“Economic expansion should see many more enjoying vehicle ownership for the first time over the course of the next decade.”
Automotive Sector Outlook
Overview
With a 2.9% year-on-year expansion in Global Light Vehicle sales for the first half of 2017, the automotive market remains on course for an 8th consecutive year of growth, building on last year’s total of 93 million units. For 2017 overall, LMC Automotive forecasts global sales to reach 95 million units.
The backdrop is one of an improving economic picture. Following relatively lacklustre growth last year (+2.3%), the global economy is expected to expand by 2.8% this year, helped by a fairly broad-based strengthening in global trade. Further improvement is anticipated in 2018, with Oxford Economics forecasting GDP growth of 3%.
Market Focus
By region, success stories this year include Europe and Asia, though North America is now in a contractionary phase after a record outturn in 2016. In the US, selling rates moved downwards from last year’s 17.4 million units to an average of 16.9 million units/year for the first half of this year. Improvement in the economic fundamentals should stop the rot in the near term, though it is clear that underlying demand has reached a plateau, especially with OEMs having to work increasingly hard, with incentives and long loan terms, in order to keep sales high.
In China, the hangover from the tax-induced car-buying spree in late 2016 continued beyond the opening months of this year. This should improve over the remaining months of the year; the removal of the final component of the small-car tax cut is looming for December 2017 and this could see another surge in demand. We would therefore expect a weak early 2018 to follow, before the true underlying state of demand becomes clearer.
The gains in Europe – it can probably no longer be described as a recovery – have been apparent over the first half of the year. Markets in Spain and Italy have further expansion potential as the Eurozone economy looks increasingly solid, while France and Germany are enjoying further year-on-year growth. Even in Russia there are signs of improvement, after four years of sharp decline, but we do not expect a quick reversal in that market. In Turkey, the vehicle market was marked by volatility last year, culminating in a strong push towards the end of the year ahead of the increase in the ÖTV (special consumption tax) rates. While a slower pace is evident this year, the market potential remains high, given Turkey has a fast-growing, young population and a very low level of car density (under 200 cars per 1,000 adults). The UK is, however, now clearly experiencing a downturn in sales following a record in 2017; the market is not helped by Brexit uncertainty and slowing economic activity.
Implications for Production
The global growth momentum in sales is, of course, driving output ever higher. This is not necessarily the case region-by-region, with the situation in North America defined by cooling local demand conditions, particularly in the US. However, reports of an imminent recession in North American vehicle production appear overblown; and what we are seeing could instead be described as a correction. China has, of course, passed through the strong distortion in its industry as the tax cut that benefitted volume in much of 2016 was reduced; the hangover from the sharp spike in output has intensified and we expect to see growth this year in Chinese Light Vehicle production to be modest.
Among the larger OEMs, the true industry giants – VW Group, Toyota and Renault-Nissan – look well-placed to continue to dominate on the world stage. In coming years, Toyota will find a declining Japanese market will act as a headwind to growth, potentially leaving it third-placed behind Renault-Nissan and VW.
Over the coming years, global growth in Light Vehicle production is expected to be close in scale to that of the overall economy, at around 2.7% per year on average (2016-2024 CAGR). This broadly follows the experience of the past 15 years, when Light Vehicle sales grew by a little over 3% per year and global GDP expanded by a little under 3%.
The Long Game
In the longer term, our base case remains one of growing industry volume. As has been the case in recent years, China will be critical to this expansion. With car density around 120 cars per 1,000 of the adult population, China is some way off the levels seen in mature markets (for example, circa 600 cars per 1,000 adults in Western Europe) or regions with greater long-term growth potential (300 cars per thousand adults for Eastern Europe, for example). A growing middle class should help drive this statistic further upwards in China over the coming years, helping push the market from around 28 million units/year today, to 35 million units/year by the middle of next decade. Similarly, India's market growth potential remains great; car density is around 30 cars per 1,000 adults currently, though economic expansion should see many more enjoying vehicle ownership for the first time over the course of the next decade.
The potential for growth among emerging markets will certainly help make up for the expected slowdown in contribution from the mature markets. Overall, we expect the Global Light Vehicle market to surpass the 100 million units/year mark by 2020, moving above the 110 million units/year mark by 2024. That said, there remain risks to the forecast, both positive — such as potential cyclical recovery in world trade — and negative — including potential policy tightening in China, or a conflict involving North Korea.
Longer-term considerations relating to the impact of new modes of mobility have continued to garner attention. We expect that new shared economy models of activity will continue to have a very limited impact on vehicle sales and production over the next few years, though such models will offer consumers greater mobility choices.
The truly transformative point will be large-scale deployment of autonomous vehicles, something which is set to emerge in mass-trial form within three to five years (with very low-volume trials already happening or planned in the near future). In the early 2020s, we judge that the threat to the existing automotive industry paradigm will be negligible, though this activity will form the basis for a later transformation in mobility that could dramatically change the sector. However, the complexity and scale of the task of transforming mobility is of the highest level and we think it premature to assume rapid adoption.
Electrification has seen very limited growth in nearly all markets up until now, but will grow rapidly in the next few years. This is being brought about by increasingly stringent legislation on climate action, energy security and pollution standards. By mid-next decade, IC-only engines will still account for around 70% of the new vehicle market (a greater proportion in North America and Asia, a smaller proportion in Europe), though the growth in Mild Hybrid (48-volt) and Battery Electric Vehicles will be in a rapid acceleration phase by then.
Diesel continues to look under threat, with data implying that erosion in share accelerated sharply after the VW emission scandal. However, if diesel were to diminish rapidly, it would raise a difficult question for OEMs and regulators alike with respect to CO2 reduction targets, given the important role that diesel would play in the solution. If diesel diminishes, then pressure to increase electrification will continue to intensify.