A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. To subscribe and/or view previous editions just google ‘Deloitte Monday Briefing’
The car industry is a bellwether of the global economy. When global trade and growth boom, so, too, do car sales. With growth slowing and globalisation under pressure, the auto industry is suffering. Car production and sales are falling across most of the rich world and in China and India. The downturn in the sector is the most pronounced since the global financial crisis.
Secular change, in technology and environmental regulations, add a structural dimension to the challenges facing the auto industry.
Cross-border supply chains and foreign sales and production are fundamental to the modern car industry. According to the IMF, autos and parts account for 8% of global goods exports and the sector is the second largest consumer of steel and aluminium. China accounts for 30-40% of the pre-tax profit of German automakers such as Audi, VW, Daimler and BMW. Half of US car sales are of imported vehicles.
The global integration of car production and sales makes it vulnerable to rising protectionism. As a prominent export, cars make a tempting target for tariffs. China has increased tariffs on US car imports, affecting not just US producers but also German manufacturers, like BMW, which make cars in the US for the Chinese market.
US tariffs on imports of steel and aluminium have added about $240 to the production cost of an average car in the US. Things may get worse. The US Center for Automotive Research estimates that if the US goes ahead with new tariffs on imports of cars and parts the price of US-made cars could rise by $1,900 and imported cars by $3,700.
The economic cycle goes up and down. But the industry faces an even greater disruption as it copes with ever tighter emissions controls and the shift to electric vehicles.
The European emissions scandal broke in 2015 and demonstrated the calamitous consequences for carmakers of being on the wrong side of emissions regulations. EU automakers have since been struggling to adjust to new emissions standards and are required to bring a host of more fuel efficient and fully electric models to market. Europeans are shifting away from diesel and delaying purchases in general in anticipation of the new models carmakers are launching in order to meet new emissions requirements.
California has led the world in terms of fuel economy requirements which are far stricter than those required by the federal US authorities. The Trump administration is challenging California’s standards creating additional uncertainties for US automakers.
China has ended tax breaks for small-engine vehicles and cut subsidies for electric vehicles, significantly hitting demand.
The industry faces longer term uncertainties. Car-sharing schemes such as BMW and Daimler’s Share Now, ride-hailing apps like Uber and road pricing could, in time, erode the attractions of car ownership. Truly self-driving cars, were they ever to become fully viable, could represent an even greater disruptive force.
The internal combustion engine, in progressively more efficient formats, seems likely to remain a mainstay of the auto industry for years to come. Yet electric vehicles, for all the obstacles in terms of cost, charging infrastructure and capacity and range, are making headway. Their market share is under 2%, but according to research house Jato, electric vehicle sales rose by 92% in the first half of this year while combustion-engine vehicle sales contracted.
The move from petrol and diesel to electric vehicles will remake the auto sector. Electric vehicles have fewer parts than combustion-engine cars and require less time to assemble. US automaker Ford estimates that electric cars demand 30% less time and 50% less factory space to assemble. Crucially, batteries—the most expensive component in an electric car—are mainly manufactured in East Asia. This means that much of the value in the car manufacturing process will shift away from the West.
Meanwhile consumer preferences are continuing to shift, creating new demands for automakers.
In all major markets, the US, China, India and Europe, small cars are losing market share to sport-utility vehicles (SUVs). They account for 40% of global car sales, up from 17% in 2010. Consumers may be concerned about the climate, but nonetheless they are switching to larger, less fuel-efficient SUVs for their spaciousness, higher seating and better visibility. Car makers are rushing to bring out new SUVs or adapt existing models to the SUV-format.
The West has probably hit “peak car”. According to the Wall Street Journal, car sales peaked in Japan in 1990, in the EU in 2000 and in the US in 2016. Car ownership is not falling, but miles travelled are.
Today Western car makers – VW, Renault-Nissan-Mitsubishi, Toyota and GM – dominate the world. But with their lower rates of car ownership and faster growth rates emerging markets offer the best growth prospects. A tilt to the east is well underway. China’s share of global car production has risen from 8% in 2003 to 29% in 2018, South Asia’s from 5% to 10%.
The auto industry is in the midst of another economic downturn. The real challenge comes from a profound shift in technology, regulation and demand.
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