The global automotive industry could be in for a hangover after cash-for-clunkers and other incentive programs expire

Clunker hangover

29 September 2009 16:55  [Source: ICB]

After the US "cash-for-clunkers" auto stimulus program and similar plans worldwide wind down, what's next for the industry?

 

 Rex Features/Chris Eyles

DURING THE last week of July, the US "cash-for-clunkers" vehicle rebate program dominated the economic conversation, as consumers flocked to car lots to capitalize on the $4,500 (€3,067) that the government was dangling in front of them to scoop up a gasoline-sipping vehicle.

By the end of that week, the $1bn set aside for the program had all but dried up and a new frenzy emerged as US lawmakers were forced to toss another $2bn into the pot for discounts.

Robust sales numbers had market observers heralding the "clunkers" rebate as a success, joining other auto industry-stimulating initiatives in Europe, Latin America and Asia as bright spots in a sector hit as hard as any in the global ­economic downturn.

The year-on-year contraction in US July auto sales - about 13% - was far less than the 40% and 30% sales declines in the first quarter (Q1) and Q2, respectively. More remarkably, US automaker Ford posted a gain in sales during the month. And August figures were even better.

In Germany, the country's €5.0bn ($7.4bn) "clunkers"-style plan spurred a 40% increase in car sales in June and helped push European auto sales into positive territory for the first time in more than a year.

The bounce upward, according to the European Automobile Manufacturing Association, came from the incentive programs across the continent.

Germany's auto sales statistics continued to post gains into August, while sales in France rose by 7%, in Italy by 8%, and in the UK by 6% during the same month.

Tax breaks and subsidies for car buyers boosted sales dramatically in Brazil, Japan, China and South Korea. And in Canada, the government is planning a cleverly dubbed "retire your ride" in the wake of "clunkers."

WHAT HAPPENS NOW?
In response to the spike in sales, carmakers announced that they would start churning out inventory to replenish the empty showrooms. The news brought optimism up the automotive supply chain to chemical producers, which rely heavily on the automotive industry.

But the discounts from the month-long "clunkers" initiative have dried up in the US and other scrappage plans across the globe are quickly coming to an end.

And now that the fanfare has died down and the hangover from government injections into the market has set in, analysts have a modest outlook for the future of the global auto industry, as the world economy slowly comes back to life.

"I think 'cash for clunkers' was the year's crescendo," says Jessica Caldwell, analyst at the US automotive consumer website Edmunds.com.

When the program expired on August 26, rebates had been employed to the purchases of nearly 700,000 new cars in the US. But skeptics say the clunkers-induced sales figures might be banner numbers for the year - far from anything resembling a turnaround for the industry.

"Annualized, that's 8.3m units," says Jeff Mengel, partner and head of the plastics team at US consulting firm Plante & Moran, about the month of clunkers-spurred sales. "That's not enough to call it a recovery. That's why I say it is a false hope."

Projections from Edmunds.com and the US National Automotive Dealers Association (NADA) are putting total 2009 US passenger vehicle sales in the low 10m unit range, which would challenge the lowest recorded sales figure.

 Germany's scrappage program
was the most effective
of any across the world

In 1981 and 1982, during another US recession, sales figures totaled 10.3m and 10.1m vehicles respectively, according to NADA data.

Paul Taylor, NADA's chief economist, says the economic slump in the early 1980s was, like the most recent downturn, set off by a credit crunch.

And now that the shot in the arm from "clunker" discounts is wearing off, the poor economic factors that plagued the car industry earlier in the year will resurface, Taylor says.

Not only will credit have to recover, but the entire US economy will have to show stronger vital signs.

Business and pleasure travel will have to pick up to encourage car-rental companies to update their fleets; state governments, mired in budget deficits, will need to start buying new vehicles; and a rebound in the housing industry are all necessary for auto sales to get back into the ballpark of 16m units/year, which has been the consistent level this decade, Taylor says.

Caldwell says vehicle buying in the US will inch up over the next few years before sales jump back to 16m/year.

"I think next year, we see it as an 11.5 [m unit] year into 2011 and some growth after that," she says. "It doesn't look like the 16m unit year is going to come any time soon."

Germany's scrappage program was the most effective of any across the world, says David Greene, an analyst at Edmunds.com who is dissecting global auto incentive initiatives.

It was the least restrictive by including one-year-old used cars, the lengthiest - from mid-January until early September - and offered about $3,600 per rebate. That is more than twice what France gave out in its program, the first in the world when it started in December 2008, and the UK, which continues to offer a matching private/public rebate for new cars.

THE BIGGEST HANGOVER
But with Germany's huge increase in sales from the incentives - up by 26% in the first half of the year - comes the prospect of a precipitous fall.

Business and pleasure travel
will have to pick up [for] car
rental companies to update
their fleets

European auto market analysts Roland Berger Strategy Consultants said in an August report entitled End of German clunker scheme - And now? that demand for new vehicles in the largest auto market in Europe will drop by 20% this year, with expectations of a 25% fall in demand in 2010.

The German Association of the Automotive Industry (VDA) predicts that vehicle sales will drop to 2.6m units in 2010 from 3.3m, which Greene says is the country's average. "For 2010, it's going to be a rough hangover," Greene says. "I expect a huge drop-off."

The American Chemistry Council (ACC) estimates that 331lbs (150kg) of plastics go into every US-made vehicle and each vehicle made in the US contains nearly $2,700 worth of chemical products or chemical processing value.

A number of other chemical producers filter their material into cars, trucks and sports utility vehicles. For example, acrylonitrile-butadiene-styrene (ABS) plastic resins, styrene butadiene rubber (SBR) tires and isopropanol (IPA), methyl ethyl ketone (MEK) and methyl isobutyl ketone (MIBK) coatings are all used in autos.

Roland Berger said in a September report that the global automotive supply industry continues to slide even while green shoots emerge in the wider economy.

The study showed, after analyzing 500 vehicle suppliers around the world, that 80% of all suppliers will lose money in 2009.

"The average returns of global ­automotive suppliers will plummet to ­historic lows in 2009," Marcus Berret, a partner with Roland Berger said in a e_SDHpstatement about the report. "We expect that following growth of 5.4% and 2.1% in 2007 and 2008, respectively, an unprecedented level of -2% to -2.5% will drag the industry down."

 

Smaller cars such as the Honda Civic contain less plastic

FROM SUV TO CUV
One sour sign for chemical and plastics automotive suppliers in the data from "cash-for-clunkers" and other fuel efficiency-based trade programs is that smaller vehicles made up the list of top sellers. Smaller sedans like Toyota's Corolla and Camry and compact cars such as Honda's Civic and Fit, which contain less plastic, resin and coatings than larger frame vehicles such as sports utility vehicles (SUVs) and trucks, were high on the list of most-sold vehicles during the month of "clunkers."

Even though bantam-sized vehicles are in the spotlight, Jessica Caldwell, analyst at the US automotive consumer website Edmunds.com, shrugs off the idea that "cash-for-clunkers" was a watershed moment that shifted the tastes of US car buyers totally to smaller cars.

"It's going to take a while but it definitely is going to happen," she says. "The current administration has it in their plans. The ground work is being laid but it hasn't happened yet." Dennis Virag, president of Automotive Consulting Group in Michigan, US agrees, saying US manufacturers are not going to bet the farm on micro cars that are more prevalent in Asia and Europe.

"I think the whole outlook for the industry is going to be for smaller, more fuel-efficient vehicles," Virag says. "But they are still going to have the amenities that the American consumer demands."

Paul Taylor, chief economist at the US's National Automotive Dealers Association (NADA) points out that the surge in popularity of compact utility vehicles (CUVs) over SUVs shows that the American car consumer wants to have some size to their automobiles. The CUVs are functionally larger than cars in smaller-size classes but boast better mile-per-gallon ratings than the jumbo-sized vehicles that dominated sales over the past two decades.

"The decade of the SUV was the 1990s and the decade of the CUVs is this decade," Taylor says. "SUVs peaked in the 2000-2002 period. It has been falling back to 2m units. The crossover to utility units from 1999 to 2007 went from under 600,000 units to approaching 3m units."

Sales of CUVs, typically built on a car chassis, overtook SUVs, manufactured on truck bases, in 2005 and Taylor says that trend will continue.

But as nearly every major auto manufacturer introduces some version of CUV into the US market, Taylor says carmakers are bringing a variety of body and size options, such as hatchbacks and wagons into showrooms in an attempt to fit as many tastes as possible in an ultra-competitive landscape.

"They are trying to fill all the niches," he says. "Because everyone is scrambling for market share."

Ryan Hickman is a markets reporter for ICIS pricing based in Houston, Texas, US. Ryan's chemical portfolio includes maleic anhydride (MA), phthalic anhydride, paraxylene (PX) and orthoxylene (OX), while keeping a close eye on the US auto market.


By: Ryan Hickman
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