Chris Brower, SAA President
2019 Automotive Outlook: On the Cusp of Change
By Chris Brower
As an industry, we find ourselves navigating transformational changes and business model shifts, largely brought about by technological advances, which are posing new risk and return profiles. This was just one of many observations shared at the Society of Automotive Analysts (SAA) month’s 32nd Annual Automotive Outlook Conference held last month in Detroit.
The Outlook Conference unofficially kicks off the North American International Auto Show. While many corporate and product announcements were made by automakers during NAIAS, many of the headlines and discussion seemed to tilt toward investor audiences vs. the traditional NAIAS auto show product highlights.
Coming off a relatively strong 2018, there are many signs to think that the auto sector in 2019 could be as strong despite sales being lower than expected in January and no shortage of risk factors both in the U.S. and globally. One thing is for sure though: Changing market dynamics presents new business opportunities, both at the macro and micro economic levels.
The industry buzz and repositioning of business models are focused on a compelling future vision of widespread autonomous vehicle adoption. However, those business models offer uncertain returns and unknown levels of consumer adoption, which is frequently debated among industry analysts and thought leaders.
A Look at the Global Economy
Advanced economies will decelerate in 2019, while some emerging markets will pick up the pace, according to Joel Whitaker of DuckerFrontier. A couple of his predictions included:
· Mexico will be impacted by a slowing U.S. economy, ongoing NAFTA uncertainty, and disruptions by Mexican President Andrés Manuel López Obrador (AMLO). As a result, Mexico will swerve widely.
· A deceleration of the Chinese economy as China continues to transition to a lower growth rate, but policy stimulus should ensure a soft landing in 2019. However, sharp-eyed industry watchers will find pockets of growth in out-of-the-way places. For example mid-sized emerging markets like Morocco, Kenya and Nigeria saw investments in auto assembly in 2018 that augur well for the year ahead.
The slowing down of the global economy was echoed by Jeff Schuster of LMC Automotive. After economic contraction in 2018, slower global momentum may start to negatively impact individual markets, he said.
Schuster noted that global light vehicle sales are expected to return to positive growth but there are no shortage of risks, led by the impact of tariffs and the threat of a trade war. The segment with the greatest risks may be the European premium vehicle market where a 25% tariff on EU imported vehicles could lower U.S. sales by 200,000 units. Additionally, the Brexit concern is back in focus after the he Worldwide Harmonized Light Vehicle Test Procedure (CO2 emission test) rolls out which could annually add £1.8 billion to the cost of exports and £2.7 billion to the cost imports. The UK’s light vehicle market could shrink by nearly 15% and threaten domestic and continental plants while undermining JIT business models.
Even with all the uncertainties, Schuster estimated a global 2019 forecast of 95.4 million light vehicles sold – an increase of 750,000 units from 2018. The slight bump will not come from the U.S. Canada and Mexico which Schuster predicts will see a 2% decline.
Electrification of vehicle should continue grow, according to Schuster, with the BEV market segment (battery electric vehicle) potential growing to 18 million units globally, or about 17% of the global vehicle market. NEV (New Energy Vehicle) subsidies continue to keep China on top with 61% of BEVs. Many more brands will take to the China BEV stage, but many will fail or be consolidated into larger groups, he added.
Keep an Eye on the U.S. Economy in Early 2019
An increase in U.S. government spending, tax cuts and wage improvements should help the U.S. economy grow 3% in 2018, with real GDP finishing somewhere between 2.25-2.5%, noted Martin Lavelle of the Federal Reserve.
Lavelle added that the U.S. economy is witnessing its longest post WWII expansion, which was aided by a strong holiday season as retailers’ expectations were met or exceeded. U.S. vehicle sales might see a slight sip from the 17.2 million mark of 2018, but stock market volatility hasn’t stopped consumers’ willingness to purchase their automobiles.
Other economic factors, such as a stagnant housing market, the hesitancy of banks to lend to smaller housing developments, high student loan debt levels, extremely low unemployment levels, hourly wage growth at just above 3% and inflation dipping, could make the first half of 2019 interesting.
According to Lavelle, since the Great Recession, the 1st quarter was the weakest growth-wise in 6 of the 9 years. Add to that the impact of the tariffs, a slowing Chinese economy, Brexit concerns, and lower oil prices, makes Lavelle wonder who will ultimately win: The consumer or Wall Street?
LMC’s Schuster believes light vehicle demand in 2019 will be flat over 2018. His scenarios for 2019 are a high of 17.3 million units with a low of 15.7 million and a base of 17.0 million.
A View from Two OEMs
Outlook attendees heard from two automakers – one of the largest and one of the newest. Both agreed about the rapid pace of change in the industry and the importance of the consumer mindset.
Andrew Norton of General Motors discussed myths of Wall Street. For example, Wall Street believes that Millennials are less interested in owning vehicle, but Norton believes it is the actual higher cost of the vehicle being the number one barrier to ownership. He also noted that Wall Street believes ride sharing will significantly shrink the U.S. vehicle fleet. Although Norton estimates 15% to 36% of consumers use a ride share service, consumers actually view ride share as an addition, not a replacement.
Executives from Rivian Automotive, newcomers to the industry, discussed electric vehicles and how adoption curves of similar products, such as the Apple iPhone and Motorola Razor, revolutionized their sectors and how tech evolutions followed. The same should happen in the auto sector.
Outlook Conference speakers also discussed Ford’s “global redesign” of the company and the new collaboration with VW on LCVs, with many product and footprint actions that will be areas to closely watch in 2019.