The problems facing the European vehicle market were described in the last instalment of January’s briefing. In this article, we consider the prospects for vehicle demand in other world regions.
[see also: January 2012 management briefing: world markets – Europe]
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Europe’s economic crisis is dominating the global business agenda in 2012. While there are undoubtedly other issues for the global economy – there are other financial imbalances and high oil prices impact everyone – the problem of sovereign debt in Europe threatens damaging financial sector consequences across the world.
“No one is immune in the current situation. It’s not just a euro zone crisis. It’s a crisis that could have collateral effects, spillover effects around the world,” IMF Managing Director Christine Lagarde told a panel discussion at the recently held World Economic Forum in Davos. But the key word in that sentence is ‘could’. A more generalised financial crisis could follow, for example, a disorderly national default on bond debt. But, to take the example of Greece, measures are being taken to negotiate write-downs on debt and shore up contingency plans (bailouts). Governments are also taking steps to redress fiscal balances in what many believe will be a long process.
However, the economic recovery in the West that perked up in 2010 has been blown off course by events in Europe. The IMF has said that the eurozone countries are expected to fall into a ‘mild recession’ this year. Lagarde said that in addition to Europe, the United States and Japan needed to adjust their large deficits, while major emerging markets should work to develop domestic consumption.
If the global economy ‘muddles through’ the current imbalances how are car markets looking? Well, it’s not nearly as gloomy elsewhere as in Europe, though there are qualifications to make. Some of the increases are off low bases. Japan’s vehicle market, for example, is forecast to bounce back after the exceptional circumstances of 2011 that sent it way below trend. Similarly, the US vehicle market may be firmly in recovery, but it remains way under pre-2008 ‘norms’.
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By GlobalDataPwC’s automotive analyst group, Autofacts, has forecast that 2012 global light vehicle assembly will exceed 79m units, an increase of 6.8% from 2011’s total.
Although many market uncertainties will carry over into 2012, Autofacts remains optimistic that the global automotive industry outlook will be positive, assuming that a policy resolution in the European Union materialises in the near-term.
“A lot depends on how the situation in Europe with sovereign debt pans out,” said Autofacts analyst Calum MacRae speaking to just-auto.
“China, in particular, has been a major positive from a global volume perspective, and we expect Asia-Pacific to continue to be positive in 2012, but the global scenario planning range is weighted firmly on the downside. A lot depends on what happens in Europe and on the scale of any financial instability, the effects of which could be felt across the world. Overall growth of vehicle assembly next year could slow to nearer 1%.”
Pent-up demand lifts US light vehicle demand
The economic picture for the US, while not exactly rosy, looks much better than Europe’s. Fragile household balance sheets and their linkage with housing troubles are holding back the economic recovery. The US economy slowed sharply in the first half of 2011, expanding at an annual rate of 1%, well below the 2.8% growth registered in the second half of 2010. Although the slowdown reflected the temporary effect of higher world oil prices and disruptions to supply chains following the Japan earthquake, private consumption has turned out to be weaker than expected in the US in 2011. The US consumer has retrenched a little, confidence knocked by higher prices and continuing bleak economic news – especially high and rising unemployment.
Nevertheless, some bright spots persist. Strong corporate balance sheets and pent-up demand for consumer durables present upside risks, and the weaker US dollar could have a positive impact on net exports. Overall, the picture supports a growth rate for the US economy of 1.8% in 2012 (compares with -0.5% or ‘mild recession’ in the eurozone) according to the IMF’s latest forecasts.
The US vehicle market remains well down on the 16m-17m annual norms before 2008, but it is coming back and on track to continue doing so in 2012.
Jeff Schuster of LMC Automotive sees a continuing recovery for light vehicle sales in 2012. He notes also that market growth is coming without high incentives.
“The market is seeing some underlying strength due to replacement demand and some improvement to the economy,” he says. “For example, we now expect that the US unemployment rate will not be as high as 8.5% in 2012. Many had previously expected it to be over 9% this year.”
The US market ended 2011 on a high note. Light vehicle sales rose 8.9% to an estimated 1.24m units, producing a seasonally adjusted annualised rate (SAAR) of 13.56m, down slightly from November’s 13.63m mark but still the second best reading of the year. Full year sales came in somewhat above 12.7m, in line with just-auto estimates.
Forecasts for 2012 are generally in the mid-to-upper 13m range. Recent sales have been robust but some worry the good results were driven by pent-up demand that may have been mostly satisfied. The US economy is recovering, albeit slowly, but there are still risks that could throw a spanner into the works.
Schuster stresses that there are risks to the US economy and that the crisis in Europe ‘remains a risk-factor’ in terms of its potential to adversely impact the global economy, but he expects the recovery to US vehicle sales to continue in 2012.
“We are forecasting a 13.8m market this year,” Schuster maintains. “But there are certainly some risks to that market forecast.”
What about prospects for the Detroit Three and others who saw share gains in 2011 which were helped by the exceptional difficulties that hit the Japanese makers especially hard? Schuster expects some claw-back in 2012.
“The competitive picture will be intense this year,” he says.
“And the Japanese OEMs will certainly win back some of the share that was eroded last year. Will they get it all back? I very much doubt that. The competition will be extremely tough and the revitalised Detroit makers, and others, will be determined to hang on to as much share as they can.”
Other market forecasts are generally consistent with the recovery theme. Investment bank Morgan Stanley recently raised its projection to 14m sales though most other analysts are looking for results in the mid-to-upper 13m range.
The US vehicle market, analyst Polk says, will experience single digit growth, primarily due to the relatively strong year for sales in 2011, and the effects of the weak economy that will continue to impact new vehicle demand through most of 2012. Light vehicle sales are expected to grow at a moderate pace, with a 7.3% increase to 13.7m vehicles, according to Polk analysts, but they do not expect the US market to achieve pre-recession levels of greater than 16m vehicles per year until 2015.
Other analysts are in the same ballpark. North American industry outlook remains positive although volumes are not expected to achieve prior peaks. Autofacts predicts an 860,000 year-over-year increase – in North America production predicated on healthier inventory, export growth, and US light vehicle sales of 13.6m units in 2012.
“The US region’s automotive sector is poised for continued growth in 2012,” said Rick Hanna, global automotive leader, PwC. “Automotive companies have ramped up vehicle inventories and growth markets are easing monetary policy. Although uncertainty persists, we anticipate the global automotive industry will run on all cylinders toward another record year as long as Europe’s issues don’t spill over to other regions.”
The luxury segment in the US market in 2012 is expected to be the fastest growing segment, with more than 14% growth, according to Polk.
“More affluent buyers are returning to the market for new vehicles, after three years of spending reductions,” said Anthony Pratt, director of forecasting for the Americas at Polk. “The luxury segment also offers a wide variety of product options for consumers across all segments, ranging from small cars to SUVs,” he said.
Polk says that leasing penetration will continue to be higher in the luxury segment in the US and will continue to lift transactions in all segments, as elevated residual values reduce the monthly lease payments, attracting consumers to showrooms who often make purchase decisions on the monthly payments that fit their budget.
An estimated 13.6m new cars and trucks will be sold in 2012, according to Edmunds.com.
“With annual sales still far below the level achieved prior to the last recession, there’s plenty of indication that pent-up demand is far from spent,” says Edmunds Chief Economist Dr. Lacey Plache. “Improved selection and loosening credit conditions are helping to entice the millions of buyers that are waiting to jump back into the market.”
Next year won’t be without obstacles, though. Dr. Plache says that the continued slow pace of the economic recovery and uncertainty in the months leading up to the US Presidential election may constrain sales growth. Threats of a European recession and a Chinese economic slowdown will also pose a risk to growth in the auto market, and if these or other negative events shake the marketplace, new vehicle sales momentum could weaken.
Prospects for the US and China are key
Besides managing the problems in the European economy, what happens in the US and China will be pivotal to how a big chunk of the rest of the world shapes up in 2012. The US remains a big source of demand for China’s exports. If the US economy stays positive that helps China. Analyst Tony Pugliese sees some room for manoeuvre for Chinese policymakers following steps taken to curb inflationary pressures during 2011. “Beijing has done a lot to curb inflation and slow demand in China,” he says. “As far as the car market goes, much depends on what the government may do in response to any weakening of demand in the general economy – say in response to slower exports. It could actually decide to reduce interest rates and encourage lending if it feels that demand is too weak. That could potentially lift the car market quite strongly as the government seeks to keep the economy on an even keel and compensate for weakness in international markets.”
Pugliese also notes that the move of demand inland to the so-called ‘Tier 2 ‘ and ‘Tier 3’ cities could be further augmented by rising replacement demand in the big eastern cities. “We have seen quite a few years of strong sales growth,” he says. “Some of those owners from three, four or five years ago will now be looking to replace their vehicles with new ones and that will be creating yet higher demand.”
Pugliese believes there is a great deal of uncertainty on where the Chinese vehicle market will go in 2012. “It could conceivably grow,” he says. “But much hinges on these bigger economic questions. I certainly do not foresee a big drop. The Chinese government before has shown that it will take swift action to stimulate the economy of it thinks that is necessary and automotive is very much seen as a pillar industry.”
After two years of breakneck expansion, China’s auto market is certainly returning to a more subdued growth pattern. The cooling has been attributed to the termination of government tax incentives and local government initiatives aimed at easing ever-worsening traffic congestion. This, some observers say, is expected to hit local car makers more than overseas players which have superior fuel-saving technologies.
Analysts looking at China are still generally upbeat about 2012. Growth is expected to come from solid demand in tier 2 and tier 3 cities, capacity expansion, easing monetary and fiscal policy and possible new investment programs after the change in government leadership due in 2012. Some industry observers expect market growth in 2012 of up to 5%, but many are hedging their bets, beyond saying that the exponential growth of a few years ago is unlikely to return.
The China Association of Automobile Manufacturers (CAAM) says it expects China’s auto sales to rise 8% in 2012, after growing just 2.5% (to 18.5m units) in 2011 – the the slowest growth in 13 years. In 2010, the market was up by a third on the previous year. CAAM believes that a looser government macroeconomic stance will support vehicle demand in 2012. The association has previously said that weaker economic growth and stricter government policies in 2011 had slowed auto sales growth. If the market grows by 8% in 2012, that would take it to 20m.
Tony Pugliese has a further point about China. “If China’s economy continues to be strong in 2012, that will help the economies of the ASEAN,” he says. “China sucks up a lot of raw materials from southeast Asia. If the Chinese economy continues to be strong and that continues to be the case, the ASEAN economies and vehicle markets will generally enjoy a lift.”
Other emerging markets set to grow
Inflation has been a problem worldwide and prompted monetary tightening and other policy shifts in Brazil, India, and China that caused slower growth in 2011. But, with inflationary fears in these markets subsiding (prompting correspondingly looser monetary policy), these markets could be poised for substantial growth once again, according to analysts. There is also clearly plenty of potential for further motorisation in places where car density remains low.
Polk maintains that growth in the other BRIC countries will outpace many mature markets over the next few years. Brazil eclipsing Germany is one example. Brazilian new vehicle sales in 2011 set another record: 3.63m units including cars and light/heavy commercials. So it’s now the fourth largest market in the world, ahead of Germany and behind only Japan, China and the US.
Brazilian trade association ANFAVEA reckons vehicle sales in Brazil will rise between 4% and 5% this year. Production is seen rising 2%.
New vehicle sales in India are expected to surpass those sold in Germany by 2014. Sales in Russia will outpace Germany by the year 2015, Polk forecasts.
Local observers are optimistic about prospects for the Indian vehicle market after a cooling down in 2011. In the second half of 2011, car sales fell as the Indian government raised interest rates and fuel prices rose. The Indian government is not expected to raise interest rates again this year (indeed, they could fall) and that, coupled with still strong economic growth, could see vehicle sales rising by around 10% in 2012. There is also talk of special measures to boost the economy and encourage growth of demand in the automotive sector. A further market driver is increased local supply from major international OEMs. However, one possible problem for India’s car market is a plan to raise a tax on the purchase of diesel vehicles. That’s something to watch in 2012 as diesel cars have been selling well in India due to higher fuel prices. More generally, upward pressure on vehicle prices ought to be easing next year.
Russia is also positioned for another year of growing local demand shored up by strong energy international energy prices. Figures released by the AEB in Moscow show that Russia’s light vehicle market increased by 39% in 2011 to 2.65m units. The market picked up on the back of an economy boosted by high energy prices and pent-up demand following the collapse of 2009 which saw sales dive to 1.5m. The AEB forecasts continued, though slower, growth for Russia’s vehicle market in 2012 to 2.8m. The cautious view reflects concerns over the global financial environment. When the international banking crisis hit in 2008, credit quickly dried up in Russia. However, Russia has a low level of car ownership, old car parc and significant demand potential if the economy continues to grow. A Russian vehicle market of 4m a year by the middle of the decade is forecast by the AEB.
Underlining the generally upbeat numbers for 2012, overall BRIC market growth is likely to reach double digits (12%) in 2012 following only five percent growth in 2011, Autofacts says.
The analysts there also say that potential exists for strong output recovery in Japan and Thailand as the auto sectors in both countries work to satisfy pent-up demand, clear product backlogs, and rebuild inventory in the wake of 2011’s natural disasters. Thailand’s eco-car program is also likely to provide assembly upside in 2012, Autofacts adds.
ASEAN ‘upbeat’
The IMF in its latest review says that developing Asia is still projected to show economic growth at 7.5% pa on average during 2012–13.
In the ASEAN region of southeast Asia, the industry overall is upbeat about the sales prospects for the region in 2012, despite the uncertain outlook for export markets in the West. Much depends on how the economies actually perform, but the potential for new car demand as motorisation rises from low levels is clear.
Toyota expects Thai sales to jump by at least 20% to 900-950,000 units in 2012, as the industry restores production capacity and addresses the lengthy order backlog carried over from 2011. First-time buyer incentives are also expected to help drive sales this year.
Toyota also expects vehicle sales in Indonesia to rise to between 930,000-970,000 units, with cheaper car financing helping to push the market higher. Economic growth remained strong throughout last year and the vehicle market brings considerable growth momentum into 2012. New models from Toyota-Daihatsu and improving supply of other vehicles are also expected to be major positives for the Indonesian market.
One major negative overhang is the government’s need to reduce fuel subsidies, with some action expected in the second quarter. Also, Bank of Indonesia has recently discussed increasing downpayment requirement for car loans. This policy would have a major impact on sales if introduced.
The Malaysian Automotive Association (MAA) expects sales to rise by 2.5% to 615,000 units in 2012 on the back of improving supply, new models and promotional activity. Meanwhile, the Chamber of Automotive Manufacturers of the Philippines Inc. (CAMPI) expects its members to increase sales by 4-5% this year, also on the back on improving product supply and new model activity.
If these forecasts are accurate the regional market would likely approach 2.8m units in 2012. The main threat to this outlook is the potential for the global economy to deteriorate further, according to Tony Pugliese.
Japan to see a 2012 market rebound
The Japanese automakers’ trade association JAMA is forecasting that domestic vehicle sales will rebound in 2012 following the natural disasters that contributed to a 15% market contraction in 2011.
JAMA forecasts that the total market for vehicles in Japan in 2012 will be 5m units – 19% up on the 4.2m recorded in 2011 (when the market was hit by widespread production disruption due to natural disasters).
Sales of passenger vehicles are expected to increase 21.7% to 4,291,000 units, while those of trucks and buses are estimated to rise 5.5% and 17.4%, respectively, to 712,000 units and 12,500 units.
In 2011, domestic sales of new vehicles, including minivehicles, fell 15.1% from the previous year to 4,210,220 vehicles, dropping to the lowest level in 34 years. The March 11 earthquake and tsunami caused serious disruption to automotive production and dampened demand. There were further parts shortages and production disruption following the floods in Thailand which hurt Japanese OEMs in particular. However, the market picked up in the final quarter of 2011 as supply problems eased.
Analysts say that car sales momentum at the end of last year is likely to carry over into 2012 following a government extension of tax incentives for purchases of fuel-efficient cars and a new scheme to subsidise the purchase of clean vehicles. However, they also caution that the outlook for the Japanese economy remains weak and that any further deterioration to economic prospects would hit vehicle demand.
Other growth opportunities
The Australian car market could see further growth in 2012 on the back of a strong economy being led by an unprecedented mining boom and recovering from 2011’s natural disasters. Again, as in the case of the ASEAN, what happens in China will be important to Australia. Australian new motor vehicle sales achieved what local lobby group, the Federal Chamber of Automotive Industries (FCAI), called “a remarkable comeback” in the second half of 2011 to finish above 1m calendar year sales for only the fourth time in history.
Official FCAI VFACTS data showed that 1,008,437 new passenger cars, SUVs and commercial vehicles were delivered to customers last year.
Volume was down 2.6% (27,137 units) compared with 2010 – which could be attributed to challenging market conditions and significant supply shortages during the year, according to FCAI chief executive Ian Chalmers. “2011 full year sales are an exceptional result given the effects of natural disasters both at home and abroad throughout the year,” Chalmers said.
Chalmers said the FCAI’s outlook for 2012 was cautiously optimistic. “Once again in 2012 we are predicting the market to top 1m sales – a realistic assessment given the recent nature of competitive strategy in the retail sector and strong consumer demand for new models,” he said.
South Africa is another southern hemisphere country that is projected to see growth in its car market in 2012. The economy is forecast to grow by around 3% and the Naamsa automotive trade association forecasts that the South African vehicle market will grow to 611,500 units in 2012, around 7% up on 2011. It says that positive underlying momentum should continue into 2012 with demand supported by historic low interest rates, improved vehicle affordability, new high technology model introductions, easier access for consumers to vehicle finance and pent-up demand resulting from owners having extended their vehicle replacement cycles during the financial and economic crisis three years ago.
