2018 was a challenging year for the global automotive sector and 2019 is has started in a similar fashion.
Given their good track record for reinvention, OEMs now face the task of evolving to become future-fit and more cost-effective.
Global market overview
Are we heading for Carmageddon? Judging by the media coverage of the automotive sector, which in recent months has highlighted falling sales, plant closures, the demonisation of diesel and regulatory pressures, you would be forgiven for thinking so.
Our view is the current challenges are part of a cycle which has witnessed an ongoing series of disruptions over the last 50 years. Placed in this context, what we are seeing now is not unusual, although the prevailing headwinds are undeniably strong.
Across Europe we are still affected by the fallout from Dieselgate - as witnessed by the dramatic fall in demand in the new car market - and the supply issues caused by last year’s introduction of the Worldwide harmonised Light vehicle Test Procedure (WLTP).
Against this backdrop OEMs are financially stretched. They are investing heavily in new technology to meet regulatory pressure aimed at promoting the adoption of electrification. Meanwhile, the race towards delivering autonomous vehicles is also soaking up R&D budgets. OEMs also face the challenge of providing alternative integrated transport solutions under the Mobility as a Service (MaaS) banner. Furthermore, OEMs have been forced to recalibrate ambitious expansion plans in light of the slowing down of the Chinese economy.
The challenges facing the automotive sector are immense but it has a good track record of evolving to address them head-on. A good demonstration of this was the industry’s response in the aftermath of the devastating Japanese earthquake and tsunami in 2011.
Within 48 hours it was apparent that a vital part of the global supply chain had been taken out, prompting a move to dual sourcing which has created greater long-term resilience in the supply chain.
We believe the automotive industry is in a constant state of evolution but, sometimes, needs a major challenge to force through change and this is very clear as over the last few weeks with the potential 50/50 merger of FCA and Renault which is no longer going ahead and BMW partnering with JLR to share EV technology.
New vehicle registrations
Mixed fortunes characterised 2018 vehicle registrations across the global markets. The US remained flat year-on-year with sales tracking - as they always do - between 17-18 million registrations. Last year’s market totalled 17.2 million, just 0.5% up on 2017. The US market has continued to change with pickups continuing to be the preferred vehicle of choice and sedans now being a small proportion of the market.
In Europe we saw a registrations peak between July and October.1This was ahead of the introduction of the WLTP regulations in September, prompting some OEMs to pre-register vehicles which would no longer be compliant under the new rules. We expect to see that spike reverse out this year with no adverse effect on car production. The European market continues to weaken as did the UK with May YTD 2019 vehicle registrations declined by 3.1%.
Last year also saw the Chinese car market go into decline.1This was due to a natural slowing down of the Chinese economy and the end of a long running incentive programme encouraging the purchase of sub 1.6-litre cars. The scheme expired at the end of 2017 bringing forward demand and leaving 2018 weaker.
The Chinese government will put incentives back into the market but they will focus on rural car buyers. This will be a concern for luxury car brands who had enjoyed strong growth and budgeted for more.
One of the highest profile losers has been Jaguar Land Rover who have addressed falling sales by cutting back UK car production. The brand is now working hard to realign its distribution model as China is such an important market for them.
The Chinese Government has also taken the decision to phase out vehicle subsidies completely by 2020 for electric vehicles and put the growth of electric vehicles on the manufacturers.
Last year saw a trend towards displacement in global car production2.
Ford retrenched back to the US and took out capacity. The brand is realigning its production and product strategy and making some tough decisions now which we believe will enable it to consolidate and go forward in a challenging period.
GM’s experience was similar to Ford with constant realignment with the big automotive player now shrinking in size.
PSA saw sales volumes decline significantly outside Europe and experiencing a particularly tough time in China where sales fell 32%. It also exited Iran, historically its biggest market outside of France, as a result of the US reintroducing sanctions.
Meanwhile Geely sees no boundaries to achieving its global ambitions. It is building capacity in China and looking to enter alliances, as witnessed by its 10% stake in Daimler, which gave it a strategic seat at the table. It will continue to build its global footprint.
This year Japan secured new trade deals with Europe which will allow OEMs to export cars more cost-effectively. They will step up their production capabilities in Japan and South East Asia, as Nissan elects not to bring X-Trail production to the UK and Honda closes its Swindon plant.
We expect global output to grow at an average compound annual growth rate of c.2% to 2025, with net growth of only around 1 million units across the developed markets (Europe, the USA, Japan, etc), while the BRIC and ASEAN markets continue to grow. With its domestic market slowing down, we expect to see China becoming more active as an exporter of cars, particularly as it pushes forth with its electrification strategy3.
OEMs are facing significant investment in electrification with the development of new platforms and powertrains and the retooling of plants. This all comes at a time when OEMs are also investing heavily in mobility services, including autonomous vehicles.
The move towards electrification is being driven by regulations aimed at driving down emissions.
Both the EU and China have placed stringent regulations on OEMs, requiring them to have electric vehicle (EV) capability in their line-ups. India also has aspirational EV targets.
The US has EV hotspots. The Midwest still has a gas guzzling culture, which is unlikely to change, while California pushes ahead with tougher emissions standards.
The impact on profitability is a challenge. We are already seeing downward cost pressures from the OEMs on the supply chain – from manufacturers to dealerships – as they undertake their own transformation projects to cut costs and restore margins.
More alliances between OEMs will be needed, as witnessed by Ford collaborating with Volkswagen in Europe, to spread huge costs over larger volumes of vehicles. We also expect to see more collaborations between OEMs and tech companies.
We believe the current crises will be worked through and resolved as the automotive sector continues its evolution.
Challenges will remain but the future roadmap presents opportunities. The slowdown in China is a concern but advances now being made by OEMs in delivering new technology and electrification will help pull the market through.
However, for this to happen we need to see more automotive alliances. The industry has not traditionally been good at partnerships but they need to happen; the cost burden now facing OEMs is too great for them to bear on their own.
The dynamics of the current crises are undeniably bigger than anything the sector has faced in the past. But the automotive industry has an innate technical capability to respond to regulatory and macro-environment and consumer challenges. The challenge is making these solutions cost-effective for all stakeholders.
Returning to our original question. We are not in Carmageddon. Far from it. The automotive industry is evolving to accommodate multiple challenges and will emerge in better shape.
In the meantime we are here to help make sense of what is happening globally and to provide you with the insight to inform your forward planning.