Global auto demand will shrink by around 4% in 2019 and continue to decline in 2020 amid cyclical downturns in sales of light vehicles in the US, Europe and China, the world’s three biggest car markets, says Europe’s Scope Ratings GmbH. Management and investors will need to steel themselves for even leaner times ahead given volumes are the most important determinant of profitability for the world’s leading original equipment manufacturers.
“Our central question is this: where is the extra incremental demand going to come from for there to be a rebound in sales in 2020?” Werner Stäblein, analyst at Scope, says. “Auto makers benefitted from several years of robust growth in light-vehicle demand in the US, Europe and China until last year, but the conditions for that no longer exist – and are not likely to return.”
Growth in smaller markets in parts of Asia and South America and rising demand for electric vehicles won’t be enough to compensate for the decline in the US market from its 2016 peak, the saturation of the European market amid slowing economic growth, and further declines in China as vehicle-tax increases take a belated toll on previously over-heated demand.
An important factor in the US is that the vehicle-leasing market has levelled off after a period of such rapid growth, helped by low interest rates, that it accounted for more than 30% of the market in 2018, roughly double the level in 2004. “Even if auto loan rates remain low, it’s not clear that alone would stimulate demand amid a slowing economy,” Stäblein believes. Average light-vehicle ownership in the US has rebounded in recent years though it remains below pre-financial crisis peaks of more than 2.05 per household, possibly an anomaly rather than a new norm, in which case ownership is already back at earlier highs. The average age of the US light-vehicle car park suggests replacement demand could prove to be a floor of demand.
In Europe, recent scrappage schemes in several countries to encourage owners of older diesel vehicles to trade them in for gasoline cars have provided a short-term boost, as underlying demand for new cars cools, matching the experience of similar schemes in the aftermath of the global financial crisis.
In China’s case, the government doubled its vehicle purchase tax to 10% between 2011 and 2015 when it cut it back to 5%, before raising it to 7.5% in 2017 and then to 10%, again, in early 2018. “In doing so, the Chinese authorities have set the market up for a roller-coaster ride,” Stäblein notes. The initial tax cuts stimulated demand in 2015 and 2016. Sales growth slowed but didn’t decline in 2017 and 2018 as Chinese consumers bought new cars to avoid the future tax increases. But without major new incentives to support demand in China since early 2018, sales have dropped steadily, with consecutive monthly declines since June last year. “Populous as it is and rapid as economic growth has been, China remains a middle-income country whose car market is more than 50% larger than the US,” he says.