Market Forecast 2019 Uncertain Outlook for China
For the first time in 20 years, China, the world's leading automobile market, is in the red. The policy of the Trump administration and the threat of a no-deal Brexit are also worrying OEMs. Nevertheless, nobody wants to speak of a crisis yet - rightly so?
For Daimler, there is no slow-down in China. While the headlines about the market in the Far East have been signaling concern since the middle of the year, the Swabian company already announced record annual sales of around 600,000 cars in November. For the first time the competition from Ingolstadt has been outstripped, says China boss Hubertus Troska emphatically in Stuttgart: "We remain absolutely optimistic about the Chinese market." Troska also believes that it is "not unusual" that this large market is now "normalizing to a certain extent". Premium brands continue to grow properly. "We are in the right segment." The S-Class was selling well, and even Maybach is "functioning excellently" in the People's Republic: "The vehicle is not ‘too much’ for Chinese buyers."
BMW is also satisfied with the premium segment. The Munich-based company expects a "solid sales growth" and speaks of a market that has merely normalized. The manufacturer mentions locally produced BMW vehicles, especially the BMW X3, as the growth drivers. Although Audi sold 3.5 % fewer cars in 2018 than in the previous year, the Ingolstadt-based company was still able to grow in China. So, things are not that bad in China - thanks to premium cars? That seems unlikely. The world's largest car market contracted by 6 % in 2018, the China Passenger Car Association (PCA) recently announced. That's the first decline in over 20 years. Sales figures are falling, especially in the volume segment. Jan Burgard, Managing Partner at Berylls Strategy Advisors: "For 2019, we expect the overall market to stagnate or continue to shrink slightly - with the exception of New Energy Vehicles (NEV), which will undoubtedly once again enjoy great popularity. Premium suppliers should continue to do good business and thus have a positive influence on the overall market."
Sluggishness in China Has Its Reasons - Some Are Homemade
An important reason for the subdued mood is the high US import tariff of 40 %. This leads to uncertainty and restraint on part of the customers, says the Berylls boss. In addition to the trade war between the USA and China, there are homemade causes for the slowdown. “The high saturation of cars in large cities such as Shanghai or Beijing results in a natural weakening in growth," says Burgard. In addition, the price of private real estate has risen sharply and there is no money left to buy a car. Additionally, new emission test standards in China are having an impact. Burgard: "The introduction of the GB6 quality standard is expected shortly. This prevents customers from buying models that are currently available and tested in accordance with GB5 standards."
PCA Secretary General Cui Dongshu also sees high dept rates as a reason. In addition, the interest of many Chinese in having their own car is waning. And last but not least, the expired tax cuts are dampening the economy. “Experience has shown that ad hoc measures lead to a yo-yo effect and do not bring about lasting changes," says Jan Burgard. He does not believe that the Chinese government will introduce a kind of scrappage bonus: "As long as the market does not weaken substantially, the government will not intervene, create further tax cuts or, for example, change the licensing restrictions in many cities.”
Expert: E-Offensive of German Manufacturers Came Too Late
At Volkswagen, Group CEO Herbert Diess has assumed responsibility of the China department himself. "The fate of the Volkswagen Group is decided in China," said the manager in January in Beijing. After all, China is the largest sales market for the Wolfsburg-based company, who sell around 40 % of their vehicles there. VW must become more Chinese, Diess demands. Despite the weak market, Volkswagen is confident of achieving further growth in China. Stephan Wöllenstein, who recently took over the operational business in China, told journalists in mid-January that the VW Group had gained further market share in 2018. The introduction of new models will also lead to an increase in sales in China this year.
Did the E-Offensive of the German OEMs in China come too late? Somewhat, says Jan Burgard: "Tesla has yet again a head start. In addition, new players such as Byton and NIO will establish themselves in the market in the short term and compete strongly with German manufacturers." According to Burgard, the premium vehicles of the importers still enjoy a very good reputation. But he warns: Chinese carmakers are also catching up in terms of image. One issue that is likely to occupy manufacturers in the current year is the Chinese government's minimum sales quotas for NEVs. In order to meet these CO2 credits, Daimler also relies, for example, on its local partners. Should the Swabian company be unable to meet the e-quota, Troska will buy the remaining CO2 credits from BAIC, BYD or Geely. According to him, the three Chinese manufacturers lead the credit ranking. For example, the Denza 500, which originates from Daimler's joint venture with BYD, achieves the full five credits per vehicle. These credits will be balanced at the end of 2020.
USA: Whims of a President
A driving force behind the high import duties is US President Donald Trump. And he's still rattling his sabers. In early December, a German OEM delegation - Daimler CEO Dieter Zetsche, VW CEO Herbert Diess and BMW CFO Nicolas Peter - met him in the White House to slow him down in his plans for European punitive tariffs. The managers wanted to appease the US president by presenting high investment plans for North America. "The president has a point in convincing us to invest more, and we are ready to invest more," Diess said after the meeting. The fear of punitive tariffs quickly translates into action. VW, for example, announced in mid-January that it would invest 700 million euros in its US plant in Chattanooga, where it would produce the ID Crozz by 2022.
Alongside China and Europe, the USA is the most important sales market for the German automotive industry. According to the industry association VDA, these manufacturers sold 1.34 million new vehicles in the US in 2018. According to forecasts by industry experts such as the US market researchers and trading service providers of Cox Automotive, the US market is cooling down this year. Following last year's better-than-expected year with around 17.2 million new car sales, around 16.8 million units are expected to be sold in 2019, according to a forecast by Cox Automotive. With new car sales of around 16.5 million units, it could fall even further in 2020. The chief economist of Cox, Jonathan Smoke, hints at the economic downturn, but warns also against the extra tariffs of 25 %: These could have a stronger impact on the market than a recession. Analysts also blame higher interest rates for the slowdown of the market. Pick-ups and off-road vehicles remain in demand in the States. However, sales of sedans slumped to 30 % in recent years. The popular SUVs soared to 49 %.
Europe: Uncertainty Due to Brexit
If you look at the European market, Italy is the only of the five main markets that is doing well (+2 %). December was the fourth month in a row with car sales falling in Germany, France, the UK and Spain, announced the Acea industry association. With an increase of 0.1 %, sales stagnated during the entire year in the European Union (15.1 million new registrations). Meanwhile, the British BMW subsidiary Rolls-Royce is preparing for a disorderly Brexit. The luxury car manufacturer intends to close its Goodwood plant in the first two weeks of April to respond to the consequences of a possible disorderly EU withdrawal. This was announced by Rolls-Royce boss Torsten Müller-Ötvös in an interview with "Wirtschaftswoche". The measure is intended to dampen possible supply bottlenecks that may arise due to the unresolved situation. The BMW subsidiary Mini also closes its plant in Oxford for four weeks.
Economic Development: The Worries of Suppliers
The slump in China is also having an impact on the supplier sector. In September, Schaeffler lowered his business target for the important automotive sector. The robot manufacturer Kuka has initiated an immediate program that will even cost jobs. Kuka’s Interim CEO Peter Mohnen blames the slowdown in the automotive and electrical industries in the last quarter of 2018 for this. The weak market environment in China and Europe also dampened growth for Hella. And only recently, lighting producer Osram announced the cut of several hundred jobs. It is true that none of the German OEMs wants to speak of a crisis. However, hardly any companies in the automotive industry are currently in a good mood.
Henner Lehne, automotive expert at IHS Markit, is once again raising hopes for the industry with regard to China: "Most of the tax-advantage effect was supposed to have been used up last year. And the income tax cuts in October 2018 should also further stimulate consumer demand, as this means a 5 to 6 % increase in net annual income." It remains to be seen whether the volume segment will also experience an upswing again. How are emerging markets developing?
Henner Lehne, automotive expert of the information service IHS Markit: He gives an assessment of the overall market in this brief interview.
Mr Lehne, how did the overall market develop last year?
2018 is the first year since 2009 in which global demand for new vehicles no longer grew. There are many minor reasons for this development in the various core markets. But globally, it is the decline in China that is depressing the overall result. In the summer, after a few weak months, it was hoped that the Chinese government would use incentives to keep the market on a growth course. But it came differently this time. The preferential effect of incentives for vehicles with a capacity of 1.6 l and less has led to a slump in demand in the lower segment in particular. We assume that from 2015 (Q4) to 2017, tax-privileged companies moved forward about two million vehicle sales, most of which were missing in 2018.
What is your forecast for the current year?
For 2019, we are currently still expecting slight growth. But the risk for this growth is higher this year than ever before, because there are too many uncertainties whose outcome cannot really be quantified: Brexit, trade barriers, geopolitical tensions in the Middle East. These factors can change a forecast in one or the other direction.
How are the emerging markets developing?
This year we will observe that the emerging markets will not develop synchronously with the old Western markets. While the West is weakening, we see growth in the BRICS countries. India was solid again in 2018 for the first time in a long time and also shows good potential for further growth in 2019. But Brazil and Russia are also on the road to recovery. Although both countries are still far below their actual potential, things are at least slowly picking up again.
This article was first published by Automobil Industrie.
Original: Svenja Gelowicz / Translation: Alexander Stark