Strong attendance at the Frankfurt Motor Show could signal an imminent upturn in the European market.
It’s been a tough few years for the auto industry, with the U.S. suffering its worst downturn in decades, Europe in a massive slump and even the booming Chinese market showing signs of a slowdown. But there should be smooth sailing ahead, industry analysts are predicting, as even hard-hit Europe shows signs of a rebound.
The U.S. is already having one of its biggest booms in years, and China’s car market is heating up again, Patrick Archambault, Goldman Sachs vice president of global research, said during a speech at the Society of Automotive Analysts, or SAA, conference in Detroit. The growth rates in worlds three big three markets will be in the “single digits” which is relatively encouraging, he said
“There is nothing sinister lurking,” asserted Archambault. “The growth is still supported by the pent-up demand created during the down turn. The average age of vehicles has increased, creating what some people have referred to as a rolling scrapyard.”
Sales in the U.S. should continue to increase before peaking at 17 million units in 2016, he forecast, when demand begins to retreat as rising interest rates and higher prices combine to make new vehicles less affordable for Americans.
“We do see a reduction in vehicle penetration as the cost of ownership increases,” he added. American own about 250 million vehicles but “vehicle stocks will grow more slowly than the population,” Archambault said.
Consumer purchases of automobiles have benefitted from an enormous tailwind created by a combination of low interest rates and high incentives that is unlikely to be repeated during the current business cycle since manufacturers are more tightly managed and have remained focused on costs and profitability, even as sales have increased.
Affordability remains a critical issues, as the price of an average vehicle in the U.S. has gone up more than 17% over the past four years, Archambault said.
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The big drag on the industry has been Europe, where sales have declined by 4% since the beginning of the year, bringing sales down to their lowest level in two decades. But the Continental market is showing signs of bottoming out with national markets in France, Spain and Italy are starting to rebound for the first time since Europe’s financial crisis began in 2008, observers suggest.
During the recent Frankfurt Motor Show, Renault-Nissan Alliance CEO Carlos Ghosn said, “We can see the beginning of a turnaround,” though he quickly cautioned, “we still don’t see growth.”
For his part, Goldman analyst Archambault said the data suggest a small increase in sales across Europe next year. The recovery in Europe will be slow because of the small population growth, he added.
Sales in China also should increase next year by single digits, he added, while noting that demand for new vehicles, particularly in second-tier cities, remains strong.
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MIke Robinet, managing director of IHS Automotive, also noted the industry in North America has been restructured significantly since the recession.
“It’s much more integrated into the global economy,” added Robinet, who said auto plants in North America now export vehicles around the globe. Vehicle exports from North America are expected to grow as Honda, Mazda, Nissan and Audi all open new plants in central Mexico, Robinet said.
Thus automotive production in North America is likely to remain stable even if sales in the U.S., Canada and Mexico actually decline.
“Production and sales are two different things,” Robinet said.
The price of fuel also should remain relatively stable, analysts said during the SAA meeting in Detroit. Rapid swings in the price of fuel have create havoc in the car business at various points during the last four decades, going back to the original “oil shock” in 1973 when the price of gasoline jumped overnight and spot shortages developed.
Mike Omotoso, senior manager of global powertrain forecasting at LMC Automotive, said the price of a barrel of oil is expected to range from $85 to $130 per barrel over the next two years. With oil now trading at more than $100 per barrel, the swings in prices will be less dramatic, according to Scott Corwin, vice president of the consulting firm Booz and Company, who noted new supplies of oil in North America will help keep fuel prices relatively stable.
And that, industry analysts agreed, should help stabilize demand in the new car market.