2019 – Another Turbulent Year Ahead for Automakers?

Just two months into the year and 2019 is already turning worrisome for global automakers. China continues to slow down, the United States is threatening to impose additional import tariffs and the clock is ticking towards a hard, and painful Brexit.  These are definite indicators that this year would be yet another tough one for the global auto industry.

Let’s begin with China. The world’s second-largest economy continues to feel the moderating effects of Chinese authorities trying to rein in the country’s rising debt, while ongoing trade tensions with the United States and withdrawal of subsidies in the auto sector are just making matters worse.  Although the government had announced stimulus measures to jump-start automotive demand at the beginning of the year, they’ve fallen short of expectations and lacked detail.

In January, wholesale sales of passenger cars fell by an alarming 17% year-on-year, according to China’s Association of Automobile Manufacturers (CAAM). The fall in January 2019 is the biggest since the market began to slow down in July last year and an eighth consecutive month of deteriorating retail sales.

It is a gloomy outlook for international brands, especially General Motors (GM) and Volkswagen, who have a high dependency on China for their global sales volumes. The troubles in China are compounded amid waning demand for cars in the United States and Europe. In China alone, sales of Volkswagen-branded vehicles fell nearly 3% in January.

However, there is an emergent bright spot as China’s sales of new energy vehicles continue to beat the trend. In January, 95,700 new energy vehicles were sold, increasing 140% year-on-year. Which is why carmakers are continuing to place their bets on electric vehicles amid China’s stringent environmental policies under which manufacturers face severe penalties unless they meet quotas for zero/low emission cars. GM plans to reverse its downturn this year by launching more than 20 new models in China and shifting its focus to electric vehicles.

At the end of a disappointing last year, CAAM gave a conservative forecast of flat sales in 2019. The association predicts sales of 28.1 million units of automobiles in 2019. In the forecast, passenger vehicle sales comprised 23.7 million units, while commercial vehicles are predicted to have a nominal increase of around 1%, at 4.4 million units. However, with these strong headwinds, we can expect significant revisions to the outlook in the months ahead.

Meanwhile, in the United States, developments of a man-made nature are looming large. President Donald Trump is threatening additional tariffs on imported automobiles and auto parts. Quite perplexingly, he describes them as a “national security threat”. Such an action by the United States will surely hit the major global brands operating in the country.

A confidential report by Commerce Secretary Wilbur Ross has been handed over to President Trump this week, investigating whether imports of cars and car parts actually do threaten national security. With 90 days to act on this report, President Trump could decide to impose tariffs of up to 25% on imports of vehicles. This would be highly damaging to companies around the world, especially those based in Europe. Germany, the home of major automakers BMW, Daimler/Mercedes-Benz, and Volkswagen, would be the worst hit. We estimate that German automotive exports to the United States could fall to almost half of the current levels within a decade if President Trump imposes the tariffs.

However, any steps taken to increase tariffs on foreign automobiles and auto parts will also have a negative impact on the American automobile industry. American manufacturers rely heavily on European and Chinese components. In the worst-case scenario, tariffs would result in price increases for American consumers, triggering lower sales, and potentially thousands of job losses in the American automobile industry.

The situation is quite grim in the United Kingdom as well with Brexit knocking at the door. With political debates in London showing no signs of abating, the UK’s withdrawal from the European Union under a no-deal outcome is imminent.  With time running out, automobile manufacturers and suppliers are now warning of the disastrous consequences of a no-deal Brexit. In the worst-case scenario, we can expect heavy tariffs and border checks, which will raise costs and delay deliveries.

In a no-deal scenario, import tariffs on goods from the European Union into the UK will need to be urgently firmed up based on WTO rules.  With 85% of cars sold in Britain being imported, the high interdependency of the UK automobile industry with Europe will be severely disrupted. Automobile manufacturers are being compelled to take severe contingency countermeasures, with most scrambling for warehouse space to stockpile parts. Many are also planning production shutdowns and job-cuts post-Brexit, while some are deferring, if not cutting back entirely, any further investments in the UK.

In a drastic and definitive fallout, Nissan has decided to move assembly of X-Trail crossover vehicle to its global production hub on the island of Kyushu in southern Japan, reversing a 2016 decision to manufacture the vehicle its Sunderland plant. Honda too has stated this week that it will close its Swindon factory by 2021. Honda’s decision appears to be associated with the uncertainties of a no-deal Brexit, as the plant was planned, and designed to serve the European car market.

The business case for the UK-manufactured and assembled cars being shipped to the European Union has been dependent on tariff-free market access. No wonder that automakers’ current frustration and anxiety is palpable as Brexit approaches.

Unfortunately, if these last few weeks are anything to go by, automakers, suppliers, and policymakers need to brace themselves for continued disruptions in 2019. To emerge unscathed out of the disruptions, all stakeholders will have to take a decisive stance and some tough choices.  In North America, Europe, and Asia, signs of a major downturn are growing. Driven by the distress of the automobile industry, the year 2019 could well be a turning point requiring an urgent and unprecedented course of action by stakeholders and governments around the world.

Vinay, Global Consulting Director with Counterpoint Research covering the automotive industry, has over 25 years of operational experience at senior leadership levels in India, Asia Pacific, and the Middle East. Associated with Ford Motor Company for over 18 years, he has held progressive international marketing, sales and service responsibilities in Ford India, Philippines and at Asia Pacific, planning, developing and launching several new products in these emerging markets. Based in Gurgaon, India, Vinay is focused on looking into analyzing industry data, identifying trends, drawing out insights and reporting stories on the continually evolving global automotive landscape. A marketing expert with technical and finance experience, he has a mechanical engineering degree from the Indian Institute of Technology, Delhi (IIT Delhi) and an MBA from Tulane University, New Orleans, USA.

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