Estudios Económicos
Automotive

Automotive

Automotive
Latin America
Northern America
Central & Eastern Europe
Western Europe
Emerging Asia
Middle-East & Turkey
Change sector

Strengths

  • Ageing of car fleet
  • Upturn in European demand
  • Car manufacturers are among the largest investors in R&D worldwide

Weaknesses

  • Slowdown in emerging countries and the United States
  • Overcapacity in China
  • Increasingly restrictive anti-pollution standards requiring heavy investments
  • Deteriorated credit risk in the United States

Risk assessment

Highlights
Sales of new vehicles, (year-on-year)

Sales of new vehicles, (year-on-year)

The global automotive market shows a mixed picture, with a contrast between European and US markets. The former remains vigorous, while the latter is in a slowdown phase. Lastly, in China, the market continues to be dependent on the State.

Growth in car sales is accelerating in China. The impact of lower taxation on engines under 1.6 L has allowed the market to recover compared with a sluggish fall 2015, with consumers anticipating their purchases in view of non-renewal of this measure. Competition is more intense between manufacturers, benefiting domestic brands as well as German groups. French brands are seeing their sales decline: -22% at the end of May 2016 over one year.

In the United States, vehicle sales slowed down year on year to 0.1% at the end of November 2016. The automotive fleet segment benefits manufacturers to sell their products. Nevertheless, residual values are beginning to decrease, which could affect future automotive sales. This trend is all the more disturbing given that it coincides with a deteriorated credit risk on the borrower side.

As for Western Europe, as of the end of October, new-car registrations have seen 38 months of uninterrupted growth. All the main European markets contributed to this resurgence. Italy topped the ranking (+16.7%), followed by Spain (+10.8%) and Germany (+4.9%).

Demand

Restructuring efforts have paid off in Europe and North America, but sales seem to be moving towards a peak. China is recovering artificially.

Coface expects an increase in vehicle sales in mainland China of 9% in 2017. Turnover and profits are up by 15% and 19% respectively. If the government did not extend this tax cut, sales would plunge, highlighting an intensified competitive situation. Lastly, according to JCS Automotive Consulting and Deloitte Consulting, automotive will be the new sector to suffer from overcapacity (estimated at close to 11.4 million vehicles) in 2017, when there will be 140 factories in China versus 123 in 2014.

Coface expects a contraction of -0.6% in annual vehicle sales for 2017 in the United States, sharply down compared with the growth seen since 2010. Various signs point to such a market slowdown. Inventories of unsold vehicles at Ford Motors grew by 33% over one year. In addition, with a less dynamic market, the approach strategy will be different, and a price war could follow in order to maintain market shares. Lastly, manufacturers will need to promote sales (at lower profitability) to vehicle rental companies, around 7% of sales for Ford. Added to this is less enthusiasm of younger generations to own a vehicle, instead preferring public transport or car sharing. The election of Donald Trump presents a risk in automobile groups’ strategy of making Mexico a production and assembly site. If the campaign promises became a reality, the profitability of automakers and equipment manufacturers would be affected.

New-car registrations in Western Europe should grow between 3% and 5% in 2017. According to our calculations, the cumulative turnover of the top automakers and equipment manufacturers grew by 5.8% in the second quarter of 2016 over one year. Production surpassed the 2007 peak, reaching 20.2 million assembled vehicles in 2016. Given that the market has not yet returned to pre-crisis levels, the difference is explained by a strong international presence, particularly for premium vehicles. In addition, automotive sales in China should remain vigorous and contribute to stronger profits in this country, particularly for German manufacturers. Lastly, the scandals over particle emissions are tarnishing the image of certain car manufacturers. In particular, the effects of these scandals are taking shape for certain groups, including Volkswagen, which will reduce its workforce by 5% by 2020, generating nearly 4 billion dollars in savings.

Supply

Global demand shows a mixed picture, with a slowdown in the United States, while the outlooks are more positive in China and Europe.

In China, the acceleration of sales should continue in the coming months, as individuals are more inclined to purchase. The lowering of the tax on small-cylinder cars continues to contribute to the growth of automotive sales. However, it appears that one point remains to be settled: the repeal of this tax measure or its continuity in 2017, which we believe to be the most likely option in order to support a market otherwise in a delicate situation. Lastly, although the October 2016 MNI car purchase sentiment indicator remains below the long-term average, it is continuing to increase. 

In the United States, the rise in interest rates in December 2016 will lead to an increase in the cost of loans that has already begun: the interest rate increased from 4% in December 2015 for a 48-month loan to 4.25% in September 2016. Credit quality (90% of new vehicles are financed through this channel) is decreasing in part, given that maturities are reaching up to 84 months, excluding these borrowers from the market for a large period, and heightening the loss of residual resale value of their vehicle. Nevertheless, the United States has reached a historically low unemployment level, while the median wage increased by 5.2% between 2014 and 2015.  However, it is conceivable that the jobs market’s good performance will decrease the number of subprime or deep subprime borrowers, even if competition between financial institutions leads to the relaxation of lending criteria.

According to Eurostat, the eurozone’s unemployment rate was 9.8% at the end of October 2016, a decrease of 0.8 percentage points compared with October 2015. Although it remains high in Southern Europe, new-car registrations are buoyant in this area, driven by car renters and companies renewing their fleets in order to take get models with lower maintenance costs. In 2017, interest rates should remain low and favour automobile loans as well as more recent financing schemes, such as leasing with an option to purchase. Nevertheless, demand is not expected to be as strong as the level seen up to now, even though the confidence of European households should remain strong. They also anticipate an improvement of the EU’s economic situation in the coming 12 months. However, this continues to be dependent on political uncertainties in the region, particularly the elections in France and Germany, as well as the start of negotiations for the United Kingdom’s exit from the European Union.

 

Last update : December 2016

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