ACEA, the European Automobile Association, reported on Tuesday that production of motor vehicles in Europe fell by 35% in the first quarter of 2009, with many manufacturers continuing to reduce stocks and cut output in light of reduced market demand. Van (-57%) and truck production (-56%) dropped even more than the manufacture of passenger cars (-31%). Also on Tuesday, Deutsche Bank Research said exports of German passenger cars are likely to fall by roughly 30% this year due to the global recession.
ACEA said in the first quarter of 2009, automotive production in total fell by 35%. While fleet renewal schemes have helped segments of the passenger car market in some countries, overall vehicle demand in Europe went further down as well.
Reflecting consumer concerns about the general economy, small cars reached a market share of 44.9% in the first five months of 2009, surpassing the record of 38.8% over the whole year 2008. At the same time, diesel car market penetration dropped to 46.1%, and the market share of 4x4s to 8.4%.
US rating agency Standard & Poor's, said in a report last April, that Western European car sales will remain below their 2007 level through to 2011. This reflects the weakness of the economic recovery expected in the next couple of years, as well as more structural changes affecting passenger car demand.
"Several trends have emerged in the past 10 years that suggest that the role of cars in people's lives is diminishing," said Standard & Poor's chief economist for Europe Jean-Michel Six. "First, the average distance travelled by motorists is steadily declining, falling by 1.4% per year between 2001 and 2007. We believe this steady decline can be attributed to better public transport systems, the rising cost of fuel, and concerns about the environment, among other things.
"Europe's automakers are also suffering from an extended replacement cycle partly of their own making. In 2007, the average age of cars registered in EU-15 countries (that is, excluding new member states) was 8.2 years, up from 5.8 years a decade earlier. This increase is in part because the overall quality of cars--and therefore their life expectancy--keeps improving.
"Moreover, new (as opposed to second-hand) car buyers are getting older: The average age of car buyers in Germany in 2007 was 51, which probably means that younger people increasingly rely on the second-hand car market--not necessarily good news for the automakers."
Deutsche Bank Researchsays German car business is marked by strong contrasts in 2009: while exports and output have plummeted during the year to date, new registrations of passenger cars have surged as a result of the scrapping premium. In terms of its effectiveness as stimulus measure, the premium is a success. In terms of market order, it gives some reason for concern, however. The downside of the scrapping premium will become apparent in 2010 as new registrations will fall dramatically. Nevertheless, DBR says it should not be extended again as the subsequent demand shortfall would be even more pronounced. Furthermore, it would raise expectations from the government which cannot be met in the long term.
DBR economist Eric Heymann, says 2009 has been the most extraordinary year in the history of the German automotive industry. The German car sector is marked by stark contrasts. On the one hand, exports of German passenger cars are likely to fall by roughly 30% this year due to the global recession - - irrespective of the fact that car sales are currently being subsidised in many countries. This negatively affects car production in Germany, which should decline by one-fifth this year, and hurts the supplier industry as well. The crisis in the commercial vehicles segment is even much more pronounced.
On the other hand, unit sales of German passenger cars have been booming in 2009. New vehicle registrations should increase by up to 20% in 2009 – bucking the global trend – and are thus likely to reach their highest level since 1999. Demand is being boosted by the scrapping premium: the government has introduced a premium of €2,500 towards the purchase of a new car or a 1-year old car if the buyer scraps his car being at least 9 years old. Together with rebate offers from the car makers and dealers, the scheme caused a run on new vehicles and prompted many customers to bring forward car purchases planned for subsequent years.
Heymann says with a view to the economic stimulus effect, the scrapping premium can thus be regarded as a success. The incentives boosted demand quickly and contributed to an improvement in sentiment surrounding the sector. Car dealers were the main beneficiaries, and the scrapping program prevented an even larger slump in production. Along with other instruments such as the extension of short-time working benefits, the premium has helped to secure jobs in the sector for the time being.
As far as market-economy principles are concerned, Heymann says the scrapping program gives reason for concern. Subsidies typically generate free-rider effects, and they distort competition with sectors having to face the crisis without benefiting subsidies. Furthermore, the instrument has direct negative repercussions on other sectors such as the manufacturers of consumer durables and the tourism sector. For car purchases reduce the scope for other consumption purchases. Motor-vehicle repair businesses are also suffering as especially older passenger cars which need more frequent servicing are disappearing from the market. What is more, the government is rewarding the destruction of real assets. For it is impossible to export old cars which in many cases are still in good shape to the emerging markets where they could replace even older and less efficient cars. In addition, the premium has a downside under social policy aspects since the market for used cars in the price segment below €2,500 has dried out.
The DBR economist says the car sector seems to have gone crazy in 2009 and thus, the stimulus programme for the industry has had a varied impact on segments: small cars in particular are benefiting, while many high-end vehicles remain unsold in 2009. Furthermore, diesel’s share of passenger cars in new registrations declines dramatically. By contrast, the share of car purchases of private consumers is soaring. Finally, foreign brands expand their market share considerably.
Eric Heymann says it was clear right from the start that the car sector would have to foot the bill for the scrapping premium once the program ends, since new registrations are set to decline next year. In 2010, the demand for passenger cars may fall by as much as 25% despite presumably large rebate offers. Sales of small cars in particular will decline heavily next year. What is more, demand of private car owners is likely to plunge. Hopes are therefore pinned on a perceptible recovery of the important foreign market and demand for commercial vehicles. Although there are noticeable indications of a revival in both market segments, Heymann says he would not place a bet on this.
He says effective stimulus packages require limited time frames and volumes in line with fiscal capacity. Nevertheless, the government must be able to readjust measures if macroeconomic conditions change dramatically. However, the scrapping premium should not be extended again even if foreign demand fails to recover or the planned fiscal resources (€5 bn) are already used up before the end of the year. As the only incentive from the premium are purchases brought forward, the demand shortfalls after such schemes turn out to be greater, the longer they applied (and the more successful they were). Furthermore, extending the premium further would raise expectations of state support which cannot be met in the long term. In addition, even the largest programmes would become ineffective at some point, for consumers do not buy a second or third car because of state subsidies alone.
Finally, Heymann says the government should allow some consolidation that the sector requires, for the international automotive industry has been suffering from overcapacities for decades. Without such a consolidation, price pressure will remain high and many structural problems will persist. He says, naturally, this recommendation can also be addressed to all governments in the leading automaking nations.
