2020 and beyond: Some tough years ahead as emissions norms are converging

Tougher market conditions are weighing on the global car industry. In the three biggest markets (The European Union, China and the United States), sales and registrations are plunging and affecting the industry outlook.

The European Union (EU) was mainly affected by the implementation in September 2018 of stringent homologation rules for new models, the so-called “Worldwide harmonized Light vehicles Test Procedures”. These tougher rules caused problem for car makers, delaying their grants to sell cars. Approval for one model took many weeks, and testing centres were flooded by car makers to certify their vehicles on time. With fewer models to be sold, registrations were lower as customers delayed their purchases. They also rallied the month before to benefit from incentivized cars. Moreover, European households were and are less prone to buy a car in the 12 months ahead, according to quarterly surveys carried out by the European Commission. Eurozone consumer confidence is on a negative trend since the onset of 2018.

The US market is affected by a weaker demand, notably for sedans, while remaining rather steady for SUV and pickups. This trend keeps impacting carmakers’ operations, as passenger car models are witnessing a drop in their market share, which is triggering the closure of several plants around the country. Moreover, even though light trucks offer higher margins than their car counterparts, they can’t be bought by less affluent households. Coupled with higher borrowing costs, these factors translate into lower demand for new vehicles and a higher one for second hand cars and light trucks.

The Chinese market is hit hard by lower demand as consumers are waiting for fiscal measures. They are also impacted by the sequels of the trade war between China and the US. Furthermore, big municipalities such as Beijing, Shanghai and the likes are imposing strict license plate figures for new cars each year. In fact, households are turning to cheaper and easier to buy second-hand car sales. Lastly, the implementation of the stricter “China VI” in some cities on July 1st 2019 (one year before the nationwide roll out) is currently underway and impacting sales over there.

The growth and revenues of automotive suppliers are severely impacted by this slowdown. The rationalization of production costs and technological developments linked to the environmental constraints imposed on car manufacturers subsequently have repercussions on the entire supply chain. This may lead to mergers and acquisitions in order to rationalize these costs, which are necessary to bring decisive technologies to market – again leading to a redesign of the automotive industry landscape.

Reference: – http://www.coface.com.hk/News-Publications-Events