Transport Manufacturing: Risk
After falling nearly 17% in 2009, world passenger car production is expected to recover in 2010, up 9% to 59.3 million units. But the sector will be unlikely to return to pre-crisis production levels, around 65 million units, before 2011. Meanwhile, the shift in production and new car registration dynamism from mature to emerging regions like China, India, Brazil will become even more pronounced.
In 2009, measures of support for the sector implemented by many countries spurred vehicle sales, but the risk of seeing registrations contract in 2010 cannot just be shrugged off. Production capacity has been considerably reduced in North America but not in Europe. The total reduction at the world level could be between 20 and 30 million units. Manufacturer cash positions are thus expected to remain tight with sales discounts continuing, debt still to repay, R&D costs rising, and possible increases in raw material prices. In turn, parts makers and dealers will remain very weak. In 2010, a speed-up will thus be likely in both the pace of setting up new facilities in emerging regions (where the competition will remain intense) and the formation of alliances between manufacturers.
North America: household debt repayment will affect sales in 2010
In North America (including Mexico), production will only return to pre-crisis levels in 2012. Excess capacity was evaluated at six million units in 2009 and will likely come down to four million in 2010. The sector outlook remains gloomy for 2010 with households likely to be reluctant to do any replacement buying at least until the third quarter focusing on reducing their debt and replenishing savings. Unless support measures are renewed, new car sales will likely come to about 14 million vehicles this year. Parts-maker bankruptcies will continue, but the strongest among them - Magna, Johnson Controls, or Linamar - are expected to stay on track in 2010, despite increasing competition from Chinese and Korean parts-makers.
Europe: government incentives will only have a marginal effect on sales in 2010
In Europe, production is expected to stabilize at 16 million units in 2010 and not return to pre-crisis levels before in 2014. In 2009, sells fell precipitously in Central European countries while the decline in Western Europe was held in check. In 2010 the sector will be exposed to several risks, especially a likely contraction in the number of prospective buyers, particularly in Germany, a more pronounced shift toward small cars with tight margins, and an increase in overcapacity up to 7 million units. Sales could thus slump to 11.8 million units in 2010. In the wake of the production decline suffered by automotive manufacturers, parts-maker business contracted considerably.
Japan: a price war and unfavorable exchange rates will squeeze manufacturer margins
In 2009, with the drop in demand from the United States (37.5% of vehicle exports) and Europe (23%, mainly from Russia), exports were down by half and local sales by 16% (2.4 million units in nine months). And manufacturer margins will remain under pressure in 2010 amid the price war raging in Japan, the persistence of high structural costs, and the yen appreciation, if sustained, which will impede their exports and undermine consolidated results. The cash positions of parts-makers - often smaller companies with a single client - will again be very tight while the financial support provided by regional banks will likely remain insufficient.
China: heavy investments in a sector of strategic importance to authorities
Passenger car sales soared 37% in the first nine months of the year (6.2 million units), spurred by the reduction in the tax withheld on small vehicle purchases and by the various discounts and rebates offered by manufacturers. Vehicle sales are expected to reach more than 10 million vehicles in 2009. A strategic sector for the government, investment has created capacity for some 160 million units, which could affect the financial performance of the some 100 manufacturers. With the weakest likely to buckle under the fierce competitive pressure and resulting downward spiral of prices, bankruptcies will continue.
India: new registrations will sag somewhat in 2010
Sales in India are expected to be up over 11% in 2009 (one million private vehicles), spurred by the elimination of import duties on assembly line equipment and of purchase taxes, by the improved access to credit resulting from reductions in the Central Bank's key rate, and by the large commercial discounts and rebates available to buyers. In a very price-sensitive market, entry-level vehicles (one million units) are in competition with two-wheel vehicles (over seven million units) but remain expensive even for middle class consumers. A possible rise in interest rates in 2010, even modest, could undermine new registrations.
South Korea: performance in 2010 will fall short of the levels reached in 2009
A very strong performance abroad by Hyundai/Kia spurred production in 2009. Korean manufacturers may nonetheless not achieve as much growth in 2010 with tax breaks discontinued in many countries and the won appreciation against the dollar, if it develops any further, undermining their exports (about four million units, or 70% of local production). Possible labor strikes could also impede production and domestic sales could suffer from trade-offs made by budget-conscious households (whose debt is very high).
Russia: a significant demand recovery in 2010 appears unlikely
In 2009 the sector suffered a catastrophic year marked by a precipitous decline in sales (one million vehicles) of over 50% and nearly 70% in production with car purchase loans virtually disappearing, interest rates very high, and unemployment rising. The profitability of automotive manufacturers will deteriorate. Slow to cut back on production, they have accumulated large stocks (Lada-manufacturer Avtovaz and number two in the market GAZ). The financial position of these two giants will remain very tight in coming months.
Latin America: varied fortunes
Mexico and Brazil, the two largest Latin American markets, headed in opposite directions in 2009: in Mexico, the industry suffered a brutal collapse with production down over 26% (1.5 million units) and sales an even steeper 29% (0.7 million units), reflecting the decline of revenues from expatriates in North America. Exports fell by 30% (0.7 million) in the first nine months of 2009. In Brazil, meanwhile, the sector is expected to achieve moderate growth in both 2009 (2.7 million vehicles) and 2010 thanks to continuation of the tax exemption benefiting automotive purchases. A reduction in the Central Bank's key rate in conjunction and the government-backed financing for automotive loans have facilitated access to credit with long duration loans (between 72 and 84 months). Exports will suffer from the drop in North American demand and, if it persists, from the appreciation of the real.
Grading and description are forecasted for 2010. Updated on globalEDGE April 2010.
