In the recent past, there have been many announcements by vehicle manufacturers of production cutbacks, mostly in the form of temporary plant closures. Fiat has announced such cutbacks in Poland and Italy, Ford in Belgium, Germany and the UK, Renault in France and Spain, and Volkswagen in Germany and Belgium. Opel trimmed build earlier this summer in Spain and is expected to trim build in Belgium, Germany and Spain before the end of the year.
Although some of these announcements had been made before September 11th, there have been many more since. Two questions arise:
· Is the slower pace of production a reflection of the change in the economic environment since the terrorist attacks?
· If so, is the much-reduced pace of production during the final quarter a foretaste of what should be expected in the ensuing quarters?
Since J.D. Power-LMC tracks these changes and attempts to incorporate them in our forecasts, as and when they occur, we believe we are in a position to suggest answers to these questions.
Changes in European domestic sales are by far the most important influence on changes in production. But there are two others: changes in the trade balance, and changes in stocks.
Europe’s trade balance in light vehicles (cars and light commercial vehicles) has changed in two ways this year:
· For Europe as a whole (both East and West) it has improved, boosting production beyond what the change in domestic sales alone would imply.
· Within Europe, the balance has swung against Western Europe, and in favour of Central and Eastern Europe (including Turkey).
The main reason for the first change is a loss of market share by Japanese and Korean marques. In broad terms, their market share is set to fall by between 1½ and 2 percentage points, from about 15% last year. This change on its own permits European production to grow by about a quarter of a million units. In addition, a higher proportion of the sales of Japanese marques corresponded to local production by those marques, because of the start-up of the Toyota Yaris and increased activity by Honda. Finally, European marques were gaining market share in the North American market, providing a further boost to pan-European production. All told, these changes add up to a boost of some 400,000 units to production in a full year.
The reasons for the second change were, firstly, a collapse of demand in Turkey and Poland, which sharply reduced sales of vehicles made in Western Europe, and secondly, growing production of a wide range of models such as the Fiat Doblo and the Skoda Fabia sold in Western Europe and made elsewhere in the European region.
However, the pace of production during the first three quarters of this year has been greater than could be justified on the basis of domestic sales, even taking account of the positive swing in the trade balance. We indicated that the improved trade balance would justify a positive change of 400,000 units in a full year, or, crudely, 300,000 units in the first three quarters. However, the actual swing in the difference between pan-European production and sales in the first three quarters of this year, compared with the gap between them in the same period of last year, was much greater than this – a positive swing of some 650,000 units in the first three quarters of the year.
There is therefore a strong hint that inventories have been growing and now need to be cut back. Since European vehicle inventory data is not published, one cannot be dogmatic about the size of this build-up, particularly because some of the production data for the third quarter has yet to be reported, and is still estimated. However, we can be fairly confident about the direction of the swing.
What does this imply for the future? To come back to the questions that we posed at the outset: the slower pace of production in the fourth quarter is not just a reflection of the change in the economic environment since the terrorist attacks. It is also in part a correction of an imbalance that predates those attacks. Many, perhaps most, of the production cutbacks would have been necessary in any event. J.D.Power-LMC expect build to contract by nearly 10% in the current quarter, compared to the same period of last year. We do recognise that a fall-off in new orders has been a contributory factor to this fall in production, but we think it important to recognise that it is not the only factor.
Does the reduced pace of production in the fourth quarter provide a foretaste of what is to come? The inventory adjustment will be over in due course, though we expect that it will persist into the first quarter of next year – we are forecasting first quarter build to contract by 8% year-on-year. Once it is over, production will tend to bounce back. The current production volumes will only be a good guide to the future if, by the time the inventory adjustment is over, there has been a deterioration in domestic sales of the same size. Still in terms of broad orders of magnitude, we estimate that a full-year sales decline of about 1.25 to 1.5 million units, or between 6% and 9% of total European light vehicle sales, would be needed to have the same effect. Our current expectation is that next year’s decline in sales will be more modest than this.
Sales and production forecast (light vehicles)
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| Absolute volumes | ||||
| 2000 | 2001 | 2002 | ||
| Pan-Europe | Sales Volume | 18,405,492 | 17,677,818 | 17,210,077 |
| Production Volume | 18,381,735 | 18,055,916 | 17,583,694 | |
| Western Europe | Sales Volume | 16,728,609 | 16,499,820 | 15,880,942 |
| Production Volume | 16,477,984 | 16,354,616 | 15,811,201 | |
| East/Central Europe | Sales Volume | 1,676,883 | 1,177,998 | 1,329,135 |
| Production Volume | 1,903,751 | 1,701,300 | 1,772,493 | |
| P – S | 226,868 | 523,302 | 443,358 |
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