The global light vehicle market is running out of steam in 2019 under the weight of trade tensions between the US and China and the broader impact on confidence and spending on consumer durables across the world. Dave Leggett takes a look at the numbers.
Data produced by our analysts shows that sales of light vehicles in the first half of 2019 reached 45.1m units, some 5.6% down on last year. The SAAR total shows a slightly more pronounced decline of 6.2%, with the SAAR running at just under 91.1m units versus 97.1m units in the same period of last year. It looks like the global light vehicle market is heading for another decline in 2019. Much depends on what happens to consumer sentiment in the remainder of the year, but trade tensions between the US and China present a major uncertainty. Similarly, geo-political instability in the middle-east could impact the price of oil and boost price inflation, potentially sending interest rates up. And in Europe, there’s Brexit. The risks appear stacked on the downside.
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Let’s start with the impact on demand of trade tensions. The theatre of the ongoing trade war between the US and China shows no sign of hitting a natural denouement. It blows hot and cold, neither side wanting to back down and both apparently happy to play to their respective audiences as they line up the next retaliatory round of tariffs – which is usually a few months away. It’s evolved into a slow-motion car crash of uncertain duration rather than a big-bang, but it is sapping confidence nonetheless. The political backdrop in Beijing and Washington DC appears to support a level of continued intransigence that is nevertheless consistent with on-off negotiations that veer between a cooling off of tensions and a ramping up.
China market in decline
For the automotive industry, the biggest concern is the negative impact on the world’s largest car market – China. Vehicle sales in China in the first seven months of this year totalled 14.13m, down 11.4% on the same period last year. The plight of the strategically important auto industry has not gone unnoticed in Beijing, with the State Council imploring local authorities and cities with restrictions on car purchase to loosen those restrictions. The Chinese auto industry’s trade body, the China Association of Automobile Manufacturers (CAAM), is also calling for more action to free up sales. At least nine Chinese cities including Beijing, Shanghai and Tianjin have imposed restrictions on car purchases. Economic policies by the government to stimulate domestic consumption have so far been unable to completely reverse the market’s decline, but the rate of decline has slowed – partly indicating heavy discounting by dealers in response to sluggish demand. The market this year has also been disrupted by new emissions regulations (new standard C6) introduced in July and the long term switch to new energy vehicles through minimum sales quotas. There has also been some volatility in tracking wholesale and retail numbers due to the impact of changing emission rules and large inventory swings on some models around the middle of the year, as well as purchases pulled forward in June ahead of C6 allied to manufacturers offering incentives. Some manufacturers – notably Volkswagen – were able to boost sales by having the right offerings at the right time (WLTP lessons learnt perhaps).
The outlook for China’s car market in the remainder of the year is highly dependent on what happens to the economy – and in particular economic relations with the US. The decision in early August by the US to apply further tariffs on Chinese imports has ramped up the trade tensions between the two and made it less likely that a bilateral trade deal can be concluded until well into 2020. The negative effects of escalating tariffs and weakening external demand have added pressure to an economy already in a structural slowdown with high levels of debt. Attention in Beijing has turned to stimulating domestic demand. Growth in China’s economy this year (at least as officially measured) is likely to be 6-6.5% – which compares with 6.5% in 2018 (the slowest annual rate of growth since 1990).
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By GlobalDataFor the auto industry in China, it is highly likely that 2019 will be a year of market decline. New vehicle sales in China fell by 2.8% to 28.08m units in 2018 from a record 28.88m units in the previous year, according to data from the China Association of Automobile Manufacturers (CAAM). A decline to under 28m units in 2019 is on the cards, but the scale of decline is highly dependent upon the evolution of consumer sentiment and also what additional measures may be taken by China’s authorities to stimulate demand, both generally in the economy and also specific to the automotive sector.
The US market defies gravity, but for how much longer?
The US light vehicle market has exceeded expectations so far this year, helped by a strong economy (tax cuts that have boosted companies allied to other strong fundamentals such as low unemployment). If the US light vehicle market exceeds 17m units this year, it will be the fifth year in a row that it has done so. We anticipate that it won’t quite make 17m, but the fact that the market has stayed so high for so long belies the conventional logic that points to some underlying cyclical trend on replacement demand. The unwinding of the fiscal stimulus and some uptick to interest rates is possible in 2020, along with a more pronounced dip to car sales as the economy slows (to GDP growth of 1.9% in 2020 after around 2.5% in 2019).
Europe squeezed
Europe’s car market is also at a historical high and facing a squeeze as economic growth slows. For Germany, Europe’s manufacturing growth engine, slower exports are contributing to an economic slowdown that has spread throughout the eurozone area. Western Europe’s car market is struggling to show underlying demand growth sufficient to take the market significantly above 14m units. Political uncertainties have also hit some markets this year – notably Spain and the UK. Indeed, Brexit remains a highly uncertain element – and a downside risk is a disorderly ‘no-deal’ Brexit – for the UK and the wider region, particularly in the fourth quarter. Against that, a more positive scenario would follow an orderly UK exit from the EU (which would likely produce an investment bounce).
India slumps
India’s vehicle market has slumped in 2019 as a number of factors have weighed against it. The government’s decision in 2016 to abolish high denomination bank notes in a crackdown on corruption hurt India’s informal cash-based economy, including car sales. Higher taxes and insurance costs have also raised the cost of vehicle ownership and hikes to the price of oil have been a factor, too. Political uncertainty has also played a role in an election year. Credit availability for car loans has also fallen amid a liquidity crisis in the banking sector. Annual car sales in India were 3.4m in the last financial year to 31 March, a gain of 2.7%. However, monthly auto sales have tumbled 17-20% since April and local car manufacturers are cutting output.
Elsewhere around the world it is a similarly flat or slightly depressed picture. Sales of new vehicles in southeast Asia’s six largest markets combined turned negative in the second quarter of 2019, by 2.4% to 833,515 units from 854,343 units in the same quarter of last year. There is growing concern in the region over the effects of the trade war between the USA and China, and of the spill-over into the rest of the region. The ASEAN region has already seen exports weaken significantly this year and investment has also slowed in most markets. In addition, the automotive industry in Indonesia has blamed uncertainty in the lead up to the presidential and parliamentary elections held in April as one of the reasons for this year’s sales decline – although there has been little sign of recovery in the months since.
Russia’s light vehicle market is around 3% down this year, the economy still hampered by the impact of sanctions and consumers reluctant to spend on big-ticket items.
Elsewhere in Asia, the picture is a fairly flat one. Japan’s car could get a boost ahead of consumption tax rises planned for October, but Japan’s rate of economic growth is likely to be under 1% this year, with exports squeezed. After the consumption tax increases take effect, consumer spending will likely be depressed, meaning that the domestic and external sectors of the economy will both be under considerable pressure. Recent survey data reinforces suggestions that business confidence is turning negative in Japan. A long-running feud with South Korea over disputed territory has recently flared up and that isn’t helping, either.
