The global light vehicle market is continuing on a downward trend this year according to the latest data, although the overall rate of decline has eased.
Data produced by our analysts shows that on an annualised basis, global light vehicle demand in Q3 dipped by around 4.7% (it was -6.2% in the first half) to stand at a little under 90.1m units. This suggests that the global market this year is heading for another decline – and a deeper one than 2018 (which was the first annual decline since 2009). Market declines in major emerging markets – notably China and India – have come alongside largely flat demand in the US, Western Europe and Japan. All the while, on-going trade tensions between the US and China continue to cast a cloud over prospects for the global economy and dent consumer and business confidence across the world, from Berlin to Seoul.
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In its latest economic bulletin, the IMF notes that weakness in the global economy is being driven by a sharp deterioration in manufacturing activity and global trade, with higher tariffs and prolonged trade policy uncertainty damaging investment and demand for capital goods. In addition, it notes that 'the automobile industry is contracting owing also to a variety of factors, such as disruptions from new emission standards in the euro area and China that have had durable effects'. Overall, trade volume growth in the first half of 2019 has fallen to 1%, the weakest level since 2012.
In Europe, the monthly numbers – especially August and September – are distorted by a base effect to the comparison with last year caused by large market swings around the introduction of WLTP. However, that effect evens out in the quarterly totals to reveal an essentially flat picture in the third quarter. In the US, the light vehicle market has hit a natural ceiling, with the North America SAAR running at over just over 20m units – a very high number – in the third quarter.
China and India markets slump
Emerging markets account for much of the Q3 decline and new emissions regulations ('China VI') in China have played a significant part. China's vehicle market this year has been disrupted by the new emissions regulations and by the long-term switch to new energy vehicles through sales quotas. At the beginning of July, 15 cities and provinces, which together account for over 60% of vehicle sales in the country, introduced stricter emission standards earlier than the central government's 2020 deadline and that has weakened the market considerably this year. Also, sales of new energy vehicles – comprising mainly electric and hybrid vehicles – plunged by over 34% year on year in September after an almost 16% drop in August.
September's overall market decline of 5.2% to 2.27m units was the 15th consecutive monthly decline for the vehicle market and reflected slowing economic growth in the country and falling domestic sentiment as trade relations with the US continued to deteriorate.Total vehicle sales in the first nine months of the year declined 10.4% to 18.36m units from 20.49m in the same period of last year.
India has also seen a disappointing market evolution in 2019. However, unlike previous occasions when the market declined due to global financial and economic crises, currently the reasons are predominantly internal. Higher taxes and insurance costs have raised the cost of vehicle ownership and hikes to the price of oil have been a factor, too. Political uncertainty has also played a role in an election year. Credit availability for car loans has also fallen amid a liquidity crisis in the banking sector.
The collapse in India of Infrastructure Leasing & Financial Services Limited (IL&FS) has dried up funding and escalated borrowing costs. Subsequently, lending by non-banking finance companies (NBFCs) has declined and dealt a blow to all stakeholders across the automotive value chain – especially the automotive dealers. Banks have also become cautious and are reducing exposure to the automotive industry, ultimately impacting the auto component suppliers and customers.
A new emissions standard BS-VI will come into effect in early 2020 and compel all OEMs to upgrade their engines. This is leading to different reactions from customers. Some are waiting for the period immediately before the implementation of BS-VI as OEMs are likely to come up with attractive promotions to get rid of old inventory. However, some customers are worried whether they would be able to sell off the vehicle after few years and the impact on resale value. Lack of clarity regarding the future of diesel vehicles in BS-VI era is also impacting vehicle sales in India. A market revival is expected only towards the end of 2020 or at the beginning of 2021, when the market 'settles down' post implementation of BS-VI.
ASEAN decline steepened in Q3
Sales of new vehicles in southeast Asia's six largest markets combined continued to weaken in the third quarter of 2019, with sales falling by 6.3% to 851,820 units from 908,913 units sold in the same period of last year. This follows a negative second quarter for the market and brings the nine-month year-to-date total to 2,538,718 units – 2.4% lower than the 2,600,737 units sold in the same period of last year.
Economic growth has slowed sharply in most of the markets in the ASEAN region this year, forcing some central banks into aggressive monetary loosening. Exports have either declined or slowed sharply, while rising economic uncertainty has held back investment in the region. The only economy that has continued to perform strongly is Vietnam.
Elsewhere around the globe, it is a subdued picture for other significant emerging markets. In places like Turkey and Iran, sales are well down. Major markets in South America remain volatile and Brazil's economy is forecast to grow by 1% this year (mining supply disruptions have hurt), at best. Market recovery in Brazil has been off a low base and is beginning to run out of steam, production in Brazil also hit by lower exports to Argentina and other countries in the region.
And the Russian automotive sector, once viewed as an emerging market with very strong demand and production prospects, has come under further pressure as the economy and vehicle market has contracted. The Russian light vehicle market peaked at around 3m units in 2012 but then fell to 1.4m units in 2016 and is running at under 2m units this year.
Outlook
The 2020 market outlook will be heavily dependent on sentiment in major emerging markets. Prolonged trade policy uncertainty is damaging investment and sentiment around the world as economies slow and exports stay sluggish. The mature markets – especially the US and Western Europe – will be flat or declining in 2020 due to unhelpful demand replacement cycle headwinds.
China and India are key. In China, much depends on the path of the economy, the state of demand following market disruption caused by emissions rules changes and expectations of subsidies/incentives applying to electrified vehicles (NEVs). Some forecasters now expect the Chinese automotive market to post modest growth in 2020. Arguably, it could be a similar story in India where this year has seen a number of domestic market negatives conspire to drag the market down. Nevertheless, underlying demand prospects in India are highly positive if the economy can resume higher growth (the IMF forecasts an uptick to 7% GDP growth in 2020), particularly as monetary policy eases.
Other emerging markets that have been depressed this year could also see a degree of rebound next year on the basis of slightly higher global economic growth, less uncertainty over future international trade and also greater stability in financial markets.
