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When I think about the state of the world’s major automakers, I’m reminded of Charles Dickens’ opening words in “A Tale of Two Cities”:
“It was the best of times, it was the worst of times.”
Nothing could be more true for the auto industry at the moment.
U.S. Auto Sales Soaring
Much of the good news for the industry is right here in the U.S. August light vehicle sales showed the highest rate of increase in 10 years. Sales surged to an annualized rate of 17.81 million units.
In addition, the seasonally adjusted annualized rate (SAAR) finished above the 17 million unit level for the fourth straight month.
Meanwhile, General Motors (NYSE: GM) recorded the best figure in absolute terms — 270,480 vehicles sold. However, Ford Motor (NYSE: F) recorded the biggest year-on-year sales increase. Its sales rose 5% to 234,237 vehicles.
European vehicles sales were also strong. Auto sales in Europe soared by 9.6% in August, with 701,245 new car registrations. Sales were led by gains in Germany, the United Kingdom and Spain as the European economic recovery gains some traction.
Europe is on course to post annual sales this year of 13.1 million units.
But that’s where the good news ends.
Developing Markets: Auto Sales Dive
The bad news comes from the auto industry’s growth engine, emerging markets, for the past number of years. Auto sales in the emerging markets are stalling out and even falling, as in Brazil and Russia.
In the first half of 2015, light vehicle sales fell by more than a third in Russia and 19% in Brazil.
Global automotive powerhouse Volkswagen AG (OTC: VLKAY), through August, sold 1% less vehicles worldwide year-on-year thanks to turmoil in emerging markets.
But the news is particularly bad in the world’s largest vehicle market, China. China is Volkswagen’s biggest market and its sales there were down 5% so far in 2015 to fewer than two million vehicles.
The company’s rival, BMW (OTC: BAMXY), also warned recently that further softening in the Chinese market would crimp its outlook going forward.
China is the largest market for the big German automakers – Volkswagen, BMW and Daimler (OTC: DDAIY).
Bumpy Ride for Luxury Vehicles in China
The only way to describe China’s vehicle market at the moment is to say it has hit a pothole.
This is especially true for the premium brands BMW, Mercedes-Benz (Daimler), Audi (Volkswagen) and Jaguar Land Rover. JLR is owned by India’s Tata Motors (NYSE: TTM). China accounts for 60% of JLR’s earnings.
One Chinese dealer representative put it succinctly to the Financial Times: “The cash cow is dying.”
These companies had enjoyed the fruits of China’s market as the nouveau riche bought up these aspirational brands. Sales of luxury brand vehicles soared by about 50% in the 2010-2014 period alone.
German automakers were the biggest beneficiaries. German auto output in China soared 29% annually on average since 2005. The Germans now produce nearly one in every four vehicles sold in China today. Output last year was nearly four million vehicles. That is seven times more than just a decade ago.
The China story goes deeper than just the luxury car brands, though.
GM and Ford Hit, Too
Other players in the Chinese market, such as General Motors and Ford, are now running their plants in China at below capacity.
A study by Bernstein on 23 large vehicle-making joint ventures (as required in China) shows the factories to be operating at a 94.3% utilization rate. A year ago, the rate was 107.4%.
The key point here is that producing below capacity is a first for these joint ventures.
GM’s joint venture is with China’s largest automaker, SAIC Motor. It produced 2.4% fewer vehicles in the first half of 2015, according to the China Passenger Car Association.
Not good for GM, which now derives 35% of vehicle sales from China.
Ford has a joint venture in China with Chang’an Automobile Group and Mazda Motor (OTC: MZDAY). China accounts for 18% of its global sales.
Sales in August dropped for both GM and Ford in China. GM’s were down 4.8% and Ford’s down 3%.
(If you think that’s bad, it’s nothing compared to the squeeze auto insurers are about to feel. See why here.)
The Future
Yet, nearly every one of the globe’s automakers continues adding capacity in China.
Are they nuts?
Not really. Operations are still profitable and worries don’t creep in until factory utilization drops to near 80%.
And the China story really hasn’t changed.
Less than one in 10 people in China drive. And the middle class is still growing there, forecast to exceed 850 million people by 2030.
China’s government is behind the industry too. The central bank recently lowered reserve requirements for auto finance companies by 300 basis points.
Bottom line: For the world’s automakers, it looks as if recent weak auto sales are just a pothole. The “worst” of times in China will be brightening and the road will become smoother in the not-too-distant future.
(But not for auto insurers. One technology threatens to slash their profits—and your premiums—dramatically. See why right here.)