AUTOMOTIVE

We expect the global automotive market to continue its delayed and bumpy recovery despite the take-off of electric vehicle sales (EVs). Indeed, the sector has switched from a global demand crisis in 2020 to a multi-speed recovery with significant supply constraints combining chip shortages, increases in input prices (steel, plastics) as well as bottlenecks in global logistics. This context will intensify the competition, accelerate the adjustments required by the structural challenges and ultimately maintain under pressure the financial metrics of most companies, notably retailers/wholesalers and more importantly suppliers. In contrast, carmakers are better positioned to adjust their production mix to mitigate the pressure on earnings and margins.

The automotive market is on track to post a limited rebound for the full year 2021 despite a noticeable recovery in the first half of the year. In H1 2021, global sales in vehicles increased by +27% ytd to 39 million units (+8.2 million ytd), with a significant catch-up in particular in the top four markets (+26% in China, +29% in the US, +28% in Europe and +12% in Japan). This compares to the weak backdrop in 2020 when global lockdowns led to a massive restriction of mobility and the closure of car dealers, showrooms, auto fairs, registration agencies and factories, pushing automotive markets into unprecedented slumps (-14% ie -12.5 million units in 2020). However, H2 2021 is to record weak performance, with the first available figures for Q3 pointing to a siginificant drop globally (-18% q/q and -19% y/y). We expect 2021 to end with a +4% increase in new vehicle sales globally to 81 million units sold, with all the top markets posting, at best, a limited increase: +3% in China (to 26 million units), +7% in the US (15.9 million) and +2% in Europe (14 millions), though some domestic markets will be on the downside such as Germany (-4%), Belgium (-6%) and the Netherlands (-4%).

Two factors are at play: Firstly, tighter Covid-19 restrictions in countries combining a resurgence of the virus and a 'zero-tolerance' approach, which dampen both demand and supply, notably in key emerging markets of Asia such as China. Secondly, and more importantly, the intensification of semiconductor shortages, which have forced carmakers to slash vehicle production in all countries despite the solid consumer demand evidenced by both order books and inventories. In most countries, the former have bounced back to high and above pre-pandemic levels, notably for EVs, and the latter have dropped to (historical) lows.

Fortunately, this global missmatch between supply and demand is giving back some pricing power to car manufacturers, giving them the opportunity to (more or less) offset the rise in input costs, at least until inventory levels normalize, and the losses in volume due to production shortfalls. Fortunately, they also recorded sound financial performances in the first half of 2021 with both aggregated turnovers and profits (EBITDA) surging compared to last year (respectively by +43% ytd and +180% ytd) and exceeding 2019 levels (respectively by +7% and +36% - compared to +1% and +14% for automotive suppliers). Most car manufacturers continue to adjust their portfolios, production capacities and product mixes to the most profitable models, brands and countries. Yet, this context is also temporarly pushing some potential buyers out of the new car market and supporting the second-hand market.

In a central scenario of chip supply gradually normalizing and other negative facors weakening by the end of H1 2022, we expect new vehicle sales to increase by +10% y/y to 89.5 million units sold globally in 2022 (ie + 8.5 million) and to remain below the pre-pandemic annual level in most countries, with China and India as major exeptions ( 28.9 and 3 million units, respectively, compared to 15.8 in Europe and 17.3 in the US), despite the acceleration of EVs.

In this context, the bulk of risks would remain on the side of (independent) retailers and wholesalers and more importantly suppliers, notably tier-2 and tier-3 ones. Car manufacturers are not immune in the medium term, notably the European ones if their dependency on the Asian batteries intensifies or more globally if they fail to adapt their business models to the intensifying consumer appetite for ‘greener’ mobility and the EU ‘Fit for 55’-plan, which raised the CO2 reduction targets (to 60% in 2030). Global EV penetration is expected to increase from the 8%-10% range in 2021 to 15%-20% in 2025, with a regionally very diverse model mix.