In 2018, global passenger car sales and automotive production both posted their first decreases in nine years, and 2019 is expected to remain challenging for the automotive industries, according to a study of the automotive sector that has a global value of USD 5,800 billion and has an average risk, conducted by Euler Hermes.
The first issue is will be to cope with weaker and troubled key markets. Sales of new light vehicles should decrease in the US (-2% to 16.8mn units) due to less supportive financing and more competition with the growing second-hand market. In China, the largest passenger car market (accounting for more than 29% of global sales last year), sales started 2019 on a sluggish pace and should only gradually benefit from a recovery in consumer confidence, thanks to fading international trade tensions and more visibility on fiscal incentives and emission mandates – two headwinds which led to the first drop in sales in nearly three decades in 2018. The EU market will struggle to avoid stagnation for the whole year, at best, and will experience volatile monthly performances in sales compared to last year’s turbulences caused by the introduction of the Worldwide Harmonized Light Vehicle Test Procedure (WLTP).
The tightening in regulations, from city bans and access restrictions to stringent standards in terms of pollution, keeps on intensifying the market’s transition. The pressure is high in Europe, with the implementation of the Real Driving Emission (RDE) certification in September 2019 and the CO2 targets settled for 2020, 2025 and 2030 with threats of financials penalties. “We expect a faster decline in diesel sales and a faster roll-out of new models compliant with the regulatory targets, which will keep global EV registrations at double-digit growth. Yet, the associated costs (R&D, industrial deployment, marketing) are weighting on operating margins and may force some players to adjust their portfolios and production capacities to free up funds in order to move mobility forward through investment and innovation in connected cars and autonomous driving,” the authors of the study argued.
At the same time, the sector still remains vulnerable to major turbulence coming from Brexit and US trade policy, with threats of US tariffs on car imports from the EU (up to 25%) and potential changes with China. “We expect negotiations to finish by the end of the first semester 2019. Outcomes are uncertain, but they have the potential to disorder international trade in cars and the current implementation strategies and supply-chain interconnections of global players.”
Somewhat in contradiction with the evolution in developed countries, in Romania, the automotive sector is going through a favorable period, with consecutive increases in the last five years of new car purchases at local level. The plus of 20% in 2018 followed by a 6% rise in the first quarter of 2019 could mark another positive year. The main lever of growth remains export, with the number of exported cars significantly exceeding the number of imported cars each year, ensuring a significant trade surplus in the balance of payments.
Turning to global trends, the propensity to use gasoline cars at the expense of diesel is also confirmed locally, with the share of premiums rising to 2/3 of the total, compared with about 55% in 2018. Electric and hybrid cars also grow in weight, but still do not have a significant volume.
The strongest impact on the European car industry in the coming years is likely to occur not due to Brexit, nor as a result of the imposition of tariff restrictions in relation to the United States but on alignment with its own EU carbon leverage regulations.
Thus, the 20% needed to be reduced by 2021 will add an additional 15% by 2025 and 37.5% by 2030 – above the initial expectations (-30%) of the producers.
In the light of these constraints, the need to maintain margins in a cyclical industry at a late stage of the economic cycle, the expectations for the European market are increasing by 2.6% of the average price during the period 2019-2020, respectively a fall in car registrations by 3.1%, which would amount to a decrease of nearly EUR 3 billion in car sales.
“With only Germany’s share of over 40% in both exports and imports of motor vehicles, Romania cannot remain immune to the above-mentioned changes at the continental level. Although global automotive manufacturers have accumulated significant buffer reserves since 2010, and for those active in Europe since 2014 – annual growth of 16% in sales and 22% in operating profits between 2015-2018 – revenue pressures and margins will intensify.
In order to maintain reasonable financial ratios, it is to be expected that producers will ultimately exercise the highest bargaining power in relation to captive suppliers both at the margins of profit and in the management of working capital,” the study pointed out.