Car industry under serious pressure worldwide
Worldwide figures are not so good for the car industry and this time good news for one continent can’t compensate bad news for another. The industry tries to fight back by cutting costs and increasing volumes.
The month of September was very difficult, the worldwide market receded by 8,5%. In the States -5,2% was recorded, -10,3% in China and a baffling -20,7% in Europe, with different reasons: the thread of a commercial war, Brexit, sanctions against Iran, rise of interest rates, exchange rates getting worse, the Chinese economy losing pace…
The sudden slowing down of the economy in China was a bit of a surprise. In the three months of the third quarter sales ware receding, partly due to the looming trade war with the US. Chinese customers are becoming more careful, the economy follows. “The slower Chinese market is a real concern”, says François Jaumain, car sector specialist at PwC. “Especially because this market was the milk cow for many manufacturers.”
For 2018, PwC expects a growth of the Chinese market by only 1,3%but is more optimistic for next year (+6,3%), but the uncertainty doesn’t come from lower volumes only, there is also a problem with shrinking margins. “This year China will produce 27,2 million vehicles while there is a production capacity for 44,8 million. With a production efficiency of only 60% we fear that some manufacturers might lose money.”
WLTP temporarily kills European market
At the moment the EU market for cars this year is still up 2,5%, but the figures for September are worrying: -23,5%. The reason is obvious, the new WLTP emission regulations are perturbing a lot of manufacturers. Some lose a bit, some much more. Volkswagen is suffering most: sales went up 41% in August (trying to sell as much non-WLTP homologated cars as possible, and sales plumped by 48% in September, with a number of models even not available anymore.
Apparently the VW Group has underestimated the whole WLTP transfer, Renault and FCA too, others like the PSA Group and BMW but also Toyota were better prepared. At the moment it is not clear yet if the manufacturers first mentioned will suffer more in the long run. Figures for the last quarter will be the indication, but it is expected that the WLTP transition will still have an influence far into the year 2019 for some.
Already at the Paris Motor Show, BMW warned about the financial results for the third quarter and this has been confirmed: with a benefit of 1,4 billion euro BMW is receding 23,9% compared to the third quarter in 2017 while turnover grew with 4,7% to 24,7 billion euro.
BMW sees its operational margin shrink to 7%, coming from 8 to 10% earlier and foresees a light regress in annual sales for 2018 while earlier this year they still counted on an increase. “We’ve been confronted with a tougher competition than expected”, says CEO Harald Krüger, “a lot of vehicles from the competition without WLTP homologation have been sold before the 1st of September, so we had to slow down production.”
“We think this WLTP effect will still influence the next months, even into 2019”, says Nicolas Peter, CFO at BMW, “while looming international trade conflicts make the customer even more uncertain.” The German manufacturer has also put aside 679 million euro to cover the costs of a huge 1,6 million cars recall due to cooling problems in the EGR (exhaust gas recirculation) system.
Nevertheless, BMW has augmented its future investments with 400 million euro, representing 7% of total turnover in the 3rd quarter. “We are still deploying our planned investments in future technologies”, declares Harald Krüger, “even when the situation is very volatile at the moment. We are also preparing ourselves for a hard Brexit”, he added.
The expectations in the longer term are that the car sector will resist and that the worldwide sales are still going to grow. The problem is that profit margins are under pressure, surely in China but also in Europe. It is also expected that growing sales of electric vehicles will influence margins negatively.
On the other hand, investments in technology and innovation are soaring: between 2006 and 2016 investments in R&D, production capacity and acquisitions have boomed from 137 billion euro to 195 billion euro, according to PwC.
To counter both problems, manufacturers see two remedies: to work on those margins by lowering costs and adding value to the cars, and secondly by increasing volumes. That can be selling more cars or acquiring other manufacturers (joint venture, fusion, other forms of collaboration…)
Lately we’ve seen the creation of Fiat Chrysler Automotive, the acquisition of Opel by PSA, the joining of the Alliance Renault/Nissan by Mitsubishi, the total acquisition of Daihatsu by Toyota, etc. “The car industry is becoming more and more capitalist”, says François Jaumain from PwC, “the critical mass seems to become a yearly production of 5 million cars if you’re a generalist. This movement of concentration is likely to continue.”