Public bumpers for the automotive market

Economic Outlookno.1228September 2016

Special Reportwww.eulerhermes.com

Public bumpers for the automotive market

Economic Research

Economic Outlook no. 1228 | September 2016 | Special Report Euler Hermes

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Economic ResearchEuler Hermes Group

Economic Outlookno. 1228Special Report

Contents

The Economic Outlook is a monthly pub-lication released by the Economic ResearchDepartment of Euler Hermes Group. Thispublication is for the clients of Euler HermesGroup and available on subscription forother businesses and organizations. Repro-duction is authorised, so long as mentionof source is made. Contact the EconomicResearch Department Publication Director and Chief Economist:Ludovic Subran Macroeconomic Research and CountryRisk:Ana Boata, Stéphane Colliac, MahamoudIslam, Dan North, Daniela Ordóñez, ManfredStamer (Country Economists)Sector and Insolvency Research: MaximeLemerle (Head), Farah Allouche, Yann Lacroix,Marc Livinec, Didier Moizo (Sector Advisors)Support: Laetitia Giordanella (Office Man-ager) Ilan Goren (Content Manager), SaraAbaid, Thomas Cardiel, Sabrina Delsert,Benedetta Scotti (Research Assistants) Editor: Martine BenhadjGraphic Design: Claire Mabille Photo credits: Images courtesy of Allianz,Images courtesy of Pixabay (public domainunder Creative Commons CC0)For further information, contact the EconomicResearch Department of Euler Hermes Groupat 1, place des Saisons 92048 Paris La DéfenseCedex – Tel.: +33 (0) 1 84 11 50 46 – e-mail: [email protected] > EulerHermes Group is a limited company with aDirectoire and Supervisory Board, with acapital of EUR 14 509 497, RCS Nanterre 552040 594 Photoengraving: Talesca Imprimeur de Tal-ents – Permit July-August-September 2016;issn 1 162–2 881 ◾ August 20, 2016

3 EDITORIAL

4 OVERVIEWPUBLIC BUMPERS FOR THE AUTOMOTIVEMARKET

8 AUTOMOTIVE MANUFACTURING IN 2016:WHAT ARE THE RISKS?

10 CHINATax break to continue

11 UNITED STATESInterest rates and fuel prices positivefor the market, not for energy transition

12 JAPANZigzagging market for carmakers

13 EUROPEDriving growth?

14 The UK and SpainBrexit and the end of the Spanish miracle

14 FranceThings are going better

16 GermanyCleaner than clean

17 The BRITs (BRAZIL, RUSSIA, INDIA, TURKEY) DISAPPOINT

17 Brazil and Russia at the bottom of thetrough

17 India and Turkey on engine braking

18 AFTER IRAN, WHICH EMERGING MARKET WILL REACH ONE MILLION NEW CARREGISTRATIONS?

20 OUR PUBLICATIONS

22 SUBSIDIARIES

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Euler Hermes Economic Outlook no. 1228 | September 2016 | Special Report

EDITORIAL

AlgocracyLUDOVIC SUBRAN

The Paris Motor Show opens in Paris on 1 October 2016. Thetiming is right for our special edition on the auto industry. This year, there are two notable trends. The first is greaterintervention by public policy in market dynamics. The secondis the growing public fascination with the future of the sectorand in particular the autonomous car.Whether in the United States or China, the United Kingdomor Spain, public policies will largely fuel the sales engine. Taxincentives, low interest-rates, and political uncertainty explainwhy new car registrations are taking off in some countriesand stagnating in others.The car remains the symbol of the middle class, and car salesfigures herald a crisis or a recovery. Whether in Argentina orIran, in Brazil or Turkey, open the hood and you will knowwhat the situation is in the country. In parallel, many countrieshave opted for greater competition on value chains, reor-ganizing the automotive market via production.After a year marked by the obsession with clean cars, fol-lowing the revelations concerning a major German carmaker,it would seem that the sector needs to obtain reassuranceby reinventing itself. There is, therefore, a fascination with the vehicle of the future,which drives and parks by itself. It is now certain that artificialintelligence is challenging the auto industry and will veryquickly make it easier to do things that we couldn't do oth-erwise. Imagine reverse parking!

Machine Learning and Big Data have already acceleratedknowledge and shaped experience in many sectors, fromthe web to the Internet of Things. Robots could even proveto have singularity as defined by Kurzweil, that is possess ar-tificial consciousness. For the car, then, Stephen King was apparently right. Wemight be facing a rosy version of Christine. She can go andfetch the children from school by herself.The search for the right algorithm, learning in varied roadand weather conditions, and the resolution of legal and in-surance gaps are all areas for investment by carmakers andtech firms. Making the user's life easier is essential, especiallysince the auto-machine would make better decisions than ahuman being. Increasing parts of our existence are controlled, managedand regulated by algorithms. Algocracy looms. Asset man-agement, online sales, entertainment choices, and soon ourcars will be guided by our past choices. I protest! What about the pleasure of driving, hair in thewind? Zigzagging on a deserted country road to impressyour passenger? Stalling on slopes? I love driving, and itwould be silly if they took that pleasure (too).

© Image 933315 (Pixabay under Creative Commons CCO, Public Domain)


2016-2017: 24 markets allover the place

Euler Hermes forecasts by market:

1•China. The largest market in the world, China,aroused concern last year when sales slowedsharply. The government intervened immedi-ately and lowered the VAT rate on small andmedium-sized vehicles. This measure, which willbe maintained at least until 31 December 2016,restored some life to the market, which has re-turned to an 8% growth rate in 2016. The exam-ple of the termination of old car-scrapping in-centives in Europe serves as a reminder that theend of stimulus measures leads to stagnation oreven a fall in sales. This is an emblematic indica-

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OVERVIEW

Public bumpersfor the automotive market

In 2016, the global automotivemarket remains divided. On the onehand, Europe, China, and the UnitedStates will post strong growth. On theother, India is stagnant, Japan isfloundering and Russia and Brazilcontinue their dizzying drop. Publicpolicies will determine growth inmany markets.

YANN LACROIX, LEAD AUTHOR OF THE REPORT

-40

-35

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-25

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-15

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0

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RussiaIndiaChina Japan

BrazilUnited States Europe (30)

June-16Mar-16Dec-15Sept-15June-15Mar-15Dec-14Sept-14June-14

10

-6

-27

-27

9

5

4

Chart 1: Growth in new car registrations for top markets year-on-year

Sources: OICA, Euler Hermes

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▶

tor of the country's economic health, and we ex-pect that the stimulus measures will be main-tained in 2017, due to lobbying by the localstakeholders. We therefore forecast 5% growthin 2017, to sales of 24 million vehicles.

2• United States. Driven by low-interest ratesand fuel prices, in 2016 the US market is ex-pected to set a new record of 18 million unitssold, representing 1% growth. In 2017, the endof this alignment of the planets points to a slightslackening. Sales were down 2%, to 17.6 millionunits.

3• Japan. The Japanese market has zigzaggedfor several years, between yen strength and gov-ernment stimulus packages. The market, stilldepressed by the 2015 VAT hike which causedit to collapse by 14%, is expected to stabilize at5 million units in 2016 before a moderate 5%rebound in 2017.

4• Europe. Growth remains sustained at 5.5%in 2016, i.e. 15 million units, but 2017 will prob-ably see a stabilization due to Brexit and the endof the Spanish fever (end of old car scrappingincentives, not offset by moderate growth in therest of Europe).{ Germany: With 5% growth to 3.35 millionunits, the market has regained its medium-termlevel. We therefore expect a stabilisation in 2017.{ France: The market is confirming its recovery,with 6% growth in 2016 following 7% in 2015.We expect a market of 2.1 million units in 2017,posting 3% growth.{ Italy: Given the momentum built up (15%growth in 2016), the market will nudge 1.8million units, which is still far from its pre-crisislevel of 2.4 million. In 2017, growth will prob-ably continue, but at a more moderate 5%pace.{ Spain: : The planned termination of old carscrapping incentives at the end of the year will

cause a jolt: +11% in 2016, before -10% in 2017,i.e. 1 million units.{ United Kingdom: After achieving record salesof 2.7 million units by mid-2016, the UK marketwill slow down towards the end of the year as aresult of Brexit. We expect modest 1% growth thisyear, before a sharp contraction in 2017 (-9%).

5• New players. Brazil and Russia continuedtheir dizzying drops. Brazil will post 1.7 millionnew car registrations in 2016, down 19%, in thewake of its 24% drop in 2015. Russia, for its part,will see its third year of decline in succession: -10% in 2014, -36% in 2015, -11% estimated for2016. India and Turkey, formerly growth drivers,ran out of steam in 2016, posting +1% and -1%respectively. Lastly, the new potential in LatinAmerica, the Middle East, and Asia undoubtedlyoffers prospects in the medium term, but theirgrowth has not stabilized and their markets willhave very contrasting growth patterns.

© Image Allianz 125957117

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A completely carbon-free,autonomous future: Notstraight away

Ever more enticing announcements seem topromise a robust future for the carbon-free,autonomous car. And yet, many questionmarks still remain, and investments are stillpendingHealth and environmental requirements, scan-dals surrounding the real level of car emissions,coercive decisions such as urban traffic restric-tions, and subsidies for clean vehicles are leadingall the carmakers to become positioned in thenew technologies. These range from hybrids(which allow driving for a few dozen kilometers,notably in urban areas, without any pollutantemissions), to the fully electric vehicle (whetherby battery charging or the use of hydrogen), thecost and usage of which are still far from match-ing their engine-powered equivalents. The in-vestments still needed are substantial, especiallysince they are combined with those related tovehicle autonomy, with the highly commend-able objective of reducing the number of acci-dents, making road traffic smoother and makinglife easier for the occupants. These car manu-facturing programs, which will extend overmany years to come, herald the next revolutionfor an automotive industry that is more than acentury old. In 2014 alone, these investmentsrepresented an R&D budget of around EUR 45billion for the European automotive industry, or

8% more than in 2013, which makes the auto-motive industry the leading industrial sector interms of R&D spending, ahead of pharmaceu-ticals. Moreover, a significant part of these in-vestments is now made by Silicon Valley firmslike Google, Apple and Microsoft. Accordingly,the magnitude of the amounts actually devotedto these road revolution projects is clearly un-derestimated.

But in fact what is a clean car? Given the transatlantic difference of opinionsregarding emissions, and the investment re-quired, it will be a long time before there is anagreement on the definitions. Whereas, in Eu-rope, it is CO2 emissions per vehicle that count,with a view to combatting the greenhouse effectand global warming, in the United States thefocus is on NOx emissions (fine particles inhaledby humans) and humans' immediate health.Technically, a petrol engine emits CO2, but emitslittle NOx, whereas a diesel engine emits lessCO2, but more NOx. Diesel is a European tradi-tion which is harder to export, whereas theAmericas and Asia are almost exclusively posi-tioned in petrol vehicles – only utility vehiclesrun on diesel. This difference is a source of com-plexity in establishing joint rules for automotivepollution control.

Some countries, especially in Europe, are startingto express their desire for a complete changeof model, with sales of engine-powered vehicles(gasoline or diesel) being halted and replaced

by electric vehicles alone. Norway, for example,has set itself 2025 as the deadline, while Ger-many aims at 2030. Assuming an average vehi-cle lifetime of 20 years, Norway and Germanywould have a completely carbon-free fleet byaround 2045- 2050. Analysis of the sales figuresshows that EV registrations depend mostly onfleets and as yet little – except in cases of verysignificant subsidies – on private customers. Itis likely to be a long time yet before a carbon-free vehicle fleet is achieved, and substantiallong-term financing will be required for R&Dand industrial investment.

Feeling the way to autonomyThe autonomous car is a robot (artificial intelli-gence) which can analyze the situation and drivewithout human intervention. Its introductionwill be sequential (use gradually extended tovarious road conditions, for example). Safetyand comfort equipment should be ready by nextyear and should be more reliable especially withregard to connectivity. But many stages still re-main before the driver can be delivered a vehiclewithout a steering wheel, without pedals andequipped with a TV set by way of a dashboard.

Other

TelecomsChemicals

IT

Banks

Industrial engineering

ElectronicsAerospaceNew technologies

Pharmaceuticals

Automotive industry

4%

17%

5%

6%

18%

9%

5%

4%

3%3%

26%

Chart 2: Breakdown of R&D spending in the European Unionby sector in 2014

Sources: ACEA, Euler Hermes

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The technologies and the legal liability rules arestill in the concept phase. Lastly, it remains tobe demonstrated that users will accept becom-ing passive.

So the revolution has been launched, but with1 billion passenger cars on the road, severaldecades will be needed to obtain clean, auto-nomous vehicles for all.

Agility and patience,necessary virtues forcarmakersGrowth in global automotive production slowedto around 2% in 2015 and 2016 and is expectedto fall to 1% in 2017. This slowdown, far fromthe 3% post-crisis annual growth, requires thatcarmakers: (i) be present in the main growthmarkets while adapting their facilities to thesometimes erratic changes in those markets;(ii) provide a product offering which movesevery day closer to regional needs, from ultra-low-cost for some emerging countries to thedevelopment of upmarket vehicles (with highvalue added) to finance heavy investment innew technologies; and (iii) continue to locatetheir production facilities where costs are lowest,especially for entry-range vehicles.

Automotive production by the yardstick offuture consumptionBetween 2007 and 2015, China's production in-creased by 176% to 24 million units, India's by83% to 2.5 million (20% are exported), and Mex-ico's by 70% thanks to the United States, to which

80% is exported. Mexico symbolizes the adventof the 'factory country', where labor is cheapand the consumer is nearby. In Europe too, thecompetitiveness shock in some countries hasreshuffled the cards and led to production trans-fers from formerly industrialized countries tothe low-cost countries, mainly in the East andmore recently in the South. For example, dueto their carmakers' strong positioning in smallmodels, France and Italy have experienced pro-duction declines of 35% and 21% respectively involume terms. These changes are not ended:new markets and price competition at the doorsof the consumer countries will mean further re-location of production lines, which have becomemore agile.

Apart from a mere cost perspective, the devel-opment of new product ranges, differentiated(SUV or 4WDs) or positioned (premium), makesit possible to maintain satisfactory productionvolumes in high-cost regions. Carmakers' prod-uct strategies and regional competitivenessagreements can enable the automotive industryto remain competitive and profitable while in-vesting for the future. ◾

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Global automotive production in millions of units (PVs and CVs)

NB: PV: passenger vehicle; CV: commercial vehicleSources: OICA, Euler Hermes forecasts

France

Italy

Japan

Brazil

Spain

United Kingdom

Germany

South Korea

United States

Mexico

India

China 176%

83%

70%

12%

11%

-3%

-4%

-5%

-18%

-20%

-21%

-35%

Chart 4: Growth in automotive productionby country, 2007- 2015 percentage

Sources: OICA, Euler Hermes© Image Allianz 1194029964

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Carmanufacturing in 2016: Automotiverisk map

2016SECTOR RESEARCH TEAM

Source Euler Hermes, as of June 22, 2016

Sound fundamentals; veryfavorable or fairly good outlook

Signs of weaknesses; possibleslowdown

l

l

l

l

Structural weaknesses; unfavorable orfairly bad outlook

Imminent or recongnised crisis

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What are the risks?

2016

2015

2014

ChinaOthers

58%61%

38%42%

57%

43%

Chart 6: Market share by origin of carmakersin China as %

Sources: CCAM, Euler Hermes

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CHINATax break to continue

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Chart 5: Growth in the number of new carregistrations in Chinayear-on-year, in million of units

Sources: CCAM, Euler Hermes forecasts

In order to boost a slowing automotive mar-ket, in September 2015 the Chinesegovernment halved the tax on pollutantemissions from 10% to 5% for bottom-of-range and mid-range vehiclesSales then rebounded sharply, and a sales vol-ume exceeding 21 million units was posted. Thistax measure was extended until end-2016 andthe market continued its rebound, posting 8%growth to around 23 million vehicles. This ad-vantageous tax system enabled the Chinesebrands to look for consumption among less af-fluent households. In the past three years, thesegained four percentage points of market share,reaching 43% in 2016. Success is due not onlyto far lower prices, but also to a product offeringthat is renewed rapidly and positioned oncrossovers and SUVs which the Chinese are veryfond of (sales growth of 50% and 18% respec-tively).

It is almost certain that these incentives willbe continued in 2017So as not to penalize a strategic sector for Chi-nese growth, the authorities will extend this taxloophole driving the market at a growth rate of5%, i.e. to achieve 24 million units in 2017.Growth will come mainly from the hinterlandregions, while the coastal cities, heavily polluted,are increasingly subjected to registration andtraffic restrictions. These regions are the pre-serve of the Chinese carmakers. If the tax re-duction were not extended, we anticipate a mar-ket contraction of between -5% and -10%.

Forced development of the electric carIn order to combat rampant pollution, the au-thorities are introducing restrictions and incen-tives. Firstly, the purchase of a new vehicle inBeijing or Shanghai is subject to a prior lottery,and this extends the purchase time to severalyears, except for an electric vehicle. Next, theincentives can amount to as much as EUR15,000 (central government and regional aidscombined) for the purchase of an electric carmanufactured by a Chinese carmaker. While itis indisputable that sales of electric cars will in-crease, their market share remains limited.◾

Sales growthin China

+8%in 2016 © Image Allianz 75405904

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This year the US market is expected to beatits sales record, at 18 million units, follow-ing 17.8 million last yearThe oil counter-shock and the indefinite post-ponement of US interest-rate hikes will haveborne fruit. Loan durations extended to morethan six years and an obvious oil dividend forpurchasing power are supporting the automo-tive market in its seventh year of growth. Withthese exceptional boosters likely to end soon,we are bound to anticipate a slight market con-traction by 2% to 17.6 million units in 2017.

Light utility vehicles (LUVs) are on a rollLarge pickups and SUVs, petrol-guzzling sym-bols of Made in America, are back in force. They

account for almost 60% of the market and offerbig margins for the carmakers. Thanks to thesuccess of these locally assembled LUVs, US au-tomotive production will reach 12 million vehi-cles this year, i.e. double the 2009 level, and alevel identical to that of the early 2000s.

The Google Car, symbol of a revolution? With no steering wheel, no accelerator and nobrake, this technological gem launched in 2015on the roads of California is now capable of trav-eling without a driver from a point A to point Bwithout human intervention. Automotive indus-try and high-tech players, as well as the govern-ment, plan to devote USD 4 billion to au-tonomous cars over the next ten years.

Pending this revolution, US automotivemanufacturers have posted earnings thatare satisfactory but very closely tied (80%)to the North American continentRestructuring operations and the upturn in theEuropean market could go hand-in-hand withsome profits after years of losses, while SouthAmerica is disappointing against the backdropof the Brazilian crisis. Following 0.6% revenuegrowth, we expect 3% growth in 2016 and 1%in 2017. The operating profit margin, for its part,will be in the 4.6% range.◾

UNITED STATESInterest rates and fuel prices positivefor the market, not for energy transition

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Chart 7: Growth in the number of new carregistrations in the United Statesyear-on-year, in million of units

Sources: Auto Alliance, Euler Hermes forecasts

40%

45%

50%

55%

60%Share of light utility vehiclesShare of personal vehicles

1615141312111009080706

Chart 8: Sales breakdown between PVs + LUVsin the United States

Sources: Auto Alliance, Euler HermesNB: PV: passenger vehicle, LUV: light utility vehicle of the crossover,4WD or pick-up type

In 2016, sales record at

18 millionsunits


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7.4%operating profit

marginin 2016

JAPANZigzagging market for carmakers

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Financialcrisis

Tsunami

EarthquakeVAThike

Chart 9: Growth in the number of new carregistrations in Japanyear-on-year, in million of units

Sources: Jama, Euler Hermes forecasts

© Image fast-807640 (Pixabay under Creative Commons CCO, Public Domain)

Table 1: Revenue and profit margin trends in Japan

Sources: Toyota, Honda, Nissan, Mazda and Mitsubishi companies, consensus, Euler Hermesforecasts(1) Revenue growth relative to prior year(2) Op profit margin: Operating profit relative to revenues

Japan 2011 2012 2013 2014 2015e 2016f 2017f

Rev growth(1) 1.0% 1.9% 12.4% 19.6% 6.9% 6.5% 4.5%

Op profit margin(2) 4.2% 2.9% 5.4% 7.3% 7.6% 7.4% 7.2%

A market that is still as volatile, with salesfluctuating between 4 and 6 million unitsover the past ten yearsThe Japanese government has decided to putoff until 2019 the VAT hike scheduled for April2017, since the market still has great difficultywithstanding the hike of April 2015. However,the market is expected to post flat new car reg-istrations in 2016, after a drop of more than 14%in 2015. 2017 could surprise on the upside, with5% growth to 5.3 million units. The Japanesemarket is still as closed (94% share for Japanesecarmakers) due to various technical and cus-toms barriers, so these fluctuations have no im-pact on the global market.

The archipelago of global giants: Toyota andMitsubishi 2.0While Toyota oscillates between No. 1 and No.2 in the world for the number of units sold, theannounced partial takeover of Mitsubishi by Nis-san (also an ally of Renault-Dacia) could meanthat the latter group with also be in the race forthe leading positions. They would automaticallymarginalize the other Japanese carmakers ofmore modest size, and this would favour major,innovative investments.

Such clout would enable the Japanese automo-tive industry to post an operating profitabilityratio close to that of the premium makes. In2016 and 2017, revenue is forecast to grow by6.5% and 4.5% (6.9% in 2015) and the operatingprofit margin is expected to be 7.4% and 7.2%respectively.

All-electric or all-hydrogen? Limited mileage and a shortage of recharginginfrastructure put a cap on the electric vehicle's

market share. That is why the Japanese havealso just brought to market the first hydrogenmodels, which, although they are still technicallyvery costly, offer a technology providing similarperformance to that of conventional engine-powered vehicles. ◾

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EUROPEDriving growth?

The European market will grow 5.5% in2016 to around 15 million units. All thecountries are in positive territory this yearIn 2016 all European countries will contributeto this new growth year, the third in a row. Italyand Spain continue their catch-up, with salesgrowing by 10%, although still below their pre-crisis level. France and Germany are doing betterand should (at last) regain their pre-crisis level,with sales growth of 6% and 5% respectively.Lastly, in the United Kingdom, new car registra-tions will peak at around 2.6 million units.

In 2017, the British and Spanish engines willexperience some misfiring, forcing sales tostagnate in EuropeWhile the trend for the past three years sug-gested that the level of 15.5 million unit salescould be regained in 2017, Brexit and Spain'sannouncement of the end of its old car scrap-ping incentives have disrupted this recovery sce-

nario. Italy (+5%), France (+3%) and many pe-ripheral countries will continue to forge ahead,while the United Kingdom is expected to lose9% of sales, or 205,000 units, and Spain 10%, or100,000 units. Against this backdrop of a marketslowdown, there will be even more intense com-petition between producer countries, which viacompetitiveness agreements will be awardedcontracts for new models and will ensure vol-ume production, and designer countries, whichwill offer the best product ranges and the besttechnologies in line with end-customer expec-tations. Margins, meanwhile, restored thanks tolow oil and steel prices, are likely to be put underpressure. ◾

Other

Italy

South Korea

Japan

United States

France

Germany

7%

13%

6%

4%

14%

20%

37%

Chart 10: Market share by origin of carmakersin Europeas %

Sources: Association of European Car Manufacturers, EulerHermes

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Chart 11: Growth in the number of new carregistrations in Europeyear-on-year, in million of units

Sources: Association of European Car Manufacturers, EulerHermes forecasts

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161 159154

146

140136

132127

123 121

Chart 12: Change in CO2 emissions by vehiclein Europe in grams per kilometer

Source: Environment European Agency

15 millionscars sold in 2016

© Image personal-943879 (Pixabay under Creative Commons CCO, Public Domain)

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Chart 14: Growth in the number of vehiclesexported, Spain

year-on-year, in million of units

Sources: ANFAC, Euler Hermes

-9 %drop in theUK market

in 2017

The UK and SpainBrexit and the end of the Spanish miracle

The first Brexit effect on the automotivesectorA fall in household confidence and purchasingpower is expected to push sales down by 9% in2017. Further out, the country is faced with nu-merous challenges in renegotiating trade agree-ments with the European Union and with the50 countries with which it has an agreementvia the EU. In 2015, the UK automotive industry's exportswere worth EUR 46 billion, of which 43% to theEuropean Union. This dependence is mutual:the United Kingdom imports motor vehicles and

parts worth EUR 70 billion, mainly from Germany(EUR 29 billion) and France (EUR 4 billion). A gentlemen's agreement favorable to both par-ties is envisaged, but this will take time. Notetoo that, in the long run, if the renewed com-petitiveness hoped for by exiting the EU is to beachieved, notably through a more aggressiveindustrial policy, the automotive industry will bein the limelight. Since most British makes arenow owned by foreigners, this industry will haveto give reassurance and demonstrate its poten-tial if it wants to attract investments.

Spain faces the end of the old car scrappingincentives in place since 2012The Spanish market, kept on life support formore than four years, has gradually regainedsome momentum, reaching more than one mil-lion units at end-2015 and 1.1 million (pro-jected) at end-2016. However, the market, whichcollapsed from 1.5 million units in 2008 to lessthan 0.7 million in 2013, has never regained itspre-crisis volumes. The announced terminationof these incentives, worth EUR 2,000 per vehicle,will lead to a major slowdown in automotivesales in 2017. We expect a surge in sales thisyear, at the cost of a steeper fall next year, byaround 10%. Production, which is very export-oriented (86%), should remain stable. With itscompetitiveness agreements on working hoursand pay, Spain has become established as thesecond-largest European producer, with around2 million cars produced this year. ◾

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1.6United Kingdom (left-hand axis) Spain (right-hand axis)

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Chart 13: Growth in the number of new carregistrations in the United Kingdom and inSpainyear-on-year, in million of units

Sources: ANFAC, SMMT, Euler Hermes


© Image eu-1473958 (Pixabay under CreativeCommons CCO, Public Domain)

© Image stamps-1214419 (Pixabay under CreativeCommons CCO, Public Domain)

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Chart 15: Growth in the number of new carregistrations in France year-on-year, in million of units

Sources: CCFA, Euler Hermes forecasts

Other

United States

PortugalSwitzerland

TurkeyThe Netherlands

PolandItaly

United Kingdom

Belgium

Spain

Germany

2%2%

27%

3%

2%3%3%

10%8%

18%

12%

10%

Chart 16: Automotive sector exports by destinationin 2015as %

Sources: ITC, Euler Hermes

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+6% in 2016

FranceThings are going better

The French market has gathered momen-tumFollowing 7% growth in 2015, it is expected togrow by 6% in 2016, before slowing to 3% in2017. By then it will reach around 2.1 millionunits, the standard level for renewal of the carfleet. The continuous fall in sales of diesel vehi-cles (53% of total sales in 2016, versus 73% in2012) is likely to gather momentum due tostricter pollutant emission requirements andthe extra costs this will entail. The electric car,for its part, still represents only 1.1% marketshare in the first five months of 2016, versus0.9% for full-year 2015.

Automotive production, for both passengervehicles and light utility vehicles, likewiserecovered in 2016, posting 10% growth to1.65 million unitsHowever, this production level is still nearly twotimes less than its level of 10 years ago. Thisgood news regarding production will be short-lived: entry-range models will probably continueto be produced mostly in low-cost countries.

The value of trade by France's automotivesector with the United Kingdom is aroundEUR 4 billion, or around 10% of total tradeFrench imports from the United Kingdom rep-resent only EUR 1.9 billion. At present, the ques-tion concerns movements in the euro/poundsterling exchange rate, which is adversely af-fecting British demand and the profitability ofthe UK market for the French carmakers (whichdo not directly have a local production plant).Pricing power is weak, and a rise in selling priceswould immediately penalize market share tothe benefit of local producers. ◾

Table 2: Revenue and profit margin trends in France and Germany

Sources: Volkswagen, Daimler et BMW groups, consensus, Euler Hermes forecasts(1) Revenue growth relative to prior year (2) Op profit margin: Operating profit relative to revenues

France 2011 2012 2013 2014 2015e 2016f 2017f

Revenuegrowth (1) 6.4% -4.4% -2.8% -1.5% 7.9% 5.0% 3.0%

Op profitmargin (2) 1.9% -4.6% -1.5% 1.5% 4.2% 4.4% 4.5%

Germany 2011 2012 2013 2014 2015e 2016f 2017f

Revenuegrowth (1) 17.4% 14.7% 1.9% 5.5% 10.2% 6.0% 4.0%

Op profitmargin (2) 8.4% 7.3% 7.0% 7.6% 4.0% 7.0% 7.3%

The German carmakers postoperating profit margins ofaround 7% when those ofFrench groups are in the vicinityof 4%.

Profit margin differential between Germanand French carmakers

French carmakers have regained a satis-factory level of profitability through a re-newal of their product ranges and com-petitiveness agreements. The gap still persists due to: (i) the German advantage in terms ofquality (and hence price);

(ii) global market diversification whichserves as a growth driver; and (iii) returns on past investments, thanksto high profitability, continually, over thepast six years..

ZOOM

2.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

17f16f15141312111009080706

3.4

16


The German market will post 5% growth to3.35 million units this yearThis is a return to a record level. We estimatethat the prospects for 2017 will be more mod-erate, with growth limited to 1%, i.e. 3.4 millionvehicles. In contrast with other markets, theshare of diesel continues to increase, accountingfor 49.6% of sales in the first half of 2016, versus48% for 2015. Lastly, note that Germany recentlyintroduced (on 2 July 2016) a 4,000 Euro subsidyfor the purchase of electric vehicles, and a 3,000Euro subsidy for rechargeable hybrids. Ulti-

mately, these amounts are still small as the mar-ket share of electric vehicles was still less than0.4% in 2015.

Germany is still by far the leading Europeanautomotive producer, with a volume of 5.8million units, more than 80% exportedGerman carmakers' sales did not really sufferfrom the Volkswagen scandal, but the Germanautomotive industry has nevertheless changedpolicy regarding emission control. The CO2emission targets for 2020 will be hard toachieve, but the rapid development of recharge-able hybrid engines (necessary to reduce thepollution level of powerful saloons and SUVs)and numerous EV projects should make it pos-sible to obtain this "green" label.

The United Kingdom ranks second, afterthe United States, with EUR 29 billionexported, out of 220 billion for the automo-tive sectorThe United Kingdom's automotive imports rep-resent only EUR 4.4 billion. Germany appearspotentially very sensitive to the consequencesof Brexit. Although the premium segmentshould be able to raise its prices without anyproblem, a recession would probably affect theexport market drivers in 2017. ◾

GermanyCleaner than clean

Other

SwitzerlandSouth Korea

The NetherlandsAustria

Belgium SpainItalyFrance

China

United Kingdom

United States

3%2%

4%3%

3% 3% 4%7%

8%

13%

15%35%

Chart 18: Exports in the automotive sector by destination in 2015as %

Sources: ITC, Euler Hermes

Chart 17: Growth in the number of new carregistrations in Germany year-on-year, in million of units

Sources: VDA, Euler Hermes forecasts

80

85

90

95

100

105

110

115

120

125

Objectif 20202015

BMWVolkswagenMercedesRenaultPSA

Chart 19: Average CO2 emissions per carmakerin 2015 and 2020 target

Sources: Ademe, constructeurs, Euler Hermes

+5 %in 2016

© Image car-916561 (Pixabay under CreativeCommons CCO, Public Domain)

17


Brazil and Russia at the bottom of thetroughThe dramatic fall of the Brazilian and Russianmarkets has been surprising: new car registra-tions have been halved in less than four years.In Brazil, following a 24% decline in 2015, weexpect a further 19% decline in sales in 2016and a slight rebound in 2017 by 5%. In Russia,the collapse (36% sales decline in 2015) is ex-pected to be milder in 2016, at -11%, with a 12%growth recovery in 2017. These two erratic mar-kets remain strategic for the carmakers, whichsee long-term growth prospects there. Financialstrength and manufacturing flexibility are nec-essary to adapt to such volatility.

India and Turkey on engine brakingIndia and Turkey are facing a severe slowdown,with sales practically stable in 2016. India willpost only 1% growth in new car registrations,after 10% growth in 2015 and before picking upto 5% in 2017. Despite its population of morethan one billion inhabitants, only two millionvehicles are sold per year. The carmakers aretrying to boost growth in this market with nu-merous ultra-low-cost vehicle offerings. Andyet, a still-low household purchasing power andlimited road infrastructure suggest that Indiawill not take over from China within the nextseveral years. In Turkey too, 2016 will be markedby a slight 1% contraction in sales. Recent eventssuch as the failed military coup attempt are not

The BRITs (Brazil, Russia, India, Turkey)

Disappoint

conducive to a rapid pickup in sales. The trendremains positive and we believe that the marketcould recover to +7% in 2017. Like India, Turkeystill remains a small market, of around 700,000sales, but with high potential in the mediumterm. ◾

1.0

1.4

1.8

2.2

2.6

3.0

0.2

0.3

0.4

0.5

0.6

0.7

Turkey (right-hand axis)India RussiaBrazil

17f16f15141312111009080706

2.2

1.8

1.6

0.8

Chart 20: Growth in the number of new car registrations, Brazil, Russia, India and Turkeyyear-on-year, in million of units

Sources: OSD, Euler Hermes forecasts


+1%in India and

-1%in Turkey in 2016

-19%in Brazil and

-11%in Russia in 2016

18


2017f2016f2015

0.13 0.12 0.14

2017f2016f2015

0.21 0.21 0.232017f2016f2015

0.41 0.47 0.51

2017f2016f2015

0.24 0.22 0.24

2017f2016f2015

0.12 0.15 0.17

CHILI

ARGENTINA

PERU

COLOMBIA

MOROCCO

E

Accelerating

Lackingvitality

A tenfold marketincrease

in ten years

Recoveryin 2017

Backin forward gear

I

After Iran, which emerging marketwill reach one million new carregistrations?

Newcar marketsfor

2016SECTOR RESEARCH TEAM

Sources: new car registrations (millions of units) OICA annual data, Euler Hermes forecasts

19


2017f2016f2015

0.75 0.79 0.83

2017f2016f2015

0.12 0.13 0.15

2017f2016f2015

0.50 0.54 0.57

2017f2016f2015

0.12 0.14 0.17

2017f2016f2015

1.101.20

1.40

2017f2016f2015

0.670.54 0.59

2017f2016f2015

0.26 0.18 0.20

SAUDI ARABIAEGYPT

INDONESIA

IRAN

PHILIPPINES

THAILAND VIETNAM

AEveryone wants

their pieceof the pie

On trackfor recovery

Dominatedby Asian carmakers

A

In reverse

gear A declinealong withoil prices

Return tomore stableconditions

High potentialfor a country of

110 millioninhabitants

20


Economic ResearchEuler Hermes Group

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Global Sector Outlook

Economic Outlookno.1223 February 2016

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EconomicOutlook no. 1222January 2016

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The 7 dwarfsof global growth

Economic Research


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◽Three Asian Tigers caught in a (Chinese) Typhoon >August 2016◽The Olympics: A false (economic) start for Brazil >July 2016◽Worldwide DSO: Paying the penalty for low growth >July 2016◽Brexit: What does it mean for Europe and the world? >May 2016◽Brazil did not need more drama right now >May 2016◽Insolvencies are back: Keep an eye on the domino effect >April 2016◽Why is global growth a FLOP(s)? >April 2016◽Switzerland: Modest export restart in 2016 while survey signals further

growing export risks >April 2016◽Oil prices: Time for (nasty) second-round effects? >March 2016◽Payment Behavior Index (PBI) shows deteriorating conditions >February 2016

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June 2016 updates

NN◽US Oil >February 2016◽US Retail >January 2016◽US Household equipment >February 2016◽France agrifood >November 2015◽US agrifood >November 2015◽Germany agrifood >October 2015◽Construction in Germany >October 2015◽US Auto Industry Outlook >September 2015◽US Steel Industry Outlook >July 2015

February 2016

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