- Sales improvement in the sector globally
- Period of unprecedented innovation in the sector
- Car manufacturers are among the largest investors in R&D worldwide
- Highly impacted by the COVID-19 crisis
- Semiconductors shortage, a key component in the automotive industry
- Increasingly restrictive anti-pollution standards requiring heavy investments, particularly in anticipation of future European and American announcements
- High uncertainties on the global automotive supply chain notably due to the knock-on effects of the trade war
- Rising prices for car parts and equipment are affecting margins
The recovery has been hampered by a global semiconductor shortage since the end of 2020, forcing car manufacturers to stop production lines. Despite this net profit margin for the entire car industry (carmakers and their suppliers) stood at 6% at end Q3 2021. The rebound in profits is the consequence of carmakers opting to sell pricey vehicles to customers eager to buy a new one. Carmakers are privileging vehicles sold with good margins over mass market ones, enabling them to push prices higher. Furthermore, financial arms are able to generate more money as residual values are increasing.
IHS Automotive expects an 11% rebound in global vehicle production in 2022, after a flat growth in 2021. The semiconductors shortage is expected to continue throughout 2022, as demand will outpace supply. Moreover, additional capacity will take time before being able to produce, as demand largely outpaces supply, while building greenfield projects need several quarters.
Coface anticipates a 4.1% global growth rate for 2022, after 5.6% in 2021. The threat of new restrictions weighs on the world economy and on the automotive industry alike. Furthermore, the sector is still undergoing a major transformation with the development of electric vehicles and increasingly restrictive regulations. The automotive industry is continuing to reconfigure itself with the rise of e-mobility and the emergence of new players in the electric vehicle and driverless car segments. Traditional carmakers and parts makers are pressured, and rush to forge new partnerships to face these new challenges.
Note for the reader: The “e-mobility” segment of the automotive sector includes fully electric vehicles, electric hybrids, and hydrogen vehicles.
GLOBAL AUTOMOTIVE SECTOR NET DEBT AND NET MARGIN EVOLUTION
Sector Economic Insights
The semiconductor shortage is hitting the automotive sector harshly
The recovery of the North American and Chinese economies, thanks to a massive U.S. stimulus package and an accommodative monetary policy in China, which boosted the manufacturing sector, have allowed a rebound in demand for cars. With longer and lingering containment measures, the recovery of the European sector came later.
Just as manufacturers seemed ready to meet this growing demand, a shortage of semiconductors, an essential part in vehicle manufacturing nowadays (but also in many other industries), is making the recovery of the automotive industry more difficult. As the shortage is still ongoing, the induced loss of production will not be recovered before 2023 or 2024. This imbalance between supply and demand, and the rise in commodity prices, has led to an increase in car prices.
In Europe, the sector is recovering, but at a slower pace. Registrations posted a tiny 1% YoY growth rate over the first ten months of 2021, while they remain 26% lower than in 2019, over the same historical range. Intentions to buy a new vehicle in Europe is constantly increasing since the end of Q2 2020, but the shortage of key components and increasing delivery times are really hurting the sector, notably the supply segment.
In the United States, sales of light vehicles grew by 9% YoY during the first ten months of 2021. However, as it is the case in Europe, 2021 levels are inferior by 9% to 2019 levels. In China, sales of automobiles were up by 6% YoY over the first ten months of 2021, while being 1% higher than 2019 levels.
Moreover, the sector is undergoing a major transformation. Indeed, the institutional environment is pushing manufacturers and equipment suppliers to develop electric engines. The year 2021 marks a tightening of the regulations governing the CO2 emissions of new passenger cars. For instance, the European Commission has proposed a ban on the sale of new petrol and diesel cars from 2035 onwards, with the aim of achieving completely decarbonised transport by 2050. As a result, the hybrid and electric segments are the most likely to recover quickly as they benefit from public support, particularly in Europe, China and the US.
The recovery of the sector can be observed in all parts of the world, with increasing sales of electric and second-hand vehicles
The recovery has been stronger in China, where production in 2021 is estimated at 0.9% higher than in 2019 and accounts for 30% of global volumes. The fear of taking public transport due to the pandemic may have had an impact on the willingness of households to buy a car. In order to boost the sector’s activity, public authorities have implemented incentives such as subsidies for the purchase of electric cars until 2022. Europe is also seeing a rebound in production in 2021 and an increase in sales of alternative engine vehicles due to government subsidies and the enforcement of stringent environmental regulations.
From a structural point of view, the automotive sector is undergoing major changes at a global level. These are mainly linked to a transition towards the decline of thermal engines in favour of electric ones. Coface expects this reconfiguration of the sector to continue in the medium and long-term.
The rise of e-mobility is mainly linked to new players such as Tesla, a manufacturer of electric vehicles, joining the world leaders. Faced with this trend, the entire automotive sector is investing heavily in Research & Development and is expanding electric vehicle ranges in order to compete with these new players. For instance, the DS, Lancia and Alfa Romeo brands (all owned by Stellantis) will become 100% electric from 2024, 2026 and 2027 onwards, respectively. However, these radical changes could have an impact on the sector’s turnover and employment. The maintenance costs of an electric car are estimated at half the value of a thermal engine. The engine does not need maintenance and the batteries have a longer lifespan than the 7-10 years of combustion engines. Consequently, the volume of after-sales operations and the number of man-hours should decrease because of the change in engines.
The COVID-19 crisis has contributed to accelerate the reconfiguration of the sector, speeding up the digitalisation of sales. Indeed, e-commerce and the digitalisation of the economy in general have developed strongly during the health crisis, which has led to the emergence of new modes of consumption. A reorganisation of distribution channels is notable in the automotive sector. For example, Tesla has adapted its sales strategy by closing its physical sales outlets in order to focus on online sales, with a dual purpose: to adapt to consumer expectations and to reduce costs to maintain financial stability in the context of the economic crisis linked to COVID-19. Other manufacturers and dealers have followed this digital strategy. Companies are now offering a new customer experience by removing some of the barriers to purchase. This includes creating a quick and easy online shopping experience and eliminating waiting time at the dealership through home delivery. However, most players in the industry do not have the staff, processes or technology to provide a frictionless experience that does not require a visit to the dealership. This situation could be an incentive for traditional manufacturers to establish partnerships, with the objective of lowering costs. This is, for instance, the case of Ford and Volkswagen, who will jointly produce 8 million commercial vehicles.
Automotive sector players must adapt to increasing regulations against pollution and global warming, which are becoming more restrictive
These measures are forcing manufacturers to make heavy investments to comply with standards. In Europe, the new CO2 standard in force since January 2020 aims to limit the quantity of CO2 for new vehicles sold. Non-compliant carmakers will be fined if their fleet of vehicles for sale emits more than a predefined threshold of CO2. By 2025, the European Union also plans to implement Euro 7 - a new standard for emissions of other pollutants, namely nitrogen oxides, carbon monoxide, fine airborne particles and unburnt hydrocarbons - for the approval of cars. Those constraints in the emissions limits have already led manufacturers such as Audi and Volvo to announce that they are halting the development of new combustion engine technologies. Although there is a natural tendency to converge on the adoption of anti-pollution standards in the main automobile markets, the question of the homogeneity of standards between the main markets still has to be monitored, considering the risk of segmentation. In the U.S., President Joe Biden will soon set a new national target for the adoption of electric vehicles, calling for them to account for half of all new car sales by 2030.
VEHICLES’ SALES AND REGISTRATIONS EVOLUTION (BASE 100 = AVE. 2019)
Last update : February 2022