Its hard to be optimistic about the outlook for the global auto market. The chart above of the Top 7 markets, which account for around 2/3rds of global sales, highlights the growing uncertainty. It shows Q1 sales in 2015 (blue column) versus 2014 (blue). Overall, these were up just 1.9% at 15.8m. And although the 3 largest markets showed reasonable growth, there are growing questions about the underlying trends.
China’s market appears to have done well, up 7.6% at 5.2m. But Chinese data is constructed on a different basis to the rest of the world, as “sales” actually represent factory deliveries rather than retail purchases. And one sign of trouble is that a price war has broken out, with China Daily warning:
“China’s auto industry’s profits have been on a downward trend this year, plagued by a slowing market and plunging car prices”.
Analysts Macquarie add that “there has been almost no sales growth in recent months in certain segments”. And used car sales growth has already overtaken that for new cars, whilst China’s auto association is warning that:
The overall market downturn would push the auto industry to further polarize. Carmakers which have competitive products will continue to have decent profits, but those without competitive products will have meager profits and even losses,”
The US market is also giving off conflicting signals. Sales were up 5.6% at 3.9m, but March sales were flat at 1.5m. This seems to confirm my fears back in January that the end of the shale gas bubble would also start to reverse the recent recovery in auto sales (as well as housing starts).
4 out of 5 cars are now bought with credit or leased, with an average term of 5 1/2 years. This tactic essentially buys sales from the future, as a car sold today won’t be replaced before 2020. In addition, an increasing proportion of sales are now to subprime buyers, whose default rates are alarmingly high.
The European market also presents some puzzles. Sales were up 8.7% at 3.5m, but analysts EY note that purchases by private individuals are at the lowest levels since 1990. They warn there is:
“Significant concern over self-registrations, where dealers sell the cars to themselves to help shift vehicles and meet incentive targets. They continue to distort the true level of demand.”
In addition, of course, the European market also continues to see major discounting, with levels of 20% easily available in many countries.
The position in the other 4 BRIJ markets is clearly weak. Sales were down 15.5% at 3.1m, as I discussed last week, with the only positive signs in India.
Overall, therefore, Q1 data tends to support my view back in October that global auto sales have reached their ‘top of the mountain‘ moment. Suppliers to the industry, and investors, face a difficult outlook as these trends continue to develop.