Global auto sales reach ‘top of the mountain’ moment

Consumer demand

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All autos Oct14The best view is always from the top of the mountain.  And that seems where we are today in global auto markets.  They are on track for another record year.  And even better news is that sales have risen in each of the 5 major markets for the first time since 2007.

The bad news is that much of these sales increases were due to unsustainable lending and stimulus policies.  2014 will therefore probably mark the peak of the post-2008 ‘stimulus economy’ as far as auto sales are concerned.

As the chart shows, sales growth has accelerated to 7% so far this year (red square) versus the 3% seen in 2013 (green line):

China is obviously the biggest threat to continued sales growth.  Its boom has been due to the lending and property bubble, which is now being wound down.  September inventories rose to 45 days versus 36 days in 2013, with imported car inventory at 60 days.  Growth in total sales of passenger/commercial vehicles was just 2.5% versus 20% last September – and yet September is normally a major sales month ahead of October’s National Day holiday.  Thus China’s automotive association expects 2014 growth to halve to 7% overall this year, with its head warning this week,  “The economy is slowing. The auto industry would reflect that but typically lags the economic cycle by a bit.”

USA sales are up 5% so far this year versus 2013.  But as I discussed earlier this month, this is due to 2 unstable elements – the rise in ‘deep sub-prime loans’ and the widespread use of 6 – 7 year leasing deals.  Neither seem a sustainable way to run a major industry

European sales have grown this year for the first time since 2009, but again the outlook is not promising.  Heavy discounting of 20% has become the new normal in Germany and France.  Spanish sales were boosted by government incentives, whilst UK sales remain supported by $16bn ($27bn) of  insurance mis-selling payments since 2011

Japanese sales are up 7% so far this year, but this is due to the sales spurt in Q1, before April’s VAT increase.  Sales were up 21% in Q1 – but since Q2/Q3 sales have fallen 1% versus 2013.  And with premier Abe’s economic policies failing to produce the promised results, the outlook for auto sales does not seem promising

India, however, does represent a genuine bright spot.  Its sales are up a modest 3% versus 2013, but there are signs that premier Modi’s straight-talking approach, focused on basic needs such as sanitation, is boosting confidence in the future.  The real need now is for a clear plan to be published, explaining how the major targets will be met.  If this plan seems sensible, then it is likely Indian sales have a good future ahead of them – although this will be for low-cost cars, due to average income still being only around $1500/person

Outside the Top 5, the risks are clearly rising.  The economies in Brazil and Russia are weakening – with Brazil in recession in H1, and Russian growth ended by Ukrainian sanctions and the oil price fall.  Thus it seems highly likely that we are close to the ‘top of the mountain moment’, where the only way ahead is downwards.  As I noted at the end of August:

As companies move into Budget season, the clear conclusion is that manufacturers and suppliers need to be far more flexible in their approach.  As the IMF has warned, they also need to accept the lesson of the past decade that economic forecasts are unlikely to prove a good guide to the future.”

 

 

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