- Period of unprecedented innovation in the sector
- Car manufacturers are among the largest investors in R&D worldwide
- Deteriorated credit risk in several region 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
Vehicle sales and registrations in the EU15,
US and China (annual change in the 3-month moving average sur 3 mois)
The automotive sector is facing many difficulties, in a context of slowing global growth (2.7% forecast by Coface for 2019 and 2020, compared to 3.1% in 2018), thus confirming its pro-cyclical nature. Car sales are down in the main world markets. In the first half of 2019, the year-on-year decline reached 1.9% in the United States and 12.4% in China. Over the same period, new registrations decreased by 3.1% in the European Union. Coface's sectoral risk assessment is now at “High Risk’ in the regions of the world for which Coface publishes sectoral 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. Considering the multitude of factors exerting downward pressure on vehicle sales, Coface expects the sector's difficulties to continue in the medium-term.
Sector Economic Insights
Sector suffering from global slowdown and the trade war
From a cyclical point of view, the automotive sector is suffering from the slowdown in the global economy, with demand declining in the main markets (Europe, China and the United States), and also from the trade war that has been ongoing since 2018, mainly between China and the United States, which is having a negative impact on players confidence.
The decline in demand is strengthening competition between manufacturers and reducing their margins, while rising prices of equipment and certain raw materials are also weighing on their profitability. Manufacturers must therefore choose between reducing costs and increasing vehicle prices. Coface expects that the American prices of several highly sought-after 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. This could have a major impact on European and Asian carmakers.
Although light vehicle sales in the United States are down sharply, the strong resilience of the light truck segment (pickup trucks, SUVs) allows the sector as a whole to limit losses. However, given the uncertain economic context, it will be difficult to return to a favourable situation: according to Coface forecasts, after growing by 2.9% in 2018, the US economy should grow by 2.5% 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 by a quarter point at the end of July 2019. However, the cost of car loans should remain high and credit quality should decline because of the increase in vehicle prices, which 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 not seen since 2011. Vehicle debt, estimated at USD 1.270 billion, is an increasingly large part of US household debt.
In China, growth is definitely slowing, and is expected to fall to 6.3% in 2019 and 6% in 2020 (compared to 6.6% in 2018). The whole economy is suffering from the trade war with the United States, with consumer confidence and the Chinese automotive sector being severely affected. In addition, the sector is also severely affected by new approval rules introduced in July, which we will discuss in more detail below. Thus, even with government support measures, vehicle sales are expected to decrease in 2019.
The worsening economic outlook for the major euro area 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 seen in 2019 is unlikely to improve in 2020, with Coface forecasting eurozone yearly growth at 1.3% and 1.4% respectively, after 1.8% in 2018. The German economy and its automotive sector, which depends on the global economic situation, are very negatively affected: Coface estimates German economic growth at 0.8% in 2019 and forecasts 1.2% in 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 12% year-on-year in April 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 transformation – the end of diesel, the rise of e-mobility
Due to the health issue it creates, diesel technology use 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 already 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, disrupting their production lines. In the short-term, this transition is in favour of petrol-powered vehicles, but in the medium-term, e-mobility should represent a share almost equivalent to that of fossil fuel vehicles (48% of sales in 2030, according to Statista).
The emergence of e-mobility is mainly linked to the arrival of new players, such as the manufacturer Tesla, a leader in the electric vehicle sector. In response to this trend, the main traditional manufacturers are investing heavily in research & development, and expanding their range of electric vehicles to compete with these new players. This situation could incite traditional manufacturers to join forces and so increase their investment capacity. This was one of the objectives of the Renault/Fiat-Chrysler merger project in the second quarter of 2019 (aborted at the time of writing), with the latter wishing to benefit from Nissan's (Renault's partner in the alliance between the two manufacturers) e-mobility technology.
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 premiums. The significant increase in the number of models marketed and in their range of use are two of the main reasons for this increase. However, this exponential growth is also due to subsidies or purchase premiums granted by governments in the main markets. This is the case in China, the world's largest market, where sales of electric vehicles increased by 52% in the first half of 2019. However, the Chinese government decided to reduce its purchase premiums more drastically than expected from June 2019. There are three objectives: to make budgetary savings, to encourage companies to improve the quality of their offer, and to make a selection from among the many domestic automotive companies that are in production overcapacity. Therefore, there are short-term uncertainties about the degree of expansion in China’s e-mobility segment – the only automotive segment to resist the drop in sales. Tesla could be strongly impacted by the decrease in Chinese subsidies, especially since the company is also suffering from the same decrease in the United States.
More stringent 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. In Europe, the new 2017 WLTP regulation, which aims to make emission tests 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 caused the current crisis in the automotive market. The country has made the health and environmental issue one of its priorities and has decided to accelerate the pace of reforms in this regard, moving the application of the "China 6" regulation forward to July 1, 2019, instead of July 2020. This regulation sets significantly stricter pollutant emission standards than before. Fifteen Chinese provinces are currently covered by this regulation, which represents about two thirds of the country's sales. Concerned that they would no longer be able to sell their cars, dealers applied heavy discounts in an attempt to sell their stock before China 6 entered into force. In addition, manufacturers must 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 on the anti-pollution rules adopted by governments of major markets, the issue of standards harmonisation should be monitored in view of the risk of segmentation. The aforementioned risk has already materialised 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: California has a waiver to set its own emission standards, therefore forcing car manufacturers to comply with more stringent rules than in other states. This diversity in regulation creates additional operational difficulties for manufacturers.
Notes for the reader
The “e-mobility” segment of the automotive sector includes fully electric vehicles, electric hybrids, and hydrogen vehicles
Last update : September 2019