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AUTOMOTIVE

Global registrations to continue their recovery from historical lows

S

SENSITIVE RISK for entreprises

  • Fragmentation

  • Internationalization

  • Capital Intensity

  • Profitability

  • Fragmentation

  • Internationalization

  • Capital Intensity

  • Profitability

Updated in June 2023.
  • Consumer interest for electric vehicles and new mobility services
  • Government support for electric-vehicle transition
  • Global fleet ageing, indicative of future replacement purchases
  • Still low car penetration in emerging markets
  • Overcapacities eliminated in past years
  • Vulnerable supply chains (car electronics in particular)
  • Heavy investment in EVs will take time to pay off
  • Rise of Chinese carmakers a competitive game changer
  • Progressive end of internal combustion engine technologies a major challenge for suppliers
  • Competition from tech giants and start-ups in the field of connected and autonomous driving technologies
  • Rising financing costs

What to watch ? 

  • The duration (and magnitude) of chip shortages
  • The potential sporadic/global resurgence of the virus
  • Any extension of the (already noticeable) rise in input costs, including energy prices and transportation costs
  • All factors at play in consumer confidence and their willingness/capacity to purchase expensive durable goods such as cars (wages, savings, unemployment social tensions)
  • Rollout momentum of EVs and changes in regulatory environment, notably public subsidies, CO2 emissions rules and bans on internal combustion engines (ICE)
  • Innovation in autonomous driving and new mobility services, boosting R&D spending, capex, M&A and partnerships
  • Price competition from second-hand market
  • Resurgence of tariff and non-tariff barriers
  • Any event leading to another major supply chain issues (for instance related to batteries)
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The global car industry is witnessing a positive shift in sentiment as new vehicle registrations have been gaining momentum across all major markets since the second half of 2022. With order books staying at healthy levels but new orders going down, carmakers are carefully calibrating production rates to prevent oversupply. The key factor contributing to this resurgence has been the easing of supply-chain constraints, particularly in the semiconductor sector. As the availability of these now ubiquitous components improves, car manufacturers are finding themselves in a better position to increase production and meet the market demand that has been building up since early 2021. This combination of strong demand and improving supply has been positive for the industry’s profitability, which was also been boosted by higher average selling prices and a greater focus on higher margin models. Raw material and transport costs have also significantly eased from their 2022 highs.

For 2023, we expect the global market to reach around  84mn units (+7%). While the gap from 2019 levels remains wide, we do not expect it to be bridged anytime soon:

  • On the demand side, because the cost-of-living crisis, higher interest rates and the general increase in new car prices are excluding a fraction of potential customers out of the market.
  • On the supply side, because carmakers are not yet engaging in a race for volumes.

The situation among suppliers in the automotive sector presents a more varied picture, particularly for those whose business models are heavily dependent on volumes and who have limited ability to exert pricing power. Suppliers that are heavily invested in internal combustion engine (ICE) technologies are also finding themselves particularly vulnerable as the automotive industry continues to shift towards electric vehicles (EVs).

The main risk factor, in our view, lies in growing competition from Chinese carmakers both in China and international markets. Because Europe is more open to international competition and European firms are the most present in China, we believe European firms are the most at risk of losing market shares in the years to come.

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Automotive manufacturers: On top of current short-term issues related to global chip shortages and supply-chain bottlenecks, including in shipping, manufacturers face high pressure from global competition: Geographical diversification, innovative model launches and operating-cost adjustments remain a key strategy to protect profitability and fund the R&D spending, capex, M&A and partnerships that are needed to address the transformation of the industry, from the electrification and new mobility services to autonomous driving.

Automotive suppliers: Suppliers used to (most often) post higher revenue growth and profitability compared to manufacturers prior to the Covid-19 outbreak, but they proved to be more impacted by the pandemic in terms of losses in turnover and profitability, and to benefit less since then. On average, tier-1 suppliers have a stronger financial situation and larger size to master the transformation from combustion engine to electric drive, but we expect a prolonged pressure from car manufacturers. The market’s transition is to increase (tech) content per car and opportunities but to reduce drastically the need for some components (i.e. diesel), keeping non-EV players as well as the smaller suppliers most at risk.

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Allianz Trade Economic Research
research@allianz-trade.com
Aurélien Duthoit
Senior Sector Advisor
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