride height, generous interior space, ease of access, flexibility of interior package – to the design of other more mainstream vehicles. There is evidence of this in the Peugeot 307, Honda Civic and Fiat Stilo. There are also efforts to replicate elements of the concept in other segment interfaces (SUVs, wagons).
Get ready for MPV-B’s
And the next hot European niche – the ‘supermini-MPV’. There are plenty of these vehicles either coming to the market or in the pipeline – Nissan Yaris Verso, Opel Corsa City, VW Polo MAV, Renault Twingo MAV, Renault Kangoo, Peugeot Partner, Mitsubishi Z-Car MAV, Fiat Punto B-MPV, Ford Fiesta MAV (don’t want to miss the boat this time).
The ‘MPV-B’ share of the market is projected to increase strongly over the next four years – particularly in 2004 and 2005 when a wave of these models impacts the market.
| III MAJOR OEM PRODUCTION STRATEGIES |
It fell to DRI’s long-time guru Nigel Griffiths (Director International Automotive Industry Research) to tackle the European production issues. So far, only operational planning has been changed in this downturn – characterised by short-term cuts to production and inventory reductions. But will there be a dislocation of a more fundamental strategic nature?
The Welsh wizard dutifully chronicled the announced European production cutbacks since 9/11 – Fiat, Ford, GM, PSA, Renault and VW. He went through country-by-country summarising the main points: ‘Spain off the boil, Germany could drop below 5mn next year, UK has hit rock bottom and Italy faces substantial cutbacks’.
Source: DRI-WEFA
Does size matter? Not so cut and dried…
Fine. Now for the more traditional Nigel stuff that ‘makes you think’. First, a finding from DRI-WEFA’s database: the increased concentration of the industry that followed the acquisition trail at the end of the 1990s has not led to the widely predicted increased domination of the Big 6: GM, Ford, Toyota, DCX, VW Group and Renault-Nissan. In fact, the middle rankers – PSA, Honda, Hyundai and Fiat – have increased their share of global production by considerably more than the Big 6 in recent years. That flies in the face of the conventional wisdom of the late 1990s that brought Daimler-Benz and Chrysler together and appears to vindicate the controversial views of the smaller players that they can thrive on their inferior scale. The whole issue is perhaps a little more complex than it seemed back in 1998.
Platform consolidation paradigm under threat
OK, so what are the OEMs doing to lower costs? Sharing platforms right? Renault-Nissan, DCX and Mitsubishi, GM and Fiat. They are consolidating platforms and that’s the way to go. Up to a point yes, but there are problems with that approach. As the degree of parts sharing on common platforms rises, so the degree of product differentiation declines over time. How many buyers of today’s Skodas are unaware of the not inconsiderable VW influence in the Skoda model’s basic design and engineering? Very few I would guess. So, some buyers of VWs start to opt for cheaper Skodas or Seats. It is happening. How far can the VW brand be moved upmarket to give some distance? Difficult one – don’t want to impinge too much on Audi.
So, for the OEM, there’s an element of diminishing returns in being too beholden to the policy of platform consolidation across multiple brands. Brand acquisition can give it more mileage, but is not a long-term solution to the need for more cost savings.
Two stage cost savings
Typically, integrating operations across brands to gain cost savings from platform savings can be viewed as ‘stage 1 platform savings’. When companies first come together, the opportunities for savings from integration are considerable. Right now for example, DCX and Mitsubishi are focusing on common platforms: common A-B (Smart 4 and Z-car – 65% commonisation); Common C (Neon, Lancer, Mirage – Mitsubishi lead team and 60% commonisation) and Common D (Galant, Sebring, Stratus – Chrysler lead team and 40% communisation). Similarly, Renault and Nissan are at an early stage in exploiting two common volume platforms across the two brands – B (Micra/Clio) and C (Almera II and Megane) which will account for 50% of the combined group’s global car production by 2006.
A new strategy has emerged lately – ‘stage 2 cost savings’ that take a cross platform perspective to savings. PSA, BMW and most notably VW Group, have independently announced such strategies this year. VW’s strategy has been termed ‘modularisation’. The basic idea is to look at creating common component sets across platforms – ‘common platform sets’ – in areas such as powertrain, axles, suspension, HVAC, seats, doors and so on.
The key is to take systems that can be vertically fitted across a manufactures range or part of it in a way that makes economic sense. Clearly there is a danger that compromises on component part spec – if the platform spread is too wide – could creep in to the detriment of a particular model or models. For example, the braking system on the top of the range Passat does not need to be the same as that on the entry Lupo. But steering systems could be more similar, particularly as ‘X-by-wire’ means that ‘feel’ can be generated electronically.
Optimising on commonality is the challenge, along with making the platform concept flexible enough to accommodate the right modules or common component sets. A flexible platform could be the answer in some circumstances, allowing greater tolerance to common component sets whilst permitting several models with different wheelbase and dimension to be built off the same platform. The example cited was that of the Renault P5 platform, which is flexible enough to support Laguna II, The Vel Satis and the Espace – all previously on unique platforms.
More extensive sharing of component sets and systems across platforms is forecast.
Source: DRI-WEFA
Vertical integration level has a bearing
The levels of vertical integration within companies are expected to impact their ability to achieve savings from cross-platform systems. Low outsourcers (such as PSA and VW) can quickly internalise such a strategy, whereas relatively high outsourcers (Ford, Fiat) have to involve Tier 1’s and they need top be involved at an early stage in platform/system design for the policy to work well.
So, to summarise in Nigel’s words:
The drive to second stage cost savings will be from cross-platform component sharing. This will not replace the platform system but supplement it. Platform architecture will become far more flexible.
However, the new cross-platform matrix will be highly complex to design and project manage and risks damaging brands if too many compromises are made in design and ‘DNA’ is lost.
| IV LIGHT VEHICLES IN EASTERN EUROPE |
Tim Armstrong is Senior Market Analyst for Eastern Europe and Middle East/Africa. His presentation provided an overview of developments in Eastern Europe – subtitled ‘The Good, The Bad and The Ugly’.
Tim began by pointing out that the transition region of the past decade has hit new circumstances in recent years. The early days of meeting pent up demand have been superseded by more difficult demand conditions. The focus in the industry has shifted to quality and protectionist barriers have had to come down. That has left local producers under considerable pressure.
Russia moving up from low base
In terms of the ugly, Turkey, Poland and Macedonia/Serbia stand out as the places gripped by crisis and/or recession. Russia and the rest of the non-Baltic Former Soviet Union are not as bad as they were and moving tentatively in the right direction. They are bad, but in recovery mode at least. Russia’s long economic downward spiral has been arrested and the economy is now growing, although real wages are only back at the 1997 level in 2006.
The real positives in the region, from a demand standpoint, are the Czech Republic, Slovakia, Croatia, Slovenia and the Baltics. Slovenia is now comparable with Greece in terms of purchasing power.
Poland suffers effects of outdated model withdrawal
Poland’s auto industry is being hit by a ‘double whammy’ of adverse macro (demand) and micro (supply) effects. The economy is reeling from a restrictive monetary policy and the withdrawal of old models over a fairly short time period is compounding difficulties. The Fiat 126 was only phased out last year but other models facing deletion include the Daewoo Tico, GM Astra Classic, Fiat Uno, Ford Escort and FSO Polonez. In 1999, more than 25% of all models were ‘outdated’. By 2002, that falls to just 4%.
Turkey in crisis
The Turkish market remains in considerable crisis and trapped in a cyclical growth/recession cycle. After negative real interest rates last year, interest rates have surged this year and choked demand. The economy is forecast to contract this year by over 7% and industrial output is projected to see a 12.7% decline. The political situation remains problematic too.
While the domestic market is severely depressed in 2001, investment in capacity for export production remains strong and vehicle production is holding up.
Russia ‘better in 5 years time’
Tim pointed out that low incomes prevent a meaningful take-off in the Russian market until 2005 (when per capita GDP is approaching $5,000). Around that time also, more Western OEMs will be supplying the local market through Russian plants (such as the Ford Focus). These are expected to be more competitively priced than built up imports.
By 2006 light vehicle production in Central Europe (excluding Turkey) is forecast to rise to 2.157 million units, up from 1.456 million units in 2001.
Daewoo was bold – and now pays the price
In terms of company investment strategies, Daewoo is paying the price of heavy exposure and reliance on local markets in the region. By contrast, Volkswagen has kept risk down – its strategy is based more heavily on exports to Western Europe (eg Slovakia produced Golfs).
Company Investment Strategies
High risk, all or nothing, local markets
DAEWOO
High risk, poverty trap
LADA ET AL.
Medium risk, safe player but with long term upside
FIAT
GM
Renault
Low risk, export strategy
VW
Risk score is overall 5year country risk.
L(arge), M(edium), S(mall) E(x)it production investments
Source: DRI-WEFA
VW Group emerges as the big winner in Central Europe due to its strong focus on exports as the main plank of its strategy. As far as Daewoo Motor’s presence is concerned, the working assumption is that the supply of kits to East European plants (not owned by GM) continues in the short term. Tim pointed out however, that by 2004/5 when GM is introducing new platforms to Daewoo’s range, they probably would be disinclined to send them to plants that they do not own.
| V ASIAN AUTOMOTIVE MARKETS |
Ashvin Chotai (Director, Asian Automotive Industry Research) presented the latest Asian forecasts. The story in Japan remains grim, with consumers holding off in the deflationary climate (‘why buy today what will be cheaper tomorrow?’). Elsewhere, there was already a slowdown in train prior it 9/11, although now it is intensified. The US recession hits export demand, foreign direct investment and lower tourism revenue. The export-oriented economies of Taiwan, Hong Kong, Singapore, Philippines, Korea and Malaysia are seen as particularly vulnerable to the effects of US recession. China, Indonesia and India are relatively immune.
Not as severe as ’98
Overall, the slump is not expected to be as severe as that which faced the region in 1998. Forecast GDP declines are more modest and total vehicle production falls 325,000 units in 2001 – which compares with a 2.65 million decline in 1998.
All Asia sees growth of 276,000 units in 2001 and a decline of 80,000 units in 2002. China remains the most significant growth market in 2001 and 2002.
In Japan, Nissan, Mitsubishi and Mazda had the lowest capacity utilisation rates in 2000 and all three are taking steps to reduce capacity. Honda stands out as an exception operating at full capacity.
China: Car Market – the Boom Continues
| Car demand will be relatively immune from global economic slowdown – Government also taking measures to boost consumption e.g easing credit on housing, cars etc. – Product activity stimulating demand – 20% growth in 2001 and nearly 13% in 2002 Segment B/C models will account for nearly 70% of growth between 2000-2006 |
| VI HEAVY-DUTY TRUCKS |
DRI-WEFA’s heavy-duty truck specialist, Richard Walles, presented an overview of prospects for a sector (over 6 tonnes Gross Vehicle Weight, or US Class 4 and above) that has historically exhibited very sharp swings in response to changes to the investment climate. He noted that industrial production – a key driver to truck demand – has turned down sharply in the US after 9 years of strong growth. No recovery in the US marketplace will occur before 2003. In Europe, the slowing of industrial production is less pronounced, but will have a negative impact on demand.
Get ready for ‘steep and deep’
The projected downturn to Class 4 and above truck sales in the US is as steep and deep as that which followed industry deregulation and recession in the early 1980s. That’s a pretty stark position. After peaking at over 500,000 units in 1999, the market will be heading under 350,000 units this year. A similar market is forecast for 2002, before the market comes back in 2003.
In Europe, the cyclical peaks and troughs are lower than in the US, with the upcoming downswing correspondingly less sharp, the over 6 tonnes GVW market being projected to decline to around 270,000 units in 2002, having peaked at around 330,000 units in 2000. The European truck cycle is clearly lagging North America and sales have stayed high this year. One factor has been that the Euro III engine emissions deadline has pulled forward sales in Q3 this year (but could result in payback and weaker sales in Q4).
Restructuring ahead
The production implications of the market downturn are grave in North America. The sector is already in crisis, with truck output declining by a third this year on top of an 11% decline in 2000. Problems began as orders softened in 1999 and inventory levels in the truck industry climbed, peaking at 3.5 months worth of inventory in 2000. More restructuring of the sector including plant closures is expected as truck production declines to a more sustainable level.
Class 8 (over 15 tonnes Gross Vehicle Weight) sales in the US are 33% off last year, itself down 32% on the 1999 peak. There is excess capacity in the fleets and a large overhang of nearly new trucks which will further depress new truck sales. Fleet operators are being squeezed on several fronts – declining workload, lower rates, and business asset values have plunged as truck residuals have fallen, worsening credit availability for new truck purchase.
Share developments in North America show the growth of DaimlerChysler over the past decade (through enhanced medium duty presence, eg buying capacity from Ford – ‘Sterling’).
Regional Sales of Light Vehicles Forecast to 2002
| 2000 | 2001 | Percentage | 2002 | Percentage | |
| NAFTA | 19,709.5 | 19,060.0 | -3.3 | 17,570.0 | -7.8 |
| W.Europe | 16,608.3 | 16,393.8 | -1.3 | 15,570.8 | -5.0 |
| Japan | 5,868.2 | 5,936.2 | 1.2 | 5,672.3 | -4.4 |
| Asia | 6,204.7 | 6,376.1 | 2.8 | 6,537.9 | 2.5 |
| E.Europe | 3,051.9 | 2,567.4 | -15.9 | 2,834.1 | 10.4 |
| South America | 2,063.2 | 2,134.9 | 3.5 | 2,275.2 | 6.6 |
| Sub Total | 53,505.8 | 52,468.4 | -1.9 | 50,460.3 | -3.8 |
| Other | 2,393.3 | 1,967.6 | -17.8 | 2,203.2 | 12.0 |
| Grand Total | 55,899.1 | 54,436.0 | -2.6 | 52,663.5 | -3.3 |
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