Auto demand to contract by over 50% in Russia

Western Europe’s auto market will shrink by around 19% in 2020, contributing to a 9% decline in new car sales worldwide as the COVID-19 pandemic disrupts the industry’s supply chains, brings production to a halt in some countries and suppresses demand, Scope Ratings GmbH says in a report, noting the slump in Europe will exceed even the severe downturns in China and the US, set to contract by 10% and 8.5% respectively this year, partly because the market was inflated in 2019 by residual government subsidies and buying precipitated by new environmental regulations.

“Our credit outlook for the automotive industry remains unchanged at negative and the more drastic deceleration in unit sales volumes in 2020 only exacerbates the view that we already had,” says Werner Stäblein, analyst at Scope Ratings.

The slump in Europe reflects the artificially high level of demand in 2019, with last year marking the sixth year of passenger car registration growth with Western European volumes almost back at the pre-crisis, 2007 level. Helping underpin demand were the one-off effects of de-stocking of inventory related to the introduction of Worldwide Harmonized Light Vehicle Test Procedure in September 2018 and consumer incentives in countries like Germany.

However, the Europe-wide lockdown is having a devastating near-term impact on the European industry, amid component shortages and the collapse in demand. Volkswagen AG, Europe’s largest car maker by sales, is suspending production at factories in Europe. The German company is following the lead of other automotive companies such as Daimler AG, FCA Chrysler, its merger partner PSA Group – home to the Peugeot, Citroën and Opel brands – as well as Nissan Motor Co. and tyre-maker Michelin SA. Scope now expects the Western European market to drop by almost 3 mio units in 2020. Much of the decline is related to Germany where there are unlikely to be special incentives this year. The largest national declines are expected for Italy and Spain.

“We see a sharp correction in China,” says Stäblein. The year-on-year decline in the Chinese market could reach 30%-35% in the first quarter of 2020, before a partial recovery later in the year, partly dependent on what consumer incentives Beijing puts in place to kick-start consumer demand. “In the US, declining consumer confidence and lower discretionary spending will lead to a more significant decline than previously expected.”

Scope forecasts that for economies dependent on crude oil/natural gas prices, such as Russia, auto demand will contract by more than 50% in 2020.

“One of the main reasons for why the slump this year will be so severe is that any resumption of production in the second half of the year will take time,” says Stäblein.

Forecasts of a rebound in demand need to be closely linked to the ability of the entire automotive supply chain to accommodate a spike in demand assuming the drastic measures to reduce the spread of COVID-19 are lifted.

“Even if capacity utilization among original equipment manufacturers suggests that sufficient spare capacity is in place, we have to keep in mind that this might not be true at the level of the very efficiently run components suppliers,” says Stäblein. Short-term shortages of auto parts may persist for some time, he notes.

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