New World Order: Auto Industry’s Road to Recovery

Special Coverage

State of the Industry: Int’l

The biggest global economic calamity in the last 80 years has left the international auto industry facing a new world order, the reverberations of which are expected to be felt for years to come.

A recent study by PriceWaterhouseCoopers forecasts global vehicle production this year will fall to 54 million units, before gaining momentum in 2010. But just four years later, the industry will see a seismic shift when a majority of cars will be built in emerging markets, the analysts say.

Major auto makers were blindsided by the financial storm that hit full force in October 2008, as worried consumers held tight to their pocketbooks and banks made credit almost impossible to obtain. Yet, few had any notion of how bad the consequences would be.

One year later, there are signs the fractured automotive industry is gaining traction, led by fundamental improvements in China, primarily on the strength of government stimulus; Germany, with its benchmark vehicle-scrappage program; and Brazil, with its major manufacturing base and well-capitalized banks.

Among the vehicle markets most negatively affected was the U.S., where the former General Motors Corp. and Chrysler LLC declared bankruptcy this summer, both to emerge weeks later as new companies. Chrysler Group LLC now is owned 20% by Italy’s Fiat Auto Group.

While the industry benefited from the U.S. government’s “Cash for Clunkers” stimulus program in July and August, September’s total light-vehicle sales fell nearly 39% from the prior month, marking a near 30-year low. Most analysts agree although the country’s economy is beginning to stabilize, the recovery won’t be felt by the auto industry until at least 2011.

Export-dependent Japan also found itself at low tide, sending already stagnating car sales tumbling to record lows. Adding to the industry’s jitters is an aging population with little need for new vehicles and a younger generation with little interest in owning cars at all.

The government in April began offering up to ¥250,000 ($2,789) in subsidies to buyers replacing older cars with new, low-emission vehicles as part of the country's largest-ever economic stimulus package. The incentive plan and a turnaround in exports are said to be helping the market slowly return to growth.

GM China sold more than 48,000 new Chevy Cruze sedans in car’s first six months in the market.

Toyota Motor Corp. reportedly has asked the new government to extend the car subsidies through March 2012. The auto maker is raising its 2009 global sales forecast 3% to 6.7 million cars and boosting production 8% to 6.45 million units, seen as a sign of a nascent recovery in worldwide vehicle demand.

Western European auto makers, though hard-hit by the global recession, particularly in Italy, Spain and the U.K., were kept from sliding full-tilt into crisis by vehicle-scrappage and other government incentive programs led by Germany and France. Germany’s car sales jumped 40% in May, alone.

But while the region’s economy is gaining strength, the International Monetary Fund in early October warned recovery will be “slow and fragile.” The good news is the current year is expected to represent the low point for exports and inventory.

In Eastern Europe, Russia, last year’s darling among key emerging markets, arguably suffered the greatest upheaval. New- and used-car sales plummeted 55% in first-half 2009 to 743,000, including imported vehicles, forcing Ford Motor Co. and GM to shutter their plants temporarily.

OAO AvtoVAZ, the country’s largest car maker, 25% owned by Renault SA, reported losing RR19.4 billion ($655.4 million) in the period and is seeking life support from both the state and Renault to keep its aging Lada plant running.

Although the industry’s September deliveries saw a slight uptick from August, albeit down 52% compared with year-ago, “clearly the automotive market continues to have a very difficult year, and we are not seeing signs of this improving in the fourth quarter,” David Thomas, chairman of the Association of European Businesses’ Automobile Manufacturers Committee, says in a statement.

PwC expects Russian vehicle sales to decline as much as 60% for the total year, to between 1.3 million and 1.6 million units, if the state does not act fast. Heavy job losses, salary cuts and the lack of affordable car loans are blamed for one of the worst years for the industry.

And although the government has launched a program that includes a subsidy to banks for lowering the cost of loans, analysts says credit remains too tight for the plan to work.

“I haven’t seen much effect,” says Ingvar Sviggum, vice president-marketing sales and service for Ford of Europe, in a conference call with reporters and analysts.

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“You can give as much incentive as you want, but (consumers) don’t have cash or credit to buy the cars. The economy has to be repaired before the industry can come back.”

Russia’s membership in the world’s four fastest-developing emerging markets now is being called into question. Among the members – Brazil, Russia, India and China, known as the “BRICs” – Russia has fallen the furthest, is burdened by the greatest overcapacity and will take the longest to climb back.

Some question whether the group should drop Russia and add up-and-coming Indonesia, whose economy reportedly grew at the fastest pace in Southeast Asia in the year’s first quarter, as local spending helped the country fend off the global recession.

“Although (vehicle) sales are currently down, a number of foreign auto makers are planning or considering production in Indonesia,” says Christoph Domke, a senior analyst with IHS Global Insight. These include Volkswagen AG, PSA Peugeot Citroen, Renault and Geely Automobile Holdings Ltd.

Jim O’Neill, head of global economic research for Goldman Sachs, which first popularized the BRIC term, insists in a recent Financial Times editorial Russia’s contracting economy will survive its current crisis, and the BRICs by the end of the decade could represent close to 20% of the world’s gross domestic product.

A September report by WP Browne Consulting LLC, which offers strategic analyses of emerging markets, is not so optimistic about the country’s car industry.

“There are just too many factors working against a return to the ‘good times,’ when forecasters thought the market would easily get to 3.5 million units of (vehicle) demand, including excess capacity within the Russian Federation,” the analysis finds.

Russia’s sales forecast for 2010 has been revised downward from 2.3 million units earlier in the year to 1.7 million, even with a rebate program expected to start after Christmas, the consulting firm says.

“The economy will be digging itself out of a negative growth year and moving into a 2010 business cycle that will generate less than 1% growth: hardly great scoreboard numbers for an emerging market; serious frostbite for the vehicle business.”

In contrast, China’s massive $585 billion stimulus-spending loosened bank credit and jumpstarted slowing growth. Vehicle sales are expected to rise to 12.6 million this year, up 35% from like-2008, according to Xu Changming, senior economist for the Chinese Cabinet State Information Center.

Xu tells an industry conference in September he is not worried if production exceeds demand, even if new-car subsidies end, because sales are likely to grow at least 15% annually over the next decade.

Not only is China farther down the road in growth than the rest of the world’s 22 emerging markets identified by economists, but it surpassed the U.S. in January to become the world’s biggest consumer of new cars, besting its own 2008 benchmark sales. It’s also is likely to become the No.1 vehicle-manufacturing country by the end of this year.

Industry deliveries in September soared 77.9%, compared with year-ago, to 1.33 million, driven by an 83.6% jump in car sales to 1.02 million, the China Association of Automobile Manufacturers reports. New-vehicle production passed 10 million units in October and is predicted to hit 12 million for the full year.

“You would hardly think there was a global recession,” Nick Reilly, GM’s president of international operations, says of China in an interview with Ward’s. “They did drop their exports for a while and results were lower, but they were easily able to pick that up in domestic consumption.”

Reilly says two-thirds of GM’s total annual sales come from overseas, with China its largest and fastest-growing market. The auto maker expects to surpass 1.6 million units for the year, GM China Group President and Managing Director Kevin Wale is quoted as saying.

Reilly also points to Brazil, GM’s third-largest market. The South American country’s strong economy, which has propelled it to the world stage as an industrial powerhouse over the last several years, proved resilient against the global financial meltdown.

Indeed, the region’s biggest car market pulled itself out of the economic recession in the second quarter, with 1.9% growth in its GDP over the previous quarter, the Brazilian Census Bureau reports.

Interest-rate cuts by the central bank, combined with accessible credit and government tax breaks for new cars and big-ticket appliances, helped push consumer spending up 2.1% ahead of the first-quarter.

Additionally, the government agreed to extend its industrial production tax break to Oct. 31, allowing auto makers to transfer the savings to consumers.

Brazil sold 1.45 million vehicles in the year’s first half, up 3% from prior-year, prompting the National Motor Vehicles Manufacturers Assn. (Anfavea) to boost its forecast for 2009 to 3 million units, a 6.4% gain on 2008.

“In the past, you could have expected (the) drop in commodity prices to wipe (Brazil) out or really cause major problems, but it’s a much more robust economy, and there is (more) domestic consumption,” Reilly says.

GM’s Brazilian operation is in the middle of a 5-year, $2.4 billion investment program, and Reilly says a joint diesel-pickup initiative with GM Thailand remains on track. Brazil also is a major market for Ford, Fiat, Volkswagen, Renault, PSA and Nissan Motor Co. Ltd.

The Brazilian Association of Vehicle Dealers reports the industry sold 2,211,421 vehicles through September, and Renault says it expects the market to grow to 4 million units by 2014.

It’s too soon to tell how quickly India, the fourth member of the BRICs, will recover, but the auto industry appears to be turning the corner.

J.D. Power Asia Pacific analysts cite strong sales momentum in the year’s first half, aggressive interest-rate cuts, major discounting and the prospect of speedy economic reforms as good reasons to reevaluate their medium-term outlook.

Industry sales grew 21% in September, compared with year-ago, for the eighth straight monthly rise. GM’s light-vehicle sales climbed 48.5% to 7,654, while Ford deliveries surged 49.8% to 3,405.

Ford President and CEO Alan Mulally recently unveiled the new low-cost Figo small car for India in Delhi, signaling the auto maker’s intention to compete in the country’s largest and most-important small-car segment.

Both auto makers plan considerable investments as they look to make India their regional export hub for small cars and engines.

India’s new government says in its Economic Survey report the country’s economy likely will expand 6.25% to 7.75% this fiscal year, compared with 6.7% year-ago. This compares with an average 8.8% growth recorded in the previous five years.

However, some economists are calling for 8% to 9% growth in each of the next three years, pointing to the new prime minister’s efforts to fuel the market by liberalizing policy to allow more foreign investment.

Despite the many promising signs of revival in the global economy, analysts warn recovery cannot be sustained until consumers feel better about spending again. Even then, few believe mature markets will see pre-2008 volumes before 2015, if ever.

While no one can predict what the global industry’s new normal will look like as a growing number of auto makers pin their hopes on emerging markets, the road to recovery already is pointing to uncharted territory.

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