Automotive, which is still a key industrial sector today also plays a signifi cant role in shaping the global economy. What kind of future is the automotive industry facing in light of expectations for future economic development? Regional Executives from LMC Automotive, a leading provider of forecasts to the global automotive industry, provide ODD with a snapshot of their views, expectations and predictions for the future development of the global automotive industry.
Global Outlook (Pete Kelly Managing Director of LMC Automotive) 
The global automotive industry faces a remarkably uncertain outlook as the aftermath of the financial and economic crisis of 2008 continues to play out. In the past six years, these events have shaped automotive markets in ways that few would have thought possible before the crisis struck.
In North America, mass bankruptcies in the context of market collapse have been followed by a powerful market upswing and, now, a highly utilised and streamlined industry. In Europe, in contrast, the recession has become depression for some economies as vehicle sales have fallen to modern era lows. The rationalisation that took place in North America has not yet come to Europe, and nor does it appear likely that it will, such is the political difficulty of closing plants rapidly in order to match supply with reduced demand. So, for those manufacturers with a high dependency on Europe as a market, financial pain looks likely to continue as European markets only now begin to show signs of recovery.
Emerging markets helped bolster the global total during the economic crisis, not least in China where sales leapt and propelled it to become the largest light vehicle market in the world. Since then, growth rates in China have slowed but sales remain at record levels and, such is the force of development, rapidly rising ownership should continue to deliver new records in the years to come. However, all is not well in emerging markets this year. For a wide variety of reasons, Brazilian, Russian and Indian demand has stumbled and a question mark now hangs over the whether these markets – all in highly populous nations with low ownership levels by international comparison – can realise their potential.
Despite the disappointing performance in many markets outside of China and the US, global sales will hit a new record this year: we expect over 83 mn light vehicles to be sold. Emerging vehicle markets, even those cooling from previously rapid growth rates, now capture such a large slice of the global total that they have created a new faster global growth rate trend, something that will continue. We remain optimistic that, even with some market softness assumed in the current year, sales will continue to rise (see chart).
In this context of a shifting centre of gravity, vehicle manufacturers who already have a good growth footprint are in by far the best position. Premium OEMs are a case in point and results from the past two years show that they are well placed to take advantage in the second stage of emerging market development: the creation of a genuinely wealthy and numerous middle class who can afford such vehicles. For example, China's market for Premium brand vehicles has risen from 110,000 units in 2005 to over 1.2 mn units in 2012. We expect this market to overtake that of the US by the middle of this decade with over 2 mn units per year.
Footprint matters a great deal at a time of geographical change and being present and competitive in the emerging markets is of fundamental importance to the industry. Chinese market participation is now essential for any global OEM, but other markets are also expected to grow rapidly. In our view, India is likely to be the next major volume growth story, despite the fact that the current period of economic and vehicle market softness is likely to extend well into 2014. Wealth thresholds are being crossed and ownership in the world's second most populous country is rising fast from a very low base. When recovery comes about, double-digit annual growth rates are likely.
This is all taking place in the context of rapid change in vehicle design, especially in the area of electrification, a trend being primarily driven by regulation, current or planned, which will compel manufacturers to offer vehicles with low, or zero CO2 tailpipe emissions. Electrification, either partial in the case of hybrids or full in the case of battery-powered vehicles, will also take off. While the rates of growth may be impressive, however, the low base starting point for these vehicles and barriers to mass adoption will limit penetration (see chart).
Europe (Justin Cox - Head of European Production)
The sales picture in Europe is still dominated by the Western countries, though there will be a shift towards Eastern Europe in the longer term as car density there continues to grow whilst ownership in the more mature West European markets follows a flatter growth path.
At the moment the key question in Western Europe is on when light vehicle sales will stop contracting and return to growth. Although we will see another contraction (-3%) in 2013, the underlying selling rate has, for the most part, been improving since the second quarter of 2013. However, many economies are still weighed down by austerity and high unemployment, which will act as a brake to any meaningful vehicle market recovery in the near-term. Beyond 2014, market growth is forecast to pick up as pent up replacement demand is released. However, the 'normal' levels of demand seen pre-2008 are not expected to be reached again this decade as the effects of the economic turmoil are felt for years to come.
With weak demand at home, OEMs are turning to exports to support Europe's production footprint and this has contributed to recent rises in output – European exports are running 10% up on last year. Many OEMs have announced aggressive market share targets for China in particular, and plan to significantly increase dealer networks and model availability there.
European capacity utilisation is currently running at 64% meaning that excess capacity is close to a massive 11 million units, an issue which still needs to be addressed. As well as closing plants at Bochum (Opel), Aulnay (PSA), Genk and Southampton (Ford), some OEMs are transferring Group production from outside Europe into local, underutilised plants. For example GM Opel has recently announced the localisation of its strong-selling Opel/Vauxhall Mokka to Spain from South Korea by the second half of 2014.
Medium term, it is expected that demand and output in Europe will recover - but it will be slow. We expect European Light Vehicle production to grow by almost 2% in 2014. However, this weak rate of recovery will leave capacity utilisation unsustainably low for some OEMs. This situation will not be helped by the ongoing expansion of capacity in Central and Eastern Europe. Although those markets, particularly Russia – which has the potential to overtake Germany within the next few years – will absorb many of the cars produced there, a significant proportion will continue to be exported to Western Europe and given the lower labour costs put them in a very strong position in the event of further plant rationalisation.
As far as the development of alternative fuel technologies is concerned, we expect the conventional internal combustion (IC) sector to dominate still by 2028. Within this segment, diesel is expected to come under pressure due to advances in gasoline technology, increasingly strict emissions regulations and the expectation that diesel fuel will rise in price faster than gasoline. However the share of the conventional IC segment will fall from 96% today to below 85% by 2028. Electric cars are expected to account for around 10% of those lost IC sales whilst the remainder is likely to consist of cars fuelled by LPG, particularly CNG.
North America (Jeff Schuster / Senior Vice President, North American Forecasting)
The North American light vehicle demand is a one of the bright spots globally, as measured recovery continues in 2013. Collectively, the region is on pace to finish at 18.4 million units, an increase of 7% from 2012 and the highest level since 2007's 18.8 million units.
The region's volume increase is driven primarily by the US market, which has performed above expectations thus far (the selling rate averaging 15.5 million units through August and volume up nearly 10%). Buyers replacing older vehicles that are averaging 11 plus years and the ability of them to obtain credit are the main factors behind the increased level of sales. The selling rate is expected to continue to improve through the end of 2013, with demand at 15.6 million units, an increase of 9% from 2012. Looking at 2014, with a stronger economy, sales are projected to top 16 million units, an increase of 3% from 2013. The risk in the near-term is more related to supply being able to keep up with demand than economic or market driven factors.
Longer-term, the region will benefit from Mexico's economy and developing automotive industry, while the US and Canada should achieve a stable level of growth in vehicle sales through new household creation and replacement demand. Risks to the longer-term forecast include economic instability and safety concerns in Mexico. In addition, there is some risk in the US and Canada that the younger buyers (millennial cohort) are less interested in owning a vehicle or will continue to delay starting households, thus postponing the purchase of a new vehicle.
North American production in the first eight months of 2013 increased by 4%, relative to the same period in 2012. As automakers are closely managing the supply-and-demand ratio, inventory levels in early September suggest a 54-day supply, down slightly from 56 days in August. LMC Automotive's forecast for 2013 North American production is 16.0 million units, a 4% increase from 2012. Looking ahead, the 2014 volume is expected to increase by 3% to 16.5 million units, with a boost coming from new model introductions.
North American production volume is expected to grow steadily throughout the forecast horizon with a peak volume of 18.7 million units in 2020. The increasing US population, the number of older vehicles needing to be replaced, and the localisation of 1.7 million units of production are some of the factors that will fuel production throughout the decade.
Hybrid and electric vehicles (EV) sales for 2013 should exceed 600,000 units, up 23% from 2012. Share of the total industry is expected to approach 4% in 2013, as incentives and model availability drive the growth. By 2020, hybrid and EV sales are forecast to exceed 1.3 million units, 7.6% of total light vehicles. As new CAFE standards come into effect over the next few years, smaller gasoline engines and an increase in diesel availability will not be enough to meet the regulations, and so therefore, we expect all major manufacturers to utilise hybrid technology to help them meet the new standards.
Asia [excluding China] (May Arthapan - Director of Asian Forecasting)
The year 2013 is on pace to be the worst-performing year for the Asian Pacific region, excluding China, since the Asian financial crisis in 1998 when light vehicle sales plummeted by 20%. The market is expected to shrink by 3% this year and weakness in demand is likely to extend into 2014 when sales are expected to fall by another 0.6%.
Market declines in India, Japan and Thailand are major drags on regional volume in the short term. The Indian market has been hit by a sharply slowing economy which is struggling to cope with an increased cost structure under a high interest rate environment, rising diesel prices, and increased costs of imports. Recent capital outflows have led to a 20% depreciation of the rupee which has become a pressing problem for India as a major net importer. We expect the currency to stabilise soon, however, and for the market to begin to recover from the first half of 2014. Government incentives in Japan and Thailand in and prior to 2012 have, in effect, pulled demand forward prompting the declines in 2013-2014.
Growth in Asia, excluding China, is expected to return in 2015 as the markets in India and Thailand recover lost ground. While the market in Japan will shrink due to a declining population, this is likely to be offset by expansions in ASEAN and India. We expect sales in Asia, excluding China, to increase at a 5% CAGR and reach 31 million by 2028.
Japan and Korea play important roles in production though, building a combined 63% of all vehicles built in Asia, excluding China. Their share is expected to drop to 45% by 2020, as auto makers are increasingly building vehicles where they are sold, instead of shipping them from a main base such as Japan. Production in ASEAN and India will also expand faster and drive growth in the region, and these two countries are likely to build more than half of all vehicles in Asia, (excluding China), by 2020. Asia, excluding China, will continue to account for a quarter of global production, but volume contribution will increasingly come from emerging bases such as ASEAN and India, and less so from Japan and Korea.
As far as alternative fuel technology is concerned, Japan is leading the way in hybrid vehicle production which accounts for around 20% of total Japanese output. Japanese OEMs have also been investing in electric vehicle (EV) and Hydrogen fuel cell technology. South Korea is currently focusing upon the improvement of EV and hydrogen fuel cell technology even though it only accounts for 3% currently.In Thailand, hybrids have had a slow start (they currently account for less than 1% of total output but other alternative such as ethanol-based gasoline, bio diesel, LPG and CNG are promising. They currently account for around 5% of total production, a proportion which is expected to grow in future. Indonesia and Malaysia are lagging behind somewhat. Although Malaysia offers a subsidy on hybrid production, only one such model is in production there. India produces a number of CNG and LPG powered models and has also started to produce electric vehicles such as the Mahindra Reva.
China (John Zeng - Director of Asian Forecasting)
In August 2013, sales of locally-made light vehicles reached 1.57 million units, climbing 10.3% on the previous year. Given year-on-year growth rates ranging from 8.8% to 9.7% for light vehicles over the previous three months, China's light vehicle market has been rising consistently recently. The improvement in light vehicle sales in August is mainly due to light commercial vehicles. LCV sales reached 370,000 units, up by 6.5% year-on-year, an improvement on the average growth of 1.4% over the period of May to July. The passenger vehicle market has remained on track since May. Around 1.19 million units were sold in August and the locally produced passenger vehicle market expanded by 11.5%.
Unlike the fluctuating situation in the previous year, the dealer inventory level has remained quite stable since Q2 2013. According to the Chinese Automotive Dealer Association, the dealer inventory index stood at 1.46 at the end of July, not far from 1.58 seen in May. Signs of a slowdown in the Chinese economy in Q2 appear to have been shrugged off by the car market and given that recent economic indicators now look more positive we believe that China's light vehicle market is on course to achieving its potential growth rate over the next few years.
Inner land provinces, such as Hunan and Hubei, have been consistently increasing their contribution to the overall market growth and car sales in those areas grew by over 20% in the first half of 2013. While coastal areas are still the backbone of continuous market growth, car sales in some provinces, such as Jiangsu and Shandong, have managed to achieve year-on-year growth of over 10% in the same period. Aided by these two regions, we believe that the potential market growth for passenger vehicles will be in the range of 10%-15% in the near future. This potential growth is, however, exposed to the risk of the implementation of car purchasing limits in some tier-2 cities.
Over the next 2 months, the market will see a higher growth rate, mainly due to a lower base on the year-on-year comparison as a result of the Sino-Japan island disputes. Wholesales of Japanese OEMs were heavily affected by anti-Japanese sentiment last September and October, with the year-on-year growth rates of the passenger vehicle market in those 2 months achieving only 1.6% and 6.0% respectively.
Chinese light vehicle production grew by 11% in the second quarter of 2013 to 5.0 million units. Passenger cars were particularly buoyant (+15%) whilst light commercial vehicles of which output edged up by 3% to 1.3m units underperformed overall. Longer term we see Chinese light vehicles growing to 33m by 2020 (compared to 24m in Europe and 19m in North America. This will leave China accounting for just under 29% of global production compared to 22% in 2012.
South America -Manager, South American Forecasting)
The Brazilian economy, the largest in the South American region, is showing few signs of a turnaround after posting a weak 2% expansion in the first quarter of 2013. Industrial production growth remains sluggish, as the local industry continues to lose competitiveness due to the high cost of doing business and underdeveloped infrastructure. The most worrying aspect is that consumer spending, which has been the major driver of the Brazilian economy over the past decade, is now slowing in the face of high household debt, rising interest rates - 8.5% at present - and a weakening labour market. The recent depreciation of the real has exacerbated inflation (6% in July), eroding consumers' purchasing power.
In Argentina, the second largest economy in the region, growth has slowed to 0.4%, the lowest rate so far this year, and industrial production growth continues to decline, suggesting that the nascent economic recovery is already losing steam. Rampant inflation of 30%, capital flight, and the widening current account deficit has increased the risk of a financial crisis.
In both Brazil and Argentina, growing protectionist tendencies, structural problems, and twin deficits (current account and budget) remain major concerns for long-term investment and economic growth. Brazil's medium-term economic outlook depends on the recovery in investment ahead of the 2014 FIFA World Cup and the 2016 Olympic Games. LMC believes, however, that any substantial economic benefit from the World Cup will come over the long term as a result of infrastructure investment, rather than a major short-term spending surge.
For 2013, total vehicle production in the South American region stands to reach 4.63 million. In 2014, production is anticipated to rise to 4.89 million. In 2015, South American vehicle production is expected to grow to 5.2 million, based on vehicle launches at new manufacturing plants in Brazil, the new Renault-Nissan and Chery plants, and already established OEMs, such as Hyundai, Honda, Fiat-Chrysler Group and PSA Group. The region is projected to see measured growth reaching 6.4 million vehicles produced in 2020.
Thus, by 2020, Brazilian vehicle production is set to reach 4.87 million per year (+5.3% annualised over 2013), Argentina 1.01 million (+4% annualised), whilst the rest of the region could exceed 457,000 units (+4.1% annualized), for a regional total of 6.3 million (+5% annualised).
In 2012, the Brazilian government officially introduced Inovar-Auto, the new industrial outline for the automotive industry. The overall objective of Inovar-Auto is to increase the profitability of the national automotive industry, promote technology innovation and improve the overall quality of the vehicles manufactured in the country through emissions reduction and improved fuel consumption efficiency. Starting in 2017, new vehicles manufactured in Brazil must feature at least 70% of locally-made components in order to avoid the 30% industrial tax. Production in Mercosul countries outside Brazil will not, as yet, count towards the tax credit.
Owing to newly established Brazilian safety standards, part of the “Inovar-Auto” decree, requiring standard ABS and front airbag systems, the region's most established players have begun phasing out many low-cost, decades-old models. Among these are the Fiat Uno 146 (dating to 1983), the Volkswagen Gol AB9 (1994) and Kombi VN721 (1957), and the Chevrolet Corsa S4200 (1994).
LMC Automotive is a leading provider of automotive production, sales and powertrain forecasts and automotive industry market intelligence. For additional information on its services, please email: forecasting@lmc-auto.com.
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