The global auto industry has come to a monumental inflection point. Traditional industry business models and product segments are being upended, replaced instead by much bigger and broader markets, borne through technological innovation. Traditional car manufacturers no longer just have to compete with each other, but will now also face serious competition from global tech companies, with vast resources. Each manufacturer is in a unique position, and the strategic decisions that they’re making today will ultimately determine how they perform in the future. For some, it’s not just performance that’s at stake, but also survival.
The Market
In 2018, some 80 million new passenger vehicles were sold across the globe. This equates to one sale for every 90 people on the planet. Worldwide, the new passenger vehicle market is worth more than $2 trillion. Yet despite this huge headline figure, sales volumes were down from 2017, albeit only modestly at 1%, with 2017 itself being a record year.
It was the larger developed markets that led the global market downwards, with Chinese, US, German and UK markets all declining. In the world’s largest vehicle market, China, sales volumes fell by nearly 4% to over 23 million units, marking the first annual fall since 1990. Over in the US – the world’s second largest market – sales fell by a more palatable 0.4%, to just shy of 14 million units, accounting for 17% of global sales. Down 0.2% for the year, the German market comfortably remains the largest market in the entire European region, where growth for the area as a whole was largely flat. The Japanese market also remained stable, though remains smaller than it was in 2005. In the UK, sales fell by nearly 7% from the year before, to 2.3 million. Since 2016, UK sales are down by almost 12%.
But there were a few markets that performed even worse than the UK, with sales in Argentina down 10%, and the Turkish market seemingly self-destructing, falling more than 30%, off the back of economic turmoil.
It’s worth putting last year’s falls into perspective, though. A 1% fall in global sales is not a huge decline by any means, especially coming off the back of strong multi-year expansions. For instance, Chinese sales have more than doubled since 2010, with China now accounting for almost 1 in 3 new car sales. Likewise, sales in India are more than twice what they were in 2008. Even in a mature market such as the UK, sales are up by 20% since 2011. The value of the global market still increased in absolute terms.
There were some bright spots in 2018, too. Sales in Brazil increased by 14%, whilst those in Thailand and Russia were up 20% and 13% respectively. The Indian market grew by 6%, overtaking Germany to become the world’s fourth largest.
Despite this, global performance in early 2019 has carried on from where it left off in 2018. Indeed, rather than showing signs of recovery – which was expected - the market falls seem to be gaining momentum. First quarter US sales are down by 2%, whilst those in the European region are down by 3%. Within Europe, the Italian market is amongst the gloomiest, with sales down nearly 5% in the first quarter of the year, whilst Spanish sales have fallen even further, down 8%. The UK’s poor showing in 2018 has continued into the new year, with sales falling a further 3%. But most alarmingly, first quarter sales in China are down by a worrying 14% from the year before.
The global automotive industry – despite its strong upward trend – is cyclical in nature. When the global economy is performing well, the market also does well, and vice versa. The market is directly driven by population and income growth, and availability of consumer credit. The current economic expansion – that has been underway since the global financial crisis – has started to teeter out, with most mature economies – excluding the US - registering lower growth in 2018, compared to the year before. In China, economic growth of 6.5% was the lowest in nearly a decade. In the UK and across Europe, the Brexit spectacle has distressed markets, and done nothing for consumer confidence and spending. UK economic growth of 1.4% was the lowest since 2012, whilst the German economy only narrowly avoided a recession in the fourth quarter of last year. Peripheral and Southern European economies continue to struggle, with the Italian economy suffering a technical recession in 2018. Italian economic turmoil is clearly visible in its car market, where car sales of 1.9 million are 24% lower than they were in 2008. In 2013, they were at the same level as they were 3 decades earlier.
Last year’s interest rate increases in both the US and the UK have essentially served to increase the cost for those buying on credit, which had been a key driver of the sales growth up to 2017. Indeed, in the UK a staggering 91% of new vehicle sales involve at least some financing, usually PCP agreements. This credit tightening is clearly visible in the UK, where the amount of consumer credit taken out in March of this year was the lowest in any month since 2013.
The UK market has also benefited heavily from the PPI compensation programme, which has paid out over £30 billion since 2011. With an average payout of around £3,000, it’s thought that up to 20% of the total compensation has been spent on new cars. The maturity of the programme – supposed to be ending next year – makes its effect on car sales noticeably smaller.
The cyclicality of the automotive business and product cycles also helps to explain declining sales volumes. With vehicles being kept on average 8 years in Japan, and 11 years in the US, the high growth that we have witnessed over the last few years is not particularly sustainable. With so many purchases in the last five years, fuelled by the swamp of car finance, it is natural that market growth will pause, as more people have relatively new cars and aren’t looking for a new one.
The escalation of trade wars has certainly affected confidence and thus sales in the two largest markets, the USA and China, but they have also affected other markets too. Tarif increases on Steel and Aluminium have already increased costs for both manufacturers and consumers in many parts of the world. In China, tax incentives for cleaner vehicles – that relate to 70% of the market – were reduced during 2018, in an attempt to reign in consumer spending, credit growth and the proliferation of new start-up vehicle manufacturers – all of which were deemed unsustainable.
In Europe, the vilification of Diesel has confused consumers and caused them to delay purchases. New WLTP emissions testing procedures have resulted in supply bottlenecks, with it now taking longer for manufacturers to get cars to the showrooms. Additionally, the new standards have meant that some cars have had to be taken off the market, due to non-compliance. The result is that there are less cars available to be bought.
All in all, the mature markets that contribute the most to global sales faced significant headwinds in 2018 and continue to do so.
Market Outlook
However, even ignoring the potential impact from technological change, the global outlook for the automotive industry in the medium to long term is still considerably favourable, primarily due to an expectation of rising incomes in large parts of the developing world.
Vehicle penetration in the developing world remains very low, providing huge scope for future growth. In India, Africa and China there are just 36, 39 and 141 vehicles per 1,000 people respectively. The contrast to ownership levels in developed markets couldn’t be starker. In Western Europe and the USA there are 600 and 800 vehicles per 1,000 people respectively. If penetration rates in India were to catch up to those seen in China, then that alone would equate to well over 100 million vehicle sales, equivalent to around twice the yearly worldwide sales volume. A growing Indian middle class will surely make that a reality.
By 2030, the world’s population is forecast to grow to 8.5 billion, 800 million higher than it is today. Even with most of that growth occurring in the developing world, that will still add at least a couple of percent a year to sales volumes, giving the industry some much needed comfort.
In the short term, however, the outlook is less optimistic. The IMF has revised down its forecast for world economic growth in 2019, for a second time this year. Yearly growth in 2019 is now predicted to be the lowest since the Great Recession in 2009. To compound matters further, President Trump has threatened to take his trade war to Europe, and specifically to European vehicle exports. Clearly, there are significant threats from trade wars and protectionism, Brexit, a faltering Chinese economy, and tightening monetary policy.
Yet there is still hope for 2019. Some commentators believe that Trump’s trade tactics are merely negotiation ploys rather than long term strategies, and so it remains possible that there will be a full deceleration of tensions. That would do much for the world economy and indeed the car industry. Additionally, it’s possible that China will relax regulations on vehicle ownership in cities, in an effort to boost sales. The Chinese have already announced an economic stimulus package, centred on tax cuts. Meanwhile, car manufacturers have had more time to ensure compliance with the new WLTP standards.
Nevertheless, all things considered, the global car industry will do well to end the year flat in 2019.
Internal Combustion Engines
A key theme in the auto industry is the move away from dirtier fuels towards cleaner energy. Air pollution – according to the WHO – causes 3 million premature deaths each year. In particular, it is diesel that has borne the brunt of environmental concerns. Initially hailed as cleaner than petrol, due to lower carbon emissions, it is now under attack, for its higher nitrogen oxide emissions. This has only been exacerbated by ‘Dieselgate’, where major vehicle manufacturers – Volkswagen especially – were found to be using software (‘defeat devices’) to manipulate emission readings in test conditions, covering up the emission of pollution that exceeded standards by up to 40 times.
In 2018, diesel’s share of new EU car sales fell from 44% to 36%, with the number of new diesels registered falling by 18%. In the UK, new diesel sales were down 29% in 2018, with diesels now accounting for only 27% of new sales. Not content with just increasing taxes on diesels, cities around the world are looking to ban them completely. The German cities of Stuttgart and Frankfurt have recently banned older diesel models, as has Delhi in India, whilst there are proposals to ban diesels from the centre of Rome from 2024. Paris, Mexico City, Madrid and Athens have already signalled that diesels won’t be allowed from 2025.
But it’s not just diesels that are in the firing line. Petrol too is coming under increased scrutiny. The British, French, and Chinese governments all plan to ban the sale of all new vehicles with internal combustion engines by 2040. Some countries and cities even have 2030 as a target. From 2025, only electric vehicles will be allowed to be sold in Norway. Whilst in the UK, Oxford City Centre plans to ban both diesel and petrol vehicles from next year. In London, the new Ultra Low Emission Zone charges all vehicles that do not come up to recent emission standards. On the other side of the Atlantic, the state of California is planning to go completely carbon neutral by 2045.
However, planning to move to zero emissions and actually achieving it, are two entirely different matters. In Italy, for example, even after a yearly decline in new diesel sales of 12%, diesels still account for over half of all new car sales. The main problem, though, is that for the most part, slumping diesel sales are being counterbalanced by rising petrol sales. In the EU, sales of new petrol cars rose by 12% in 2018, taking petrol’s share of new registrations from 50% to nearly 57%. In the UK, petrol cars now account for a huge 66% of all new sales, resulting in an increase of UK vehicle CO2 emissions for the second year running.
Clearly, the pursuit of a carbon neutral automotive industry is only just beginning.
Electrification
Naturally, governments and environmentalists are looking to alternatively fuelled vehicles to fill the void, with particular emphasis on electric vehicles. Globally in 2018, there were over 2 million sales of alternatively fuelled vehicles (AFVs), predominately comprising: electric vehicles (EVs), plug-in hybrid electric vehicles (PHEVs), and hybrid electric vehicles (HEVs).
Once again, China leads the way, accounting for roughly half of the global EV/ PHEV market, with growth of nearly 80% in 2018. In the first quarter of this year, Chinese EV sales increased by over 120%, from the year before. EV sales are growing at a high rate across the world, with worldwide sales increasing 3-fold in just 2 years, to more than 1 million in 2018. Sales of EVs in the US have increased by over 2,000% since 2011. EV sales in the EU were up 53% in 2018, with standout performances in both Italy and the Netherlands, where sales in both countries were up by more than 150%. In the UK, EV sales are up 55% in the first quarter of the year.
PHEV sales have been affected by last year’s WLTP testing standards, which meant that many models of PHEV were no longer compliant, leaving them in need of urgent battery upgrades. In the UK, PHEV sales are down by 20% in the first quarter of the year, after increasing by four thousand percent between 2013 and 2018. Nevertheless, 2018 sales of PHEVs were still 26% higher in the EU, with the UK and Spain posting gains of 24% and 65% respectively.
Outside of China, the majority of AFV sales remain HEVs. In the UK there were around 81,000 HEVs sold last year, which is 5 times the number of EVs, and a third more than EVs and PHEVs combined. Sales of HEVs in the US have fallen by 30% since 2013’s high, and remain at the same level as they were a decade ago. But that still equates to around 343,000 sales, more than any other country. In the EU, HEV sales rose by 35% in 2018, with German sales up nearly 80%.
A variant of the battery electric powertrain is the hydrogen fuel cell electric vehicle (FCEV). Like its battery powered relative, the hydrogen fuel cell also produces zero carbon emissions, and runs from electricity, but that electricity is actually generated on board the vehicle, from hydrogen. FCEVs benefit from long ranges and quick refuelling, whilst energy produced from braking can be stored to generate more electricity. The characteristics of this technology - in comparison with pure electric powertrains – mean that it is most compelling when applied with respect to larger and heavier vehicles, such as buses and trucks. The technology is in its infancy. Sales volumes are negligible, and the charging infrastructure isn’t anywhere near the required level. In the whole of the UK, there are only 11 hydrogen refuelling stations, as of the beginning of the year. Nevertheless, real progress in the commercialisation of this technology is being made, and with the world’s biggest car manufacturers devoting more resources to its development, it’s very likely that it will have a part to play in the future evolution of the industry.
So, in contrast to the overall car market, sales of AFVs are booming, and the speed of growth is actually increasing. Not only are AFVs appealing to governments and environmentalists, but they are also becoming an increasingly more viable option to consumers too. Prices are falling, and each passing year sees more manufacturers enter the market, with more models available to consumers. The number of AFV models available in the US increased from 39 in 2009, to 128 in 2018. One of the reasons that today’s models are more compelling is that the ranges of AFVs are increasing and becoming more acceptable, with the top performers capable of over 300 miles on a full charge. Likewise, the number of charging points is also growing, making owning plug-in cars increasingly practical. In the US, the number of electric charging stations doubled between 2015 and 2018, to over 60,000.
Despite the surge in uptake of EVs, and the progress made in making them more attractive to consumers, the distribution of global EV sales is hugely uneven. China accounts for over half of the market, with EV/ PHEV sales accounting for more than 4% of total new passenger car sales in the country. In the EU, on the other hand, EVs/ PHEVs have a market share of just 1.5%. Away from China, sales of electric vehicles are heavily correlated with income and wealth. 85% of all EU EV sales occur in just 6 Western European countries. The three European countries with the largest EV market shares – Norway, Sweden & the Netherlands – also happen to be the three wealthiest countries, when measured by GDP per capita. In Norway, EV sales make up almost half of the entire market. Likewise, Poland has the lowest GDP per capita in the EU, and also the lowest EV penetration rate. There is a clear split between East and West Europe, and also between North and South.
Another factor that is affecting EV popularity is the lack of charging infrastructure. As is the case with EV sales, the number of charging stations is also massively inconsistent from country to country. Within the EU, just 4 countries account for three quarters of all public charging stations. There are less than 50 public charging stations in Greece, compared to over 30,000 in the Netherlands. In the USA, a third of all charging stations are located in the state of California, which has nearly twice as many stations as the whole of the UK.
More specifically, EV activity is mostly confined to large cities. Nearly half of the worldwide EV sales occur in just 25 global cities, that account for only 12% of the global passenger vehicle market. These cities are also home to roughly 40% of the world’s charging points, with 50,000 in Beijing alone. Beijing, Los Angeles, and Shanghai each account for more than 5% of the total EV market. Of these 25 global cities, over one third of them are in China. In fact, there are more than 10 cities in China, where sales of EVs are higher than for the whole of the UK, with Beijing leading the way with nearly 150,000.
Despite major progress from car manufacturers in making EVs more appealing to drivers, and reducing customer pain points, we are still at a point where owning an EV is very niche. Whilst some of the EV’s popularity can be attributed to the environmental concerns of customers, to a large extent, the EV take up to date is the result of what are in some cases, very meaningful incentives and legislation.
Large Chinese cities, including Beijing and Shanghai restrict the number of new vehicle registrations, through lotteries and auctions. New registrations can cost more than $10,000. However, EVs are exempt from such restrictions, serving as a huge financial incentive. A mixture of local and national incentives have created savings of up to $10,000 in Los Angeles, and over £3,000 in the UK, whilst those available in Norway are even larger. Additionally, France, the Netherlands, Romania, Italy and Germany all offer bonus incentives to those buying EVs, in some cases up to €10,000.
The Chinese government have set a target for EV sales to make up 20% of all sales by 2025, equivalent to around 7 million vehicles, representing a 700% increase from 2018 levels. To achieve this, they are introducing a system that is akin to a carbon trading scheme. Each manufacturer has a minimum requirement of EVs/ PHEVs that they must produce. Failing to meet the quota means that they must either purchase excess credits from other manufacturers, who exceed their quotas, or pay fines to the Chinese government. Regulations in China have also been relaxed, with foreign car manufacturers now allowed to produce EVs in China, without needing to collaborate with a Chinese partner.
Cities such as Oslo offer other benefits to EV drivers, like allowing them to drive in bus lanes, and reduced road tolls. In London, EVs are exempt from the congestion charge. Chinese and also some European cities – including Paris and Barcelona – have a system where there are restrictions on which roads vehicles can drive on and at what time, but these do not apply to EVs. Environmentally attuned cities are increasingly monitoring pollution levels in real time, and restricting petrol and diesel use accordingly. The likes of Paris, Oslo, and Los Angeles are also offering EVs preferential and in some cases free parking in their city centres. Furthermore, EV charging points are now beginning to be incorporated into planning processes. For example, in Beijing all parking spots for new residential buildings must have a charging point, whilst in London 20% of parking spots at new developments must come with charging facilities.
So, it is cities themselves that are at the forefront of the electric vehicle revolution. Devolution has allowed them to implement both incentives and legislation at a rate that is much faster than that seen at a national level. They are leading by example, and nowhere is this more evident than in Stockholm, where the city has electrified its entire fleet of nearly 1 thousand cars.
Even though EV infiltration of the mainstream passenger vehicle market remains very low, it’s clear the future of transport will be electric, and that petrol and diesel engines have a limited shelf life. Morgan Stanley have predicted that there could be more than 1 billion EVs on the world’s roads by 2050, making up more than half of all road vehicles. Whilst Bloomberg predict that there will be 60 million EV sales a year by 2040.
The automotive industry will continue to make quick progress on the performance of electric batteries, with EVs predicted to become price competitive during the mid 2020’s. In response to growing waves of city-based incentives and legislation, manufacturers are developing more models to bring to market, that appeal to different consumer tastes. Battery and charging progress will make it much quicker to charge an EV, bringing down the time to fully charge, from more than 10 hours today, to maybe an hour or two in the future. Commercial supercharging stations will be common, using chargers that are 10 times more powerful than those used in homes today. Smart charging solutions would mean that cars are charged at the most cost and energy efficient times of the day. Along with vehicle to grid technologies, this would mean that fears of a huge increase in peak energy demand, would be largely unfounded and manageable.
Meanwhile, the ranges of EVs will continue to increase, becoming comparative with today’s petrol and diesel vehicles, in around 20 years time. Furthermore, technological advancements will make hybrid and plug in hybrid vehicles obsolete, with pure battery EVs dominating the market. As EV take up becomes more mainstream, governments will change their focus – as they already have in China and the UK – from offering incentives, to enacting legislation and increasing taxation, which is surely a more cost-effective way to increase penetration.
Size Matters
As well as being cleaner, the near future will also be bigger, with consumers increasingly demanding larger vehicles. In the US, light trucks are considerably more popular than smaller cars, accounting for over two thirds of the market. Since 2009, light truck sales have more than doubled, whilst small car sales have barely changed. In fact, virtually the entire growth in US car sales since the 1970’s has come from light truck sales.
Across the world, the SUV segment was one of the few bright spots in 2018, growing by over 5%, and accounting for around a third of global passenger car sales. In the world’s largest car market, China, SUVs now make up 41% of all sales. Even in Italy, whose automotive heritage is centred on small urban cars, SUV sales now account for 36% of the market, with sales growing by nearly 20% in 2018. In fact, the market share of SUVs in Italy has actually doubled in just 5 years. Elsewhere, German SUV sales rose by 20% last year, whilst SUV sales in the UK have increased by over 200% in 10 years.
Offsetting the growth of the SUV segment is the decline of the smaller vehicle and MPV segments. In Japan, sales of small vehicles have fallen nearly 40% since 2000. Back in Italy, small cars now account for 40% of the market, down from 45% in 2015.
In particular, it is the compact and smaller SUV categories that are doing so well. This segment is becoming increasingly accessible to consumers from a cost perspective, whilst offering a more practical experience to consumers, with the added storage space. Additionally, consumers have clearly decided that in many cases, SUV designs are more aesthetically appealing, compared to smaller cars, with SUVs now considered in vogue and aspirational. Whilst SUV market shares in many developed markets - such as the USA, China, Italy, Australia and Spain – are already at a high level, there is clearly potential for future growth in other markets, such as Japan and Germany, where SUV sales still represent less than 20% of all sales.
The global automotive industry is a complex creature. At any one time, there are a multitude of different factors at play, that each have considerable effects on the market. Whilst 2018 and the first half of 2019 has seen a decline in sale volumes, undoubtedly caused by negative global macroeconomic developments, there is still huge scope for future growth for the industry, in both the medium and long term. Within the market, there is a clear shift in relative importance, from the stagnating, developed markets of the West, to the growing, dynamic markets of the East. The journey to carbon neutrality via electrification represents a paradigm shift for the entire industry, and brings with it both opportunities and challenges. The development and adoption of electric powertrains is a defining moment in automotive history – comparable with the introduction of internal combustion engines - with environmental implications that transcend the entire automotive industry.
GCIS - Commercial Intelligence - Market Intelligence