Structural shift brings winners and losers

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Light vehicle output grew by an impressive four per cent in 2006, to 66.4 million units, as demand in Asia provided a substantial boost to output. But as East European car plants continue to expand the ultimate fate of a number of plants in Western Europe remains in doubt. Pete Kelly

The global light vehicle market has started 2007 strongly with year-to-date sales already up by almost one per cent (to April) thanks to a record-breaking run of rapid economic growth. The good news for those in the industry is that there are good reasons to expect continued improvement in demand at the global level. However, the performance will be uneven in different regions.

China was an important factor in the strong start to 2007, with early-year sales rising to a record level. Not only do the many positive demographic and macro-economic trends evident in China for much of the past several years appear to be likely to continue for some time to come, but there has been some evidence of manufacturers engaging in aggressive marketing and pricing policies aimed at increasing market share. While many in the industry deny this is a symptom of overcapacity concerns, as might very often be the case in a number of the World’s other markets, one must wonder whether there are not some manufacturers concerned about keeping the rapidly expanding production base well utilised. Yet, while this development is worthy of a comment, we do not see overcapacity as a being likely to become a problem for the Chinese industry.

The West European light vehicle market is poised to enjoy a stronger year in 2007. Yet, the fact remains that mature markets like North America and Western Europe retain only limited potential for expansion, despite their large size, beyond the short term. In the USA, light vehicle sales look set to stagnate, at best, this year as macro-economic factors take a toll and the Big Three manufacturers at least try to keep away from pricing incentives, concentrating instead on reducing their production base to meet the requirements of a reduced market for their vehicles. The erosion of Big Three share continued last year as the Asian companies continued to improve their position: Ford, GM and DaimlerChrysler combined lost three per cent share in 2006, compared with 2005 (taking penetration down to 56.5 per cent). Meanwhile, Toyota gained a further two per cent share, with 15.4 per cent in total, overtaking what was then DaimlerChrysler.

Booming market conditions, in the meantime, continue in a number of emerging markets. The rapid expansion of China is at the top of this list of course. But, even in Brazil, where a long history of financial instability has eroded the confidence of industry decision makers to the extent that investment in new products has been damaged, the recent performance and near-term outlook are excellent. Demand in Russia has also excelled.

From a segmental perspective, mature markets appear to be responding to higher fuel prices and increased environmental concerns in a way that will likely prove to be durable. For example, in North America, large SUVs and Pickups have peaked in terms of market share and will remain under pressure well into the next decade.

Despite many unknowns relating to how the European Union will manage a reduction in vehicle
CO2 emissions, this will push those buyers who would still be inclined towards an SUV-type vehicle towards small or midsize SUV variants. It remains unclear at this time how producers of premium vehicles, some of which have significantly above average CO2 emissions, will cope with the coming changes, but the ability to sell smaller vehicles with premium pricing will likely become an area of great interest for product designers.

In many emerging vehicle markets, the small vehicle is already dominant, primarily as a consequence of lower pricing. Expensive fuel and/or fiscal and regulatory policies will slow the expansion of larger vehicle share more than was expected just a few years ago but the kind of slow reduction in share of large SUVs that is expected in the US does not appear likely. This is a result of such vehicles’ role as a status symbol as much as mode of

Light vehicle output grew by an impressive four per cent in 2006, to 66.4 million units, marking out the fifth successive year of growth as demand in Asia provided a substantial boost to output.

Gains in Asia dominated as output in the region grew by over two million units to 25.5 million and, of this large increase, 1.5 million units came from China. In North America and Western Europe however, output fell as restructuring hit. The large restructuring programmes at the Big Three in North America were largely responsible, though it remains a moot point as to whether there will need to be more action. Ford and GM have made relatively large inroads, but capacity reductions at Chrysler appear inadequate.

Changes in Western European output are more a case of transition from West to East, as East
European plants continue to expand. The ultimate fate of a number of plants in Western Europe remains in doubt. What is most difficult to predict is exactly which plants, especially in core automotive countries such as France, Germany and Italy, will ultimately close. Attrition – in the form of a gradual reduction in output as products are replaced – may well be the approach from some car companies seeking to avoid the negative political consequences of the outright closure of a large plant.

What continues to be important, of course, is that the industry remains in growth and that there are winners and losers behind the structural shifts. It is in this context of expansion and profound change that the full impact of the very visible changes in play at
the OEM level may mask the true scale of the changes within the broader automotive industry: as vehicle assembly moves to lower-cost countries, then so too will large swathes of the supply industry, to become involved in new supplier parks and related infrastructure. This process has often lagged the moves of car manufacturers but it is catching up.

Pete Kelly is senior director Europe, JD Power Automotive Forecasting

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