Automotive

Still a bumpy road ahead (between weaker volumes, tighter regulations, disruptive innovation and trade uncertainties)

Sector
Value

5800bn USD

M

MEDIUM RISK for entreprises

  • Fragmentation

  • Internationalization

  • Capital Intensity

  • Profitability

  • Intensifying consumer appetite for alternative-fueled vehicles and new mobility services
  • Diversity of local needs (i.e. city cars in China, pickups in Thailand)
  • Dynamic demand in emerging markets (growing middle-class, low equipment rate), supporting the mid-term perspectives of the market
  • Demand momentum in premium models and larger Sports Utility Vehicles (SUV), supporting carmakers’ profitability
  • Expertise of established players on differentiation (i.e. design), production and supply-chain issues
  • Slowdown in renewal needs and smaller driving prevalence amongst the younger generation in mature markets’ large cities
  • Value proposition of EVs in the short-term, due to the battery cost, driving range and expansion of the charging network
  • Intensifying environmental requirements (pollution, CO2 emissions) necessitating heavy investments and leading to high(er) car prices
  • New car sales’ dependency on public measures (subsidies, tax exemptions), monetary policies (borrowing cost), oil prices (running costs) and prices in the second-hand market
  • Increasing competition from tech giants and start-ups in the field of connected and autonomous driving technologies

What to Watch?

  • Downturn in light-vehicle sales in top markets (US, China, Europe) and rapid decline in diesel vehicles?
  • Rollout momentum of electric vehicles (EV) in Europe and changes in regulatory environment, notably public subsidies for EV and bans on internal combustion engines (ICE)
  • Innovation in autonomous driving and new mobility services, boosting R&D spending, capex, M&A and partnerships
  • Carmakers and supply-chain strategies in response to the outcome of Brexit uncertainties and US threats on tariffs 

In 2018, global passenger car sales and automotive production both posted their first decreases in nine years, and 2019 is expected to remain challenging for the automotive industries.

The first issue is will be to cope with weaker and troubled key markets. Sales of new light vehicles should decrease in the US (-2% to 16.8mn units) due to less supportive financing and more competition with the growing second-hand market. In China, the largest passenger car market (accounting for more than 29% of global sales last year), sales started 2019 on a sluggish pace and should only gradually benefit from a recovery in consumer confidence, thanks to fading international trade tensions and more visibility on fiscal incentives and emission mandates – two headwinds which led to the first drop in sales in nearly three decades in 2018. The EU market will struggle to avoid stagnation for the whole year, at best, and will experience volatile monthly performances in sales compared to last year’s turbulences caused by the introduction of the Worldwide Harmonized Light Vehicle Test Procedure (WLTP).

The tightening in regulations, from city bans and access restrictions to stringent standards in terms of pollution, keeps on intensifying the market’s transition. The pressure is high in Europe, with the implementation of the Real Driving Emission (RDE) certification in September 2019 and the CO2 targets settled for 2020, 2025 and 2030 with threats of financials penalties. We expect a faster decline in diesel sales and a faster roll-out of new models compliant with the regulatory targets, which will keep global EV registrations at double-digit growth. Yet, the associated costs (R&D, industrial deployment, marketing) are weighting on operating margins and may force some players to adjust their portfolios and production capacities to free up funds in order to move mobility forward through investment and innovation in connected cars and autonomous driving.

At the same time, the sector still remains vulnerable to major turbulence coming from Brexit and US trade policy, with threats of US tariffs on car imports from the EU (up to 25%) and potential changes with China. We expect negotiations to finish by the end of the first semester 2019. Outcomes are uncertain, but they have the potential to disorder international trade in cars and the current implementation strategies and supply-chain interconnections of global players.  

Automotive manufacturers: Manufacturers face high pressure from global competition: Geographical diversification, innovative model launches and operating cost adjustments remain a key strategy to protect profitability and fund the R&D spending, capex, M&A and partnerships needed to address the transformation of the industry.

Automotive suppliers. Suppliers most often post higher revenue growth and profitability compared to manufacturers. The market’s transition is to increase (tech) content per car and opportunities but to reduce drastically the need for some components (i.e. diesel). 

Key players

Country Role Sector risk
United States

#1 importer

#2 producer

#3 exporter

A

Low risk

Germany

#1 exporter

#2 importer

#4 producer

C

Sensitive risk

China

#1 producer

#3 exporter

B

Medium risk

Japan

#2 exporter

#3 producer

A

Low risk

Contact

Contact Euler Hermes

Economic Research Team

research@eulerhermes.com

Sector Risk Analyst

Maxime Lemerle

maxime.lemerle@eulerhermes.com

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