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BRIC auto sales stall as Brazil and Russia recessions worsen

Consumer demand
By Paul Hodges on 13-Apr-2016

BRIC Apr16Clouds are gathering over the auto industry, as the impact of the post-2008 stimulus programmes fades into history.

It is hard to believe that back in 2013, only 3 years ago, analysts were confidently predicting that Russia would have become the world’s 5th largest market by 2020.  And they were similarly forecasting great things for Brazil, which had just become the world’s 4th largest market.  But as the chart shows, since then:

  • Russia’s sales have fallen 48% versus 2013, to total just 319k in Q1
  • Brazil’s sales have fallen 44% over the same period, to total 465k in Q1
  • Both markets are now smaller than India, although its sales were only up 4% versus 2013 at 700k in Q1

This highlights the slowdown in the former high-flying BRIC countries (Brazil, Russia, India, China), which had been expected to support global economic growth for decades to come.  Consensus thinking had assumed that emerging markets would account for 2/3rds of global auto sales by 2020, compared to less than 1/3rd in 2000.

The problem was the general assumption that (a) growth was inevitable as the BRICs were all becoming middle class by Western standards, and (b) auto penetration would inevitably rise as this “rising middle class” would all want to buy new cars, as Reuters reported in 2013:

The market will grow as a rising middle class becomes first time car owners or upgrades aging models.  There are only 290 cars per 1,000 Russians versus 560 in Western Europe and many of those vehicles are old, while a decade of strong growth driven by Russia’s mineral wealth is slowly empowering a greater chunk of its population.”

Today, of course, it is becoming clear that the outlook is much more complex.  As we note in the new Study, ‘Demand – the New Direction for Profit’, GDP/capita tells a very different story about potential growth levels for the future:

  • Western developed countries mostly have GDP/capita in the range of $40k – $60k
  • Brazil’s GDP/capita is just $8.8k, and Russia $8.5k
  • The other BRICs are even lower, with China at $8.3k and India only $1.7k

For the moment, China’s sales are still motoring along, but the pace of growth has slowed.  Volume is up 25% versus 2013, but was up just 6% in Q1 versus 2015.  And the nature of the market is changing rapidly:

  • Post-2008 sales growth was focused on new car sales, which were affordable due to the property bubble
  • Current sales are being boosted by a 50% tax cut on sales of smaller cars, with engines less than 1.6 litre
  • And used car sales are being boosted by new State Council support to promote the sector
  • As I noted last year, it is currently just half the size of the new car market, but is now poised for rapid growth

The issue was that China had relatively few cars on the road in 2008, and so the stimulus programme artificially boosted new car sales.  But now, all those new cars are entering the used car market, giving buyers a choice – for the first time – between used and new.  This must cannibalise future new car sales growth.

Auto manufacturers are therefore learning their lesson the hard way.  Having rushed to build new capacity, they are now either closing it – as in Russia – or repositioning it to focus on export markets as in Brazil, China and India:

  • Brazil’s exports were up 24% in Q1, China is targeting 3 million auto exports by 2020
  • Ford in India is already exporting nearly half of its new EcoSport production

In turn, this is exporting the BRICs problems into other markets.  Volvo began exporting from China last year, and GM is starting to export this year, with more manufacturers planning to follow.  Clearly, difficult times lie ahead for the industry and its suppliers, as the over-supply created during the stimulus years now battles to find a home.