Carmakers braced for end to record global growth run

When the world’s car industry last assembled in Frankfurt for the biennial motor show, automobile sales in Europe were hurtling towards a two-decade low. But there was an upbeat tone from the assembled executives and a certain sprezzatura in the stylish concept cars.

Those flashy products and confident messages will be in evidence once again at this year’s Frankfurt show, which opens to the world’s media on Tuesday. Carmakers and parts suppliers will unveil more product premieres than ever: 210 in all.

But the optimistic mood will probably be forced. Despite near record car purchases in the US, a surprising recovery in Europe and healthy profitability at some of the biggest manufacturers, analysts are increasingly concerned that the car industry’s strongest run of unit sales growth is coming to an end.

The global sales trajectory is still upward — just. LMC Automotive, a consulting firm, expects global passenger vehicle sales of about 88m this year, up 0.6 per cent compared with 2014. LMC has been cutting its 2015 forecasts for several countries.

There are fears the booming US car market could soon come to a shuddering halt, particularly if interest rates rise. Carmakers are already grappling with big falls in vehicle purchases in Russia and parts of Latin America; and China, the world’s largest market, generating 30 per cent of global sales, is going into reverse because of the country’s economic slowdown.

“If you’re struggling in the market that generates a significant part of your profits, you try to compensate elsewhere,” says Andy Palmer, chief executive of Aston Martin and a former senior manager at Nissan. “In order to hit your volume targets, you start to put incentives on to the cars. [Then] you’ll see pricing starting to give way.” These issues have been putting pressure on some carmakers’ share prices.

Analysts at Exane BNP Paribas forecast that car industry unit sales will start to decline from 2017. If they are right, the additional manufacturing capacity that carmakers are bringing online — the ability to make 16m more vehicles by 2020 compared with levels this year — will look profligate and put further pressure on the money the industry makes for each car.

In recent times, the biggest single source of satisfaction for many of the world’s carmakers has been North America.

In particular, the US market — number two globally in terms of sales — is experiencing high demand amid encouraging economic indicators, such as low unemployment.

It has also been highly profitable for the US carmakers — General Motors, Ford and Fiat Chrysler Automobiles — that underwent major restructurings during the financial crisis.

Low oil prices have prompted a shift in consumer tastes towards “light trucks” — the broad term for pickups and sport utility vehicles, which generally command higher profit margins compared with smaller cars. In August, Ford, GM and Fiat Chrysler generated 74 per cent of their US sales from trucks — a record.

But with US sales back above pre-crisis levels, analysts say two factors could halt the bonanza.

First, a rise in US interest rates could curtail credit and therefore reduce vehicle purchases. Second, carmakers could seek to compensate for falling demand in China by increasingly pushing for sales in the US, resulting in price wars.

Furthermore, new manufacturing capacity in the southern US states and Mexico will soon come on stream following commitments from the likes of Ford, Toyota and Volvo.

Max Warburton, analyst at Bernstein, doubts that the improving European market can offset an expected decline in US profitability and problems in emerging markets. “Can European demand — and a weak euro — continue to carry the day?” he asks. “We remain dubious.”

Russia and Latin America — along with China — were once considered the main future profit drivers for the car industry.

Brazil, now engulfed in recession, is a notable weak spot for the carmakers — sales are down 20 per cent so far this year compared with 2014. Russia in August showed signs of stabilisation, but sales are still expected to fall 36 per cent this year, compounded by a sharp drop in the rouble.

But by far the dominant concern in Frankfurt will be China.

Falling sales in China are taking a toll on the jumbo pricing and outsized margins that carmakers have been enjoying in the country for several years.

General Motors and Volkswagen relied on China for 44 per cent and 41 per cent of operating profit respectively last year, according to AlixPartners, a consultancy.

Manufacturers will launch a number of vehicles at Frankfurt that were signed off at a time of buoyant optimism around the Chinese market — which had a predilection for luxury vehicles until a crackdown on ostentatious consumption two years ago.

Bentley will launch the Bentayga — “the world’s fastest, most luxurious” SUV, according to the company — alongside rival products from Jaguar and Maserati.

The decline in Chinese car sales comes at a time of ambitious plans to increase car manufacturing capacity in the country. Exane BNP Paribas estimates that 7m units of capacity will be added by 2018 — an increase of 20 per cent compared with this year.

“Manufacturers do tend to be a bit bullish in terms of installing capacity and it can catch them out when the markets turn down,” says Jonathon Poskitt, head of sales forecasting at LMC.

Leading car executives will probably put their faith in the long-term potential of the Chinese market as they take to the stands in Frankfurt. But in the short term, China is unlikely to continue its role of fuelling the carmakers’ growth run.

Letter in response to this report:

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