"The future of the global automobile industry to be shaped by mergers and alliances" - Analysis by Euler Hermes SFAC
PARIS, France, July 3 /CNW Telbec/ - In a study entitled "The automobile
industry confronted with a decline in global demand," Euler Hermes SFAC
reviews the outlook for the sector. A plunge in global demand and massive
destocking are such that in future, the industry will need to find ways to
share certain costs through tie-ups and alliances. Subcontractors in France
are being hard hit by plummeting automobile production, and redundancies and
bankruptcies stand to go mounting. The impact on the sector will be lasting,
with volumes only recovering to the 2007 level toward 2012.
1. Crisis in demand
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Up until 2007, vehicle registrations grew at an average annual rate of
around 5%, driven exclusively by emerging countries. Between 2007 and 2009,
global vehicle registrations are expected to drop by close to 25%,
corresponding to a 15 to 16 million decline in vehicle sales.
"Some 80% of vehicles are purchased on credit, so between the economic
crisis and financial crisis triggered by the collapse of Lehman Brothers, the
primary source of financing has dried up", says Yann Lacroix, manager of the
sector studies department at Euler Hermes SFAC.
- United States: vehicle registrations down 40% over two years,
production declining
Historically the world's largest car market with close to 17 million sales
a year, the US market began to trend lower early in 2008 before collapsing in
the summer of that year. Average annual registrations are expected to reach
just 10 million in 2009, implying a 40% drop over two years. The introduction
of a scrappage incentive would not boost vehicle sales by more than one
million in 2009-2010.
"Automobiles nonetheless remain the main means of transport in the US. The
market should thus gradually rebound to average registration levels of 15-16
million vehicles a year, but not before 2011-2012," says Yann Lacroix.
"Production volumes, which have to be adjusted to demand until recovery takes
hold, have been declining steadily since early 2008. It is estimated that 6.5
million cars will be produced in all of 2009, down from 9 million in 2008 and
almost 11 million in 2007."
- Japan, the world's leading exporter, caught off guard by downturns in
main markets
The Japanese market had been contracting for several years, and the
downturn has accelerated since the summer. Over the longer term, it should
level off at about 4.5-5 million units.
While production continued to ramp up over the first three quarters of
2008, Japan being by far the world's leading car exporter, the crisis began to
be felt in the last quarter of the year and became a very brutal reality in
the first quarter of 2009, when massive destocking hit.
"Over the 2009 full year, vehicle production will reach around 9 million,
down from 11.5 million in 2008," says Yann Lacroix.
- European market (27 countries) a mixed bag in terms of registrations
and production
It seemed that 2008 was set to be a record year in terms of registrations,
but the financial crisis had an immediate impact starting in September 2008:
sales volumes fell off sharply, especially in countries where household debt
is high and the economic crisis was particularly violent (e.g. Spain and
England). Registrations have fallen by 12 to 13% on an annual average, which
corresponds to 2 to 2.5 million fewer cars on an annual basis.
"Several countries - France, Germany, Italy and Spain - have introduced
scrappage incentives to boost demand. A sudden elimination of such incentives
in 2010 would cause the market to contract by 5 to 10%. The collapse in car
sales is even more severe in new member states (-30%) and Eastern Europe (-50%
in Russia). Across the European continent as a whole, sale are likely to fall
by 20 to 25%," says Yann Lacroix.
- Severe consequences on production in Germany and France
Germany, an export-driven market like Japan, had a somewhat delayed
reaction to the crisis, with production volumes crashing by 55% in the first
quarter of 2009 alone. In all of 2009, the country is expected to produce 5
million vehicles, down from 6 million in 2008.
In France, massive destocking in the last quarter of 2008 and first
quarter of 2009 affected the entire industry. With 2.5 million units produced
in 2008 for a market of 2.6 million, France became a net importer. In 2009,
production could fall below 2 million.
"Unlike in older industrialised countries, automobile production in China
began trending upward again early in 2009. China stands to become the world's
leading market in 2009, with close to 11 million vehicles. Because car
ownership rates remain very low, growth should carry over to 2010 and 2011,"
notes Yann Lacroix.
2. Profitability being put to the test
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Plunging demand and massive destocking will clearly have an impact on
sector margins.
- In the US, restructuring since 2000 reduced employment levels by half
but did not spare Chrysler and General Motors filing for bankruptcy
protection.
- In Asia, carmakers have been thrown into turmoil after "outperforming"
the market. The three main culprits are: a contraction of their domestic
market, which is closed and highly profitable; the collapse of the US
market, of which Asian manufacturers account for 40%; and a drop in the
euro/yen exchange rate in the summer of 2008 that wiped out five years of
productivity gains in three months. Most carmakers (Toyota, Nissan) have
slipped into the red.
"Honda is the only manufacturer that has yet to post a loss, but its
profits are down 80%", notes Yann Lacroix.
- In Europe, the downturn did not begin until the fourth quarter of 2008,
so profitability levels for the 2008 full year were decent. The relative
weighting of German carmakers helped make this good showing possible. The
industry is nonetheless in crisis, and activity levels are likely to
contract by 10% in 2009 (i.e. not as much as the global market) with net
margins coming in negative (-1.5% of sales). This "smaller" decline,
notably compared with Japanese manufacturers, is explained by lesser
exposure to the US market, and for some players - especially VW - by
solid positions on emerging markets.
French carmakers appear to be much more at risk. Their profitability is
starting from a significantly lower level, with no premium positioning and
insufficient exposure to growing markets. Renault's accounts will be affected
by negative contributions from Nissan (40% Renault), which has announced
losses, and from AB Volvo, of which Renault owns more than 20%.
"As the crisis continues, more carmakers and equipment vendors are going
under. The number of bankruptcy filings in the large European countries and
the US in the first five months of 2009 (87) has almost matched the full-year
2008 level (94)," notes Yann Lacroix.
3. Subcontractors hit by decline in automobile production in France
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Stimulus schemes (ecological bonuses and scrapping incentives) can have a
downside by favouring entry-level models production of which is largely
offshored. Production has been declining in France since 2006 when
manufacturing first began to be transferred abroad. Underutilised production
capacity will require further restructuring if not site closures.
Staff levels will continue to be cut and the trend will accelerate in
2009. Redundancies exceeded 13,000 in 2008, bringing the total to 33,000 since
2005, and 6,000 jobs were cut in the first quarter of 2009. Euler Hermes SFAC
estimates that the industry will shed between 20,000 and 30,000 jobs in 2009.
In May of 2009, subcontractor bankruptcies were up 65% on an annual
average, and 141% higher in the first five months of the year than in the
comparable 2008 period. Over the full year, there could be 400 failures. "The
magnitude of the crisis, and a sharp increase in claims, are seriously
threatening France's industrial fabric," observes Florence Lecointe, Euler
Hermes SFAC arbitrator.
"The future of the global automobile industry will depend on companies
sharing certain costs via mergers and alliances, enabling them to establish
solid positions in emerging countries with adapted products and to fund
research and development for new technologies (including hybrid and electric).
Industrial facilities will also have to be adjusted to limit excess production
capacity. As of today, the landscape of players has not yet begun to change in
earnest," concludes Yann Lacroix.
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Euler Hermes is the worldwide leader in credit insurance and one of the
leaders in the areas of bonding, guarantees and collections. With 6,200
employees in over 50 countries, Euler Hermes offers a complete range of
services for the management of B-to-B trade receivables and posted a
consolidated turnover of 2.2 billion euros in 2008. Euler Hermes has
developed a credit intelligence network that enables it to analyse the
financial stability of 40 million businesses across the globe. The group
protects worldwide business transactions totalling (euro)800 billion.
Euler Hermes, subsidiary of AGF and a member of the Allianz group, is
listed on Euronext Paris. The group and its principal credit insurance
subsidiaries are rated AA- by Standard & Poor's.
www.eulerhermes.com
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These assessments are, as always, subject to the disclaimer provided
below.
Cautionary Note Regarding Forward-Looking Statements: Certain of the
statements contained herein may be statements of future expectations and other
forward-looking statements that are based on management's current views and
assumptions and involve known and unknown risks and uncertainties that could
cause actual results, performance or events to differ materially from those
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continue' and similar expressions identify forward-looking statements. Actual
results, performance or events may differ materially from those in such
statements due to, without limitation, (i) general economic conditions,
including in particular economic conditions in the Allianz SE's core business
and core markets, (ii) performance of financial markets, including emerging
markets, (iii) the frequency and severity of insured loss events, (iv)
mortality and morbidity levels and trends, (v) persistency levels, (vi) the
extent of credit defaults (vii) interest rate levels, (viii) currency exchange
rates including the Euro-U.S. Dollar exchange rate, (ix) changing levels of
competition, (*) changes in laws and regulations, including monetary convergence
and the European Monetary Union, (xi) changes in the policies of central banks
and/or foreign governments, (xii) the impact of acquisitions, including
related integration issues, (xiii) reorganization measures and (xiv) general
competitive factors, in each case on a local, regional, national and/or global
basis. Many of these factors may be more likely to occur, or more pronounced,
as a result of terrorist activities and their consequences. The matters
discussed herein may also involve risks and uncertainties described from time
to time in Allianz SE's filings with the U.S. Securities and Exchange
Commission. The Group assumes no obligation to update any forward-looking
information contained herein.
For further information: Anne-Laure Dodero, Euler Hermes SFAC, 01 40 70
54 00, anne-laure.dodero@eulerhermes.com; www.eulerhermes.fr
