- Period of unprecedented innovation in the sector
- Car manufacturers are among the largest investors in R&D worldwide
- Lower registrations and sales in the three main global markets
- Worsening credit risk in several regions across the world, including the United States and United Kingdom
- Increasingly restrictive anti-pollution standards requiring heavy investments
- High uncertainties notably due to knock-on effects of the trade war on the global automotive supply chain
- Rising prices for car parts and equipment are affecting margins
Amid slowing global growth (2.4% forecast by Coface for 2020, after 2.5% in 2019), the automotive sector is facing many difficulties, thus confirming its pro-cyclical nature. Car sales are down in the main world markets. In the first ten months of 2019, the year-on-year decline reached 1.1% in the United States and 9.7% in China. Over the same period, new registrations decreased by 0.7% in the European Union. Coface’s sector risk assessment is now showing high risk in all of the regions of the world for which Coface publishes sector assessments. This illustrates both the poor health of the sector and the significant interconnectedness of global production chains.
The automotive sector reflects the current vulnerabilities of the global economy. It is affected by the economic slowdown, trade protectionism and structural changes linked to innovations, regulations and changes in consumer behaviour. Given the many factors exerting downward pressure on vehicle sales, Coface expects the sector’s difficulties to continue in the medium-term.
Sector Economic Insights
Hurt by the global slowdown and the trade war
From a cyclical point of view, the automotive sector is being hurt by the slowdown in the global economy, with demand declining in the main markets (Europe, China and the United States), but also by the trade war that has been ongoing since 2018, mainly between China and the United States, which is having a negative impact on confidence.
The decline in demand is strengthening competition between manufacturers and reducing their margins, while higher prices for equipment and certain raw materials are also eating into profitability. Manufacturers must therefore choose between reducing margins and putting up vehicle prices. Coface expects that the US prices of several popular trucks will rise this year by between USD 2,000 and USD 7,000. In addition, US President Donald Trump has threatened on several occasions to increase customs duties on vehicle imports into the United States, which could have a major impact on European and Asian carmakers.
Although light vehicle sales in the United States are down sharply, strong resilience in the light truck segment (pickup trucks, SUVs) is limiting losses for the sector as a whole. However, given the uncertain economic context, the sector will struggle to get back to a favourable situation. According to Coface forecasts, after growing by 2.9% in 2018, the US economy will grow by 2.3% in 2019 but only 1.3% in 2020, notably due to the impact of the trade war and less vibrant business investment. In this context, the US Federal Reserve System (Fed) decided to lower its key interest rates again by a quarter point in October 2019. However, the cost of car loans is expected to remain high and credit quality is set to decline because of the increase in vehicle prices, a process that is already under way. In February 2019, the Fed announced that 7 million Americans were 90 days behind schedule on their car loans, a level unseen since 2011. Vehicle debt, estimated at over USD 1.270 trillion, is an increasingly large part of US household debt.
In China, growth is definitely slowing and is expected to fall to 6.1% in 2019 and 5.8% in 2020, compared with 6.6% in 2018. The economy is suffering because of the trade war with the United States, with consumer confidence and the Chinese automotive sector being severely affected. In addition, the sector is being hard hit by new approval rules introduced in July, which we discuss in more detail below. Thus, even with government support measures, vehicle sales are expected to continue to decrease in 2020.
The worsening economic outlook for the major Eurozone economies (Germany, France and Italy), as well as political uncertainty in the United Kingdom, will continue to weigh on new vehicle registrations in Europe. The economic slowdown announced for 2019 is unlikely to be followed by a big improvement in 2020, with Coface forecasting yearly growth of 1.1% in the Eurozone, after 1.9% in 2018. The German economy and its automotive sector, which depends on the global economic situation, have been very negatively affected: Coface estimates German economic growth will be 0.5% in 2019 and 2020, compared to 1.5% in 2018. In addition, German automotive production fell from an annual growth rate of 5% in February 2017 to a decline of 9% year-on-year in October 2019. These difficulties have a particular impact on Central and Eastern European countries, whose automotive value chains are highly integrated with those of Germany.
Major structural transformation for the global automotive industry with the end of diesel and the rise of e-mobility
Criticized for its associated health issues, diesel technology is in decline around the world. The global share of diesel vehicle sales is expected to fall from 19% in 2017 to only 5% in 2030. This decline can plainly be seen in Europe, where the share of new diesel registrations dropped from over 51% in 2015 to less than 36% in 2018, according to the European Automobile Manufacturers’ Association (ACEA). As a result, manufacturers are being forced to turn away from diesel, which is disrupting their production chains. In the short term, this transition is benefiting petrol-powered vehicles, but further out e-mobility is expected to represent a share almost equivalent to that of fossil fuel vehicles (48% of sales by 2030, according to Statista).
The emergence of e-mobility is mainly linked to the arrival of new players such as Tesla, a manufacturer and leader in the electric vehicle (EV) segment. In response to this trend, the main traditional manufacturers are investing heavily in research & development and expanding their EV ranges to compete. This situation could encourage traditional manufacturers to join forces in order to boost their investment capacity. This was one of the objectives behind the proposed Peugeot SA (PSA)/Fiat-Chrysler merger in the second half of 2019, with Fiat-Chrysler seeking to benefit from PSA’s electric technology, and PSA looking for critical mass and access to the US market.
Although affected by the sector’s difficulties, the e-mobility segment continues to grow in the main markets. Nevertheless, it remains highly dependent on purchase rebates. The significant increase in the number of models being marketed and the expanded range offered by these vehicles are two of the main reasons for the rise. However, the segment also owes its exponential growth to subsidies or purchase rebates offered by governments in the main markets. This is the case in China, the world’s largest market, where EV sales increased by 52% in the first half of 2019. However, the Chinese government decided to reduce its purchase rebates more drastically than expected from June 2019. This move had three objectives: to make budgetary savings, to encourage companies to move to upmarket, and to single out some of the many domestic automotive companies with excess production capacity. Accordingly, there are short-term uncertainties about how much China’s e-mobility segment – the only automotive segment to resist the drop in sales – will expand. Tesla could be strongly impacted by the Chinese subsidy cuts, especially since the company is also suffering from a similar decrease in the United States.
Tougher environmental regulations are forcing the automotive sector to adapt
As governments impose new environmental regulations linked to climate change and pollution, manufacturers are required to make significant investments to comply with the new standards. Implemented in September 2018, Europe’s new 2017 WLTP regulation, which aims to bring emissions testing more in line with actual vehicle use, continues to affect production chains and slow the growth of registrations. In China, the rapid tightening of anti-pollution standards is another factor in the current crisis in the automotive market. The country is prioritizing health and the environment and has therefore decided to step up the pace of reforms in these areas, bringing application of the China 6 regulation, which sets significantly stricter pollutant emission standards, forward from July 2020 to July 1, 2019. Fifteen Chinese provinces, representing about two-thirds of the country’s sales, are currently covered by this regulation. Concerned that they would no longer be able to sell some of their inventory, dealers applied heavy discounts in an attempt to sell off their stock before China 6 came into force. Manufacturers are also being forced to adapt quickly and will likely face significant difficulties in complying with these regulations in the coming months.
Even if there is a natural tendency for smaller economies contributing to the global automotive value chain to converge towards the anti-pollution rules adopted by the major markets, the issue of standards harmonization should be monitored in view of the risk of segmentation. This risk has already materialized in the US market, where the Clean Air Act has led to a legal rift between the US federal government and the state of California. The Trump administration has revoked the federal waiver that allows California to set stricter emission standards, prompting the state, along with 20 or so others, to take the federal government to court over this decision. The potentially drawn-out legal battle ahead could lead to increased uncertainty for carmakers.
Note for the reader: The “e-mobility” segment of the automotive sector includes fully electric vehicles, electric hybrids and hydrogen vehicles.
Last update : September 2019