The latest JD Power-LMC ‘Global Automotive Outlook Conference’ took place in London last week. The overall assessment of prospects for the industry was very much more positive than many in the industry would have dared to hope for just a few months ago. But it is not all good news. Just-auto.com managing editor Dave Leggett went along to hear the proceedings, experience déjà vu and chew the cud with quite a few old colleagues.

I must confess to enjoying my regular trips up to London, especially at this time of the year. And the chance to attend a forecasting conference at a swanky hotel in Mayfair was too good to miss. It also brought back some memories for me personally. Many a time in the past, I’ve been the information-overloaded analyst ready to make a presentation on the state of say, the Brazilian truck market or prospects for the vehicle industry in Asia. A look at the conference programme confirmed that this was going to be a pretty information intensive day and indeed it was.

What follows is my assessment of some of the day’s highlights.

Global economy overview: recession giving way to recovery

Bob Schnorbus directs JD Power’s economic analysis and started the day with an overview of developments in the global economy. Bottom line: the ‘mild’ global recession or ‘sneeze’ that has hit the global economy – led by the US – is being worked through and giving way to a recovery. Global GDP is now expected to expand by around 1.5% in 2002. The recovery is being led by the US, with Europe and Japan acting as ‘laggards’. Overall, the global economy is expected to be on 3-3.5% GDP annual growth path post-2002 – a ‘good environment’ for car markets.

Schnorbus said that the position of Japan is particularly worrying. As the economy continues to flounder, hopes for reforms there are fading along with Prime Minister Junichiro Koizumi’s popularity and reform enthusiasm.

For the US, GDP growth of 3% is anticipated for 2002. This year growth has come back strongly after the dip at the end of 2001 – led by a large inventory swing. But there is more volatility and uncertainty than is usual for consumption and real disposable income.

“Interest rates could rise as the economy heats up”

Interest rates could rise as the economy heats up, inflationary pressures could get a boost from rising energy prices.

In emerging markets, the picture is mixed but things are generally improving – especially from 2003 out. Latin America’s economy doesn’t look too healthy right now and is dominated by the problems of Argentina, but also a shaky post-devaluation recovery in Brazil. Venezuela shows that ‘populism and oil don’t mix’.

Asia looks much more positive. In response to a question, Schnorbus said that while he doesn’t believe the official Chinese GDP annual growth figures of 7-8%, growth is nevertheless running at over 4%. In SE Asia, concerns over the need for economic reforms act as a caveat to the forecast for economic buoyancy in the ASEAN economies.

Schnorbus pointed out something that has been evident for quite a few years now: emerging rather than mature markets will generate most of the volume growth the industry sees in the future. But a bright future for emerging markets is being tarnished somewhat by lagging reforms.

Incentives and the absence of market ‘payback’ in the US

Schnorbus took a look at incentives in the US light vehicle marketplace and concluded that the continued use of aggressive and higher incentives is preventing the classic ‘payback’ to demand that analysts expect to see following a period of incentive driven ‘pulled forward’ purchases. There was no significant payback in the US after the 2001 Q4 demand surge. In April, US light vehicle sales are coming in at an annualised rate in excess of 17 million units. The 2002 calendar year forecast has been revised up to 16.4 million units and there was a strong hint that it could be revised upwards again.

Schnorbus maintained that

“it is inconceivable that the Big Three will back off from incentives”

it is ‘inconceivable that the Big Three will back off from incentives’. Competitive pressures will keep them hooked and they’ll be worried about the consequences of removing incentives.

Europe’s deceleration and downturn in line with expectations

While 2002 is Europe’s slowest GDP growth year since the dark days of 1993, Charles Young said that the picture was not quite as bleak as that fact suggested. The main economic dip was in 2001 Q4 and this year, growth has resumed. The European economy should grow by around 0.7% in 2002 and over 2% in 2003. The main downside risk is presented by the possibility of higher oil prices – not factored in to the current forecasts. There is also concern about persistently high unemployment in some countries.

West European new car sales are expected to fall by 4.5% this year. A return to a 15 million unit selling rate is not envisaged before 2004. Despite the relative maturity of the market, some further growth potential is there and demographics supports more growth in SUVs and larger cars. 

Currently, the West European car market is being buoyed by the (unsustainable) strength of the UK market.

“Germany is well below equilibrium trend “

Germany is ‘well below equilibrium trend’ and Italy is seeing a sharp slowdown based on the payback following a prolonged period of discounting and high incentives. France was described as ‘intermediate’ and likely to see decline, while the Spanish car market faces a downturn from an unsustainably high sales rate.

Upper medium Mondeo/Passat segment reviving

Young also looked at the segmentation of the West European car market. After a prolonged decline brought about by the growth of lower medium platform-based ‘monospace’ vehicles (pioneered by the Renault Scenic) the upper medium Segment D (Passat/Mondeo/Vectra) is seeing a product-led revival. (That will be boosted further by the impact of Opel’s new Vectra.) The product surge and favourable demographics that drove the Scenic sub-segment of ‘C’ were described as less strong going ahead. The demographic bulge over thirty-somethings who went for these vehicles becomes older and once Volkswagen and Ford add their high van variants, product lines looks pretty filled out.

‘Winners and losers’

Young also had some views on OEM winners and losers in Western Europe, which can be summarised:

• There’s no stopping the two most successful OEMs currently – BMW and PSA
  
• For Renault, the Megane replacement is crucial to stopping share loss
  
• Opel is under pressure on share and much depends on the upcoming new Vectra
  
• Fiat’s Stilo won’t hit over-ambitious expectations; capacity stays a problem for Fiat
  
• For Ford, delays on the Fiesta have cost dearly in the supermini class
  
• Volkswagen is vulnerable due to late model cycles
  
• Honda may be a star OEM in Japan and in North America but in Europe it has a poor record. That could be about to change with the impact of the Jazz and diesel engines

Young also had a few words to say on distribution, new car prices and upcoming changes to Block Exemption in Europe. In a nutshell, he does not expect a big bang and a massive tumbling of prices. Pre-tax prices will tend to equalise across markets – with rises in high tax countries. Since generally high tax countries account for a large proportion of sales, there is little scope to cut prices there. He believes that there will be efficiency gains that will permit small reduction in distribution costs – ‘that will be very mildly positive for volumes across the board, but nothing cosmic’.

Contrasting production capacity performances

Arthur Maher took a look at the capacity situation for the industry and the OEMs across Europe. He began by noting that

“during the first three quarters of 2001, there was a 280,000 unit build up of stocks “

during the first three quarters of 2001, his analyses suggested that there was a 280,000 unit build up of stocks – so an adjustment was due, even before September 11. And in Q4, there duly followed a 325,000-unit reduction to inventory. Total West European light vehicle build is forecast to fall further this year (by 3-4%, to under 14.5 million units), coming back strongly in 2003 as demand picks up. Maher said that Eastern Europe shows more stability in its output trend currently and shows a strong pick up from 2004 and 2005, with the addition of new production from several sources including Toyota-PSA’s small car joint venture in the Czech Republic.

Maher also pointed out that concepts of capacity can be difficult to nail down definitively in the case of some plants where what might be termed ‘plant idling’ measures are undertaken – such as shift removal or a line being taken out. And his programme of plant visits has uncovered some interesting issues and differences of approach between OEMs. For example, while 3-shift working and flexible working arrangements have become commonplace, views on ‘optimal’ plant size appear to differ. GM sees new Russelsheim as optimal (270K per annum) and that is in line with Toyota and Honda. But Nissan is going for 350-400K and the practices of Ford, Renault and PSA suggest that the 400K multi-line plant is far from dead.

Maher then went on to take a look at underlying plant dynamics with respect to GM’s European operations on the Astra/Vectra model lines. The picture was complex with flexible plants, lead plants, and ‘swing’ plants on particular models. Bottom line: capacity actions at one plant will have ripple through knock-on effects across the whole European production base.

A look at the specifics of plant capacity utilisation at the individual OEMs showed some striking variances in performance. At the top end, PSA was described as running at capacity build – 100% capacity utilisation. The company has had to negotiate new working arrangements with its workers to add 10 working days to 2002. At the other extreme was Fiat, seen as operating at around 65% capacity this year and with little major improvement until the closure of Rivalta in 2005.

Overall, Maher expected to see significant build and capacity utilisation improvements from Ford, Fiat and GM by 2007. However, he said that Renault-Nissan was at risk of seeing capacity utilisation deteriorate later in the decade as Sunderland expands to 500,000 units of annual production capacity from 2003.

European growth centre-of-gravity moving eastwards

Carol Thomas reviewed developments in Central and Eastern Europe and it was clear from her presentation that, while short-term prospects for these countries are decidedly mixed, their long-term demand potential, as incomes rise, is considerable. The European Union (EU) accession timetable certainly looks ‘demanding’, although the official line from the EU’s ‘enlargement commissioner’ remains that the timetable is realistic and feasible:

EU Accession Timetable
=========================================
2004               2008             2010
=========================================


Baltic States     Bulgaria         Turkey
Poland            Romania 
Hungary  
Czech Republic  
Slovenia  
Slovakia  
Malta  
Cyprus  
=========================================

The economies of newly admitted member states can expect to see a considerable boost if past experience is anything to go by. For the OEMs who sell in Western Europe, the enlargement of the EU is expected to bring a number of advantages. A more unified regulatory environment is expected to follow, with the countries adopting EU environmental, Type Approval and competition policy norms. Also, the area of the EU’s common external tariff (CET, or customs duty) is enlarged – which should benefit manufacturers operating within the EU versus, for example, the Japanese and Koreans.

OEMs already active in the East

Thomas also pointed out that many OEMs already have a significant manufacturing presence within the region – eg Skoda,

“the region [Eastern Europe] will be increasingly important to the automotive industry”

VW, Renault, Suzuki, Audi and Fiat. (The future of Daewoo’s plants – not part of GM’s planned purchase of Daewoo Motor assets – remains unclear.) The perceived advantage in manufacturing in a low cost area within the EU and with good local demand prospects will likely grow over time. Even if generous government investment incentives are reduced as a consequence of EU membership, the region will be increasingly important to the automotive industry – in a European context  – in the future.

Powertrain and CO2 – be ready for change

The emergence of ‘new diesels’ in Europe has helped the share of these vehicles to climb towards 40% of the European new car market. The perception of diesels as ‘dirty’ has not altogether been laid to rest (particulates), but the perception of consumers concerning the performance penalty has now shifted in the direction of a greater acceptance of diesels – which use less fuel than gasoline burning counterparts (and are therefore better on CO2). Policymakers have adjusted ‘anti-diesel’ policies in some markets too, although the anti-diesel policies keep the diesel share very low in Sweden for example (under 10%).

Diesel penetration rates vary widely across Europe. In Italy, the removal of penal taxation measures applying to diesels caused diesels to soar to 40% penetration and in Germany, tax concessions in the fleet sector have helped to push diesel share up – also to around 40%. In France, the diesel share is now around 60%. The UK is at around 20% diesel penetration, but it is rising strongly. By 2007, the diesel share of the European car market as a whole is forecast at over 50%.

These and other interesting powertrain observations came to us courtesy of LMC’s Alastair Bedwell. He also took us through some volume projections on transmissions.

“Get ready for more 6-speed manuals (20% share of manuals in Europe by 2007). “

Get ready for more 6-speed manuals (20% share of manuals in Europe by 2007). Automatics rise to around 18% of the market by 2007 – against 12% now. And 6-speed automatics will be increasing share too. Amongst the factors helping automatics are their suitability for congested driving conditions, a favourable shift in their manufacturing costs versus manuals, a role in CO2 reduction and changing perceptions among consumers.

Bedwell maintained that the future for Automated Manual Transmission (AMT) is brighter now that the problems surrounding ‘user satisfaction drawbacks’ have been overcome. A CVT revival is expected across a wide range of market segments. The share of all transmissions accounted for by CVT and AMT combined is projected at around 5% by 2007.

Bedwell also expects to see a continuation of the trend towards all wheel drive in conventional passenger cars.

Diesel engines for SUVs in the US?

“Diesel share is low in the US, but attitudes could be changing. “

Diesel share is low in the US, but attitudes could be changing. A big question. On the plus side, diesels are suited to the large trucks that Americans like to drive. Bedwell said that those that have tried diesel generally say they are happy with the switch from gasoline. Mercedes-Benz is importing a diesel-engined E-class to the US. But the image of diesel is generally poor.

Diesel outlook in Asia not great

Asia is not seen as fertile ground for diesel cars. Anti-diesel measures are in place in Japan, Korea, India and Taiwan due to poor air quality, particularly in major urban areas. China and Australia have little diesel incentive due to low gasoline prices.

Across the region, much depends on segment development (ie are the vehicles in demand those suited to diesel engines?) as well as progress on ‘clean technology’ (2008?). Korea, as well as Japan, now has indigenous makers developing diesels for light duty applications.

The emissions conundrum: sometimes CO2 reduction conflicts with other requirements

Brian Knibb, consultant from Knibb, Gormezano and Partners, picked up the baton to look at the CO2 regulatory framework and the options facing manufacturers. Complex? Certainly. A couple of things stuck with me. One is the potential for conflict between CO2 reduction and clean air.

“Diesel is great on CO2 but not so hot on noxious emissions. “

Diesel is great on CO2 but not so hot on noxious emissions. Also, there’s a balance to be struck on CO2. Carbon dioxide reduction can also work against safety – eg side impact protection involving reinforcing, heavier materials. Weight-saving measures as well as powertrain technology, have a part to play in reducing CO2 emissions.

In Europe, the CO2 fuel economy ‘agreement’ for the vehicle fleet currently stands at 169grams/kilometre. By 2008, the target moves to 140g/km, which is tightened to 120g/km by 2012. The biggest contributor to CO2 reduction thus far is diesel – but diesel will find it harder to meet future emissions legislation. Lower sulphur fuel (LSF) will help (expected 2005).

Knibb pointed out that there are a number of important developments in weight reduction ahead, including high strength steel (eg ULSAB), aluminium body panels, the increasing use of aluminium in chassis/suspension and powertrain, as well as a role for magnesium and plastics.

‘Mild hybrids’ under development

Another development that will assist in the meeting of CO2 targets is the more efficient running of engines made possible by 42 volt electrical systems. Technologies such as the Integrated Starter Generator (ISG) developed by Volvo and so-called ‘

“mild hybrid powertrains will likely become more important”

mild hybrid powertrains’ will likely become more important. Mild hybrids can provide electrical energy to, in Knibbs words, ‘support acceleration on take-off’. No European application is in production but Volvo’s ISG prototype has achieved a 20% CO2 reduction measured on NEDC’s urban cycle. Citroen claims similar savings on its ‘Dynalto’.

But the rub is costs and the 42v timetable. Knibb said that 42v programmes are proving costly and timetables are slipping.

In the longer term – 2010s – gasoline and diesel start to converge on CO2 as gasoline engines become more efficient with Homogeneous Charge Compression Ignition (HCCI). Out that far, Knibb takes a cautious line on the impact of alternative powered vehicles (EVs, HEVs, FCVs) in Europe and the US – their share is under 10% and not dramatically up on today.

‘The dog that didn’t bark’ – the Japanese in Europe

John Lawson, Managing Director, Automotive Research at Schroder Salomon Smith Barney (SSSB), gave us the view of the European automotive sector from the City. It was an upbeat address and he began with some historical perspective. In the early 1990s, the European makers feared the consequences of opening up the European market and removing volume restrictions on Japanese imports. In fact, the high yen held them back in the 1990s, just as the European makers developed improved product. Lawson said that

“the Japanese makers need 120 yen to the euro to breakeven in Europe”

the Japanese makers need 120 yen to the euro to breakeven in Europe, which has been a major black spot for them – at least compared to their operations elsewhere around the world.

They now have the profitability gain caused by the low yen versus the dollar and cost reduction measures have been impressive. They are now turning their attention to Europe more seriously, but the late arrival of good diesel engines has also cost them dearly in some markets.

The Japanese makers may have failed to move up to 15% plus market share in Europe following the end of volume constrains (in 2000), but the positives may not repeat. Block Exemption reform could help the Japanese, diesels are arriving and Nissan and Mitsubishi have the benefit of European associates in the shape of Renault and DaimlerChrysler. They are also broadening their European manufacturing operations away from emphasis on the UK and towards more cost-effective locations. They could be ready for a revival, emphasising their small car strengths.

Ford and GM also lost out in the 1990s

Lawson also pointed out that Ford and GM had a bad decade in Europe during the 1990s. He said that European operations were hampered by poor product flow and the wrong production base – with too heavy a reliance on the UK. Both makers were also described as ill-prepared for the diesel boom and ultimately saddled with a poor image and residuals.

Upscale makers making hay, but increasingly dependent on US and dollar/euro rate

Lawson pointed out that while the upscale makers may be the shining stars of the day in financial terms, they have become increasingly dependent on sales in the US. He estimated that

“some 40% of BMW’s profits are dependent upon sales in the US”

some 40% of BMW’s profits are dependent upon sales in the US. Rising sales there have been a major benefit of course, but that has also become a risk!

As far as the European volume makers are concerned, Lawson was cautious on predicting long-term losers. Fiat could be. But much depends on future product flows. As he put it, referring to Orson Welles: ‘There’s not much wrong with Hollywood that can’t be put right by a few good pictures’ – and the same applies to the automakers and future product flows.

In Lawson’s view, the European automakers have strong balance sheets and industry gearing is far lower than previously at this stage in the cycle. He was fairly sanguine about developments on reducing capacity too. 
 

“Lawson concluded though that the industry in Europe ‘needs a new source of share’. “

Lawson concluded though that the industry in Europe ‘needs a new source of share’. He did say that it was unlikely to be Ford or the Japanese, but was reluctant to back everyone’s favoured candidate – Fiat.

Block Exemption reform and possible financial consequences

Lawson described the results of SSSB research into the possible financial consequences of changes to distribution and reform of Block Exemption. Their analyses suggest that a simple averaging of Euro prices could trim Volkswagen profits by 300-600 million euros (6-12%), but add 80-160 million euros (4-7%) to PSA’s. If UK prices came down to the Eurozone level, that could trim 250-500 million euros from PSA profits (11-22%) and 8-15% for the industry.