Top Gear

It’s a dramatic rebound for an industry that, a decade ago, seemed like an old car model broken down at the side of a road, steam pouring from its engine.

In 2008-2009, the auto industry suffered its worst crisis ever when production plunged 15.5 percent to 61.8 million vehicles. Faced with the freefall, many countries introduced car scrappage schemes and other sales incentives, and in the United States, executives from a couple of carmakers went cap-in-hand to the government for a bailout.

Now, after seven years of growth, it is estimated that annual sales this year will hit 95.8 million vehicles and rise to 98.2 million in 2018, on the way to the 2019 milestone. A new report from credit insurer Euler Hermes projects growth of 2.1 percent in 2017 and 2.5 percent in 2018.

“The market is continuing to grow, but is slowing. Cyclical factors, such as the elimination of tax advantages in China or tightening financial conditions, could derail these expectations,” says Maxime Lemerle, Head of Sector Research at Euler Hermes and one of the authors of the report. “Still, the trend is clear as the industry is experiencing strong growth in electric vehicles, the demand for mobile services and a rise in autonomous driving that can offset any downward forces.”

According to the report, titled ‘The Auto World Championship’, China’s decade-long domination as the number one auto market is set to continue, with sales projected to rise by 2.0 and 3.2 percent over the next two years despite slowing growth rates. By 2019, it is expected that more than 30 million new cars will be sold in China annually. The Indian market is the second largest and growth of 10.7 and 13.5 percent expected in the next two years.

While Asian countries are embracing cars with ever increasing enthusiasm, sales in Western countries lag, particularly in the UK and the United States, two traditional car cultures. Growth is expected to fall by 0.5 and 0.6 percent in the UK in the next two years and by 2.5 and 1.8 percent in the U.S. Booming used-car markets in both countries have contributed to sales deceleration as growing numbers of off-lease vehicles lead to downward pricing pressures, according to Euler Hermes. In the UK, uncertainty surrounding Brexit is also affecting both consumer and business confidence. In the U.S. auto sector, both production and employment growth have stalled following seven years of stable growth.

In the longer term, sales in Western countries may be hampered by “peak car”, the idea that distance traveled by the private car has now peaked and will fall in a sustained manner in the future. Coupled with an observed lack of enthusiasm among millennials for car ownership in preference to car sharing, it could cause trouble for the industry down the line.

“Peak car, if it occurs, would still seem to be quite a long way off,” says Lemerle. “We believe the growth momentum of electric vehicles, the demand for new mobility services and the rise of autonomous driving are helping to make cars cool again. The impact of these in terms of boosting global sales is only beginning to be felt.”

According to the report, the worldwide fleet of electric vehicles (EV) surpassed 2 million in 2016 after crossing the 1 million threshold in 2015. Although the numbers of battery cars are minimal in comparison to global vehicles sales, the 60 percent growth rate is staggering. It is expected that the number of EVs will climb past 3 million on a double-digit growth trajectory. The largest growth markets are China, France, Germany, the UK and the U.S.

By the end of 2017, China and the U.S. will account for more than two-thirds of global EV sales. Government subsidies, the expansion of charging networks and less expensive battery prices will drive the growth of the market. As reported by Chinese media, the government is working to promote what are known locally as new energy vehicles. In the “Made in China 2025” initiative unveiled in 2015, the electric sector was listed as a priority industry for China’s economic transition, and plans were included to subsidize charging stations.

EVs are viewed as being of strategic importance not only for the automobile industry to compete globally, but also for pollution control and energy independence. The goal is to have 5 million EVs on China’s roads by 2020, and the government has spent billions of yuan subsidizing local electric car and battery makers. At the end of 2016, the State Council also announced that it would tighten regulations for new factories for gas-burning vehicles to further push automakers to convert to non-polluting electric vehicle, while the Ministry of Industry and Information Technology is expected to introduce a quota system in 2018, which will require all large automobile manufacturers in China to produce a specified proportion of EVs (8 percent in 2018 and 12 percent in 2020).

But there are dangers in the government’s carrot-and-stick approach. “If electric vehicle sales were to accelerate too fast, monetary incentives run the risk of becoming a burden for governments,” the report cautions. “At the same time, fuel tax revenues would start to fall along with declining traditional vehicle sales, thereby putting a strain on public finances.”

Euler Hermes concludes that the auto industry enjoys strong profitability with average earnings before interest and tax of 6.0 percent in 2016, up from 5.5 percent in 2015 and 5.2 percent in 2014. Japanese manufacturers and Italian suppliers lead and the debt burden of manufacturers is now lower than pre-crisis 2007 levels, except for American and Italian carmakers.

The ability of manufacturers to secure future markets will depend on the research and development (R&D) spending and the ability to deliver patentable technology. In 2015, the industry spent 108 billion euros on R&D, the third-strongest sector after pharmaceuticals and technology hardware, with the European Union being the largest investor at 47 percent. The most aggressive growth in R&D comes from Asia, where Chinese and Indian car manufacturers and suppliers have raised spending by 20.9 percent and 18.8 percent, respectively, from 2012 to 2015.

In terms of patents, nearly 8,000 were registered in 2016. As with R&D, the traditional industry champions such as Germany, Japan and the U.S. continue to dominate with 67 percent of total patents. However, carmakers face challenges from external players, notably in the field of connected and autonomous driving technologies. Between 2012 and 2016, Google filed 221 patents related to driverless technologies, surpassed only by Audi with 223 patents.

Euler Hermes is the global leader in trade credit insurance and a recognized specialist in the areas of bonding, guarantees and collections. With more than 100 years of experience, the company offers business-to-business (B2B) clients financial services to support cash and trade receivables management. Its proprietary intelligence network tracks and analyzes daily changes in corporate solvency among small, medium and multinational companies active in markets representing 92 percent of global GDP. Headquartered in Paris, the company is present in over 50 countries with 5,800+ employees. Euler Hermes is a subsidiary of Allianz, listed on Euronext Paris (ELE.PA) and rated AA- by Standard & Poor’s and Dagong Europe. The company posted a consolidated turnover of 2.6 billion euros in 2016 and insured global business transactions for 883 billion euros in exposure at the end of 2016.

www.eulerhermes.com

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