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The Global Automotive Outlook 2017 has predicted that the global automotive industry is set to reach 114 million in worldwide sales annually by 2024. While immediate figures may encourage industry players however, new trends including the electrification of the automotive industry could leave them out in the cold should they fail to adapt, with the market share taken by Electronic Vehicles (EVs) having grown by 168% over the past two years. The UK auto market particularly has seen a 2.2% drop in automotive sales when the first seven months of 2016 and 2017 are compared, as consumers draw back from spending on combustion engine vehicles due to the government’s proposed 2040 ban of the sale of such vehicles.
According to analysis conducted by AlixPartners, the next 7 years in the automotive industry will be characterised by global growth of 2.8 % per annum, ultimately reaching the figure of 114 million units in 2024. Regionally, North America and Europe are predicted to have the lowest rates of growth at 0.1% and 1.7% respectively, while Asia and South America are predicted to grow at significantly higher rates. The Greater China region, which consists of China, Hong Kong and Taiwan, registers the highest rate of predicted growth at 5.2%, followed closely by South Asia at 4.5% and South America at 4.3%. However, the figure for South Asia might be boosted by the fact that the report includes Australia and New Zealand within the same bracket, despite geographically falling within the broader region of Oceania.
The low average growth figures for the North American region have in no small part been caused by the negative rate of growth of -0.1% predicted for the USA. The report attributes this to a cyclical peak reached in the US market last year, rather than the political and societal turmoil which the nation has been thrown into since the end of 2016. A cyclical peak, in market terms, refers to point in a market progression when spending and production are at their highest, after which both begin to contract. Meanwhile, the rest of North America’s automotive market is predicted to grow at a steady 1%.
The US auto industry is a major player in the country’s economy, with automakers and their suppliers currently responsible for 3% of America's GDP. No other manufacturing sector generates as many American jobs, suggesting a period of contraction may have dire consequences for the US economy in the long-term. The Donald Trump administration has talked for some time of increasing tariffs to boost the domestic auto market and put consumers off investing in imported vehicles – however the likely effect of tariffs would see the domestic market stung by inflated prices for parts and maintenance, costing manufacturers between $21.6 billion and $23.8 billion, which in turn would increase prices for consumers who would invest less, meaning companies would see lower profit margins which they would likely aim to recuperate by cutting jobs and wages, according to a Roland Berger report.
The Netherlands, Germany and the UK are three of five countries best prepared for industrial change in the auto sector, according to a recent analysis of the global industry. However, in Europe as a whole, the Western market is expected to stagnate at -0.1%. AlixPartners predict this is to be countered by a high rate of growth in Eastern European nations (7.3%) though, while Southern and Central Europe are set to achieve relatively average rates of growth at 1.9% and 2.9% respectively.
One of the primary reasons for the sizeable growth rate in the East is the recovery of the Russian market from the Ukraine crisis, which has prompted a boost in public aid for the automotive industry. Political considerations have meanwhile most likely caused stagnation in Western Europe, with the uncertainty and mistrust resulting from Brexit hindering trade in the UK especially, as well as across the rest of the EU.
Meanwhile in South America, the region is forecast to witness an above par growth rate, despite continued constitutional crises in a number of players including Venezuela, aided by the stabilisation of the Brazilian economy. Markets have been keen to capitalise on the deposing of President Dilma Rousseff following allegations of corruption. Although the incumbent President Michel Temer faces domestic criticism, with his administration labelled a “coup government” by opposition parties, having been in office for a year without winning an election, corporations have treated his term in office as a major opportunity, following his pledge for a sustained period of major privatisation. Temer himself currently faces charges of corruption after a court decision at the end of June 2017.
The region may also see sustained growth thanks to the growing economic strength of growing economies in the region. In a PwC whitepaper from earlier this year, it was suggested G7 nations could be surpassed by rapidly expanding economies such as Colombia by 2030. Colombia’s broader economy has enjoyed positive growth over the past seven years, although it has tapered off to around 2.5% in 2016, on the back of macroeconomic conditions. Its 10 largest neighbours, however, have seen an average contraction of -1.3% in 2016.
Electrification
Despite the encouraging predictions for sales in the industry, there is also the potential for major disruption due to the advance of environmental crises and corporate and governmental responses to them. Alongside the growth trends in the conventional automotive industry, the AlixPartners analysis noted a major trend in the relatively new Electric Vehicle (EV) industry, highlighting that the EV share of the overall market has exponentially grown by 168 % over the past two years. At the current rate, the share of EV vehicles in the overall automotive sales of Europe is expected to surpass 40% by 2030.
Combined with the hybrid vehicle category, this figure rises to an imposing 65%. The gravitation towards hybrid and EVs has gained traction amongst manufacturers, with Volvo announcing a complete shift to hybrid/EVs in the next two years. Both the French and British governments have made a decision to ban Internal Combustion Engines (conventional vehicles) entirely by 2040 as Europe works to meet various climate goals while improving air quality, demonstrating that there is political backing for the transition as well, even though the move will majorly impact the profitability of petrol, diesel and the domestic auto market in the short-term.
While from an environmental perspective, the new measures seem common sense, should manufacturers fail to treat them seriously, major players in the industry could be left out in the cold, while sales could subsequently suffer. According to recent figures from the Society of Motor Manufacturers, the UK's new car market is already shrinking due to this, with new car registrations down 9.3% in the month of July 2017. The month saw 161,997 new cars registered in the UK, down from 178,523 compared to July 2016. The total registrations for the year meanwhile reached 1,563,808, representing a 2.2% fall from the first seven months of last year. Diesel sales have meanwhile taken the biggest fall of 20.1% for the month of July in which the government’s proposed ban of petrol and diesel vehicle sales, while falling 11% for the year in total.
Commenting on the findings of the report, Andrew Bergbaum, a Managing Director in the automotive arm of AlixPartners, said, “The end of the internal combustion engine is now a reality, with Volvo’s announcement that all new models would be electric or hybrid within two years and the French government’s decision to ban ICEs from 2040. Both these developments come on the back of a very strong year for OEMs. However, whilst a number have been able to make considerable efficiency savings which have helped fund short-term Capex and R&D, this is not a sustainable position over the longer-term without fundamental changes to production and the amount of investment required is going to continue to increase. Efficiency savings are only putting off the inevitable consolidation that will need to happen.”
