Even in China, where 2005 auto sales could see a 15% increase, S&P's global survey finds little worth celebratiing
How has the global automobile industry held up in recent months -- and what may the future hold? Here is a region-by-region review from Standard & Poor's Ratings Services. (View ratings information and detailed commentary on specific auto makers.)
U.S.: Industry demand has been fairly stable to date this year, with light-vehicle unit sales during January and February down 3.6% from the same period a year earlier. One factor weighing on consumption recently has been a slight abatement of price competition, as some auto makers have sought to limit incentives. This could prove temporary, however, given high dealer stocks.
Still, notwithstanding relatively robust growth of the general economy, there's little pent-up demand in the auto sector, owing to the extent of past discounting. Standard & Poor's Ratings Services expects industry sales for full-year 2005 will approximate the level of 2004 (16.9 million units).
One particular concern has been the pronounced weakness in industry sales of midsize and large sport utility vehicles -- product segments that have accounted for a highly disproportionate share of the earnings of General Motors (GM) and Ford (F). High gasoline prices, a shift in consumer tastes, growth of so-called crossover SUVs, and the timing of the product renewal cycle for certain major products (including those of GM and Ford) are evidently contributing to this phenomenon.
U.S. industry heavy truck (above 16 tons) sales rose more than 40% during 2004, vs. 2003. We expect full-year 2005 unit sales to be up at least 20%, totaling a robust 240,000 units. Sales growth is being boosted by improving U.S. economic conditions and substantial replacement demand. We assume a cyclical downturn will occur in late 2006 or early 2007.
Despite the cyclical upturn, higher fuel and raw material prices and component shortages remain concerns. High steel prices, in particular, have been affecting truck original equipment manufacturer (OEM) profit margins. Component shortages have delayed delivery of some truck orders. Moreover, diesel-fuel prices remain high, putting pressure on customers' profit margins.
Sales growth in 2005 may be lower than expected fuel costs increase further or component shortages become more prevalent.
Europe: Strong December sales supported European passenger car registrations, which increased 2.1% in 2004, vs. 2003. The growth has increasingly been supported by the EFTA countries, whereas sales in the new EU member countries, which showed strong growth during the initial months after EU accession, declined 4.6% in full-year 2004. For 2005, we expect passenger-car registrations in Europe to remain flat or, at best, recover by about 1%.
Net pricing in Europe has been negative since 2001, and discounting has intensified broadly. This trend is expected to continue in 2005, particularly in the midsize segments. After renewing product offerings with numerous new-model launches, from Volkswagen AG's Golf V to GM's Astra and BMW AG's 1 series, Europe's auto makers will continue the theme in 2005, notably with Peugeot S.A.'s 407 and Volkswagen's Passat. Nevertheless, the overall shrinkage of this market segment is expected to continue.
Looking at the major European car markets individually, the prolonged cyclical downturn in Germany continues. Registration numbers declined 3.0% in the first two months of 2005, vs. the previous year's first two months. We expect the German market to remain flat in 2005. Even though the average age of vehicles in Germany is reaching a postwar high of about eight years, consumer spending is extremely low, signaling little consumer confidence.
DOLLAR DAMAGE. Auto sales in France showed growth of 4.8% in the first two months of 2005. Italy showed a decline of 4.3%, while the British market was down by a significant 10.5% year-to-date. For the full year 2005, we expect growth of the Spanish market (up 2.3% year-to-date) to continue, while stable or even slightly declining markets are expected in Britain, France, and Italy.
New car registrations in the new EU member countries remain disappointing, with a decline of 15.2% in the first two months of 2005. In the medium term, however, we expect the EU accession countries' car markets to return to a growth position.
The depreciation of the dollar against the euro will continue to negatively affect manufacturers whose endmarket sales are in different locations from their production or the origin of parts or raw materials, or where there is a currency mismatch between revenues and debt service.
Volkswagen, despite attempts to extend its financial hedging, will remain exposed to the currency situation until at least this fall, when the new Bora will be exported from Mexico. Volkswagen also plans to manufacture the Variant in Mexico, which will bring capacity utilization of the Puebla plant to about 90% in 2006, from 50% in the third quarter of 2004. BMW and Mercedes Car Group will also be more exposed to further depreciation of the dollar in 2005 because their financial hedges, which largely covered their exposure in 2004, will be reduced.
CYCLICAL TURN. Western European light-commercial registrations showed clear signs of recovery in 2004, with the numbers increasing 9.0%, reflecting overall improved business-investment confidence. We believe this positive momentum will continue through 2005 and into 2006.
Western European registrations for heavy trucks tend to display greater cyclicality. The market bottomed out with a 10% full-year drop in 2002, then grew only 1%, to 215,000 units, in 2003. Further improvement occurred in 2004, when demand increased by 8.1%.
Except for Britain, which showed a decline of 0.9%, all the main Western European markets contributed to the growth: Germany (up 16.7%), Spain (up 7.6%), Italy (up 3.3%), and France (up 4.5%). For 2005, we factor a further recovery in European registrations of heavy-duty trucks into our ratings, although growth is expected to be slower than in 2004.
China: After impressive annual growth of between 60% and 70% in recent years, the Chinese passenger-car market slowed to a mere 15.6% in 2004. This year started slow, too, with February passenger-car sales down 24% year-on-year, although sales were hampered by the timing of the Chinese New Year, which fell in February in 2005, rather than January, as it did in 2004. Overall, our expectation for 2005 and 2006 sales growth is comparable to 2004 sales -- about 10% to 15% per year.
As a result of the increasing competitive pressures in China -- led by the two largest market players, Volkswagen and GM -- pricing pressures have intensified, leading to weakened profitability, which is fast coming down to the world-average level. We expect this trend to continue or even accelerate when pending extensive production capacity expansion projects are completed.
Japan: During the first two months of 2005, overall vehicle sales in Japan remained soft, at 920,000 units, off 1.9% from the same period in 2004. We expect industry demand to be flat for 2005 compared with 2004, when sale totaled 5.85 million units. After showing some improvement, economic indicators in Japan have been mixed in recent months. Despite a slight improvement in unemployment, meaningful recovery in consumer confidence and vehicle demand has yet to materialize.
We expect auto makers' profitability in the Japanese market, excluding earnings from exports, to remain under pressure from intensifying competition amid stagnant demand and a proliferation of new models. The Japanese vehicle market has become increasingly focused on new-model introductions, and these tend to have increasingly shorter showroom lives.
Year-to-date sales of standard-size passenger cars have decreased 8%, while demand for small passenger cars has increased 5% from the same period a year ago, resulting in a weaker market mix with a higher proportion of low-margin small cars. Moreover, higher steel prices stemming from a tight supply/demand balance and steelmakers' stronger pricing power are pressuring auto makers' profitability -- it's difficult to pass through material price hikes to consumers when vehicle demand is stagnant.
In 2004, Japanese truck sales declined, as replacement demand stemming from stricter emissions standards for standard-size trucks (more than 4 tons) peaked in the Tokyo metropolitan area. In 2005, Japanese truck demand is expected to recover to some extent from the 2004 level, with replacement demand expected to pick up later in 2005 as the grace period for meeting stricter emissions regulations implemented by the Japanese government in 2002 comes to an end.
The recalls at Mitsubishi Fuso Truck & Bus Corp. continue to have lingering adverse effects on that company's unit sales -- a decrease of 48% in the first two months of 2005 from the same period in 2004.
Korea: The first two months of 2005 showed continued weak domestic demand. Shaky consumer sentiment led to a 6.7% decline, to 153,101 units, in domestic sales from the same period last year. We expect weak domestic demand to persist in the Korean market through at least mid-2005. Continued weak consumer sentiment will drag down domestic car demand, and intensifying competition will likely lead to higher incentives offered by carmakers -- to the detriment of profitability.
Offsetting the decline in domestic demand, and despite the strengthening of the Korean won against the U.S. dollar, export demand remains strong, increasing 26.4% during the first two months of 2005 from the same period last year. The persistently strong won against the dollar is likely to affect the price competitiveness of Korean cars in the U.S. However, the strong euro is expected to offset some of the decline seen in U.S. sales. From Standard & Poor's Ratings Services