GM's Chevrolet Volt is an electric vehicle with extended-range capability. It is designed to drive up to 40 miles on electricity without using gasoline or producing tailpipe emissions. When the Volt's lithium-ion battery is depleted, an engine/generator seamlessly operates to extend the driving range if there is no access to an electrical outlet to recharge the battery. Volt production begins later this year and in city driving, it is claimed it can achieve 230 miles per gallon. Electricity costs works out at about 3 cent per mile.

The global car industry endured a year of turmoil in 2009. Many governments launched subsidy schemes in response to the deep recession afflicting the sector. These schemes triggered widely varying market developments last year. Although the global automotive sector has in recent months emerged from its trough, the expiry of support measures together with the overcapacities in the sector suggest that further difficulties will materialise in 2010 and beyond, according to Deutsche Bank economist, Eric Heymann

US rating agency Standard & Poor's, said in a report in April 2009, 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."

In a commentary last week,DB economist Eric Heymann, said that in early 2009 it looked as if global auto demand would slump even more drastically than in the previous year. In 2008 the sector had already skidded into a recession that deepened after the collapse of Lehman Brothers; a double-digit decline in global new car sales in 2009 seemed inevitable. The major economic and political significance of the sector in many countries meant that governments were not prepared to stand idly by in the face of this implosion. Their response was to allocate billions of euros to demand stimulus packages for which political approval was also relatively easy to obtain. Germany was a trailblazer in this respect and was particularly generous with its €5bn car scrappage bonus scheme. Many European countries, the US, China and other countries followed Germany’s example.

The subsidies propped up demand in individual markets, but the market outcomes were very diverse as there were differing subsidy levels and economic circumstances. The measures were most successful in China: demand for cars rose by more than 40% in 2009 due to a variety of stimuli. At the opposite end of the scale came the US and Spain, for example, where unit sales dropped by around 20%. The incentive schemes “merely” prevented an even greater decline in demand. However, the subprime crisis had already wreaked havoc and dragged the auto market down, too. All in all, global unit car sales fell by only a small single-digit percentage in 2009.

The worst is over, but risks persist in the market

Eric Heymann says that in most of the world’s automobile markets the cycle has bottomed out during recent months. This is true of the car segment in particular, while the truck segment has not yet stabilised. The demand momentum triggered by the subsidy schemes could develop into a self-sustaining recovery. Talk of an upturn would, however, be too strong, he says. The expected growth rates are too low to justify such optimism. Miracles should not be expected from Western Europe of all places in 2010 because the ending of subsidies will weigh on a number of markets - - at least temporarily. In China, too, the growth rate is likely to be in the region of “just” 10% in 2010. In the US a double-digit increase is possible, albeit from a very low base.

German automotive industry divided once again

Heymann says the main driver of the German auto market in 2009 was the scrappage bonus scheme- - and this is bound to be the case again in 2010 with the opposite impact. After new car registrations rose 23% in 2009, demand could fall by up to 30% in 2010. It is particularly those segments that were successful in 2009 which are set to lose out in 2010: demand from private buyers will be lower, while on average sales of larger vehicles and diesel cars will increase once again. This will benefit German premium carmakers - - relatively speaking - - whereas the volume segment will give rise to major headaches. Importers are therefore unlikely to hold on to the market share gains they have just made.

German automakers and their suppliers could then get off relatively lightly by offseting the slump in domestic demand by resuming export growth. After all, the export share of German automakers in 2009 still came to nearly 70%. Because the demand for larger cars is likely to grow faster outside Germany, the premium manufacturers also stand to benefit on this count. Domestic production will definitely rise again. By contrast, the situation will become really serious for car dealers and car repair businesses in 2010. On the one hand, they will not have access to the export channel, and on the other, the end of the scrappage bonus will hit not only new car sales, but also used car sales and repairs. Due to the success of the scrappage bonus in 2009 there are not only two million fewer potential used car buyers in 2010, there are also two million fewer used cars requiring repairs.

Fundamental problem of overcapacity persists

Heymann says considering that in the last two years or so the global automotive industry found itself in its deepest crisis ever, the current mood in the sector - - as reflected at the current Detroit Motor Show for example - - is astonishingly optimistic. There is justification for this on account of the recovery of individual markets, but the continued global overcapacity remains a virulent fundamental problem for the sector.

Significant capacity adjustments have hitherto only been made in the US. At the same time, new factories are being built or planned, primarily in Asia, but also in the US. Supply overhangs will thus persist, although the global demand for cars will continue to grow over the coming years. The paring back that needs to occur has been prevented by subsidies. The price that the sector will pay is continued stiff competition and price pressure. The next storm in the sector is therefore inevitable and will - - if politicians allow it - - also claim casualties.