The automotive sector: Steering beyond the crisis

©Jackie Naegelen/Reuters

The car industry has taken a dent since the recession started to bite in 2008, but even before then, new patterns were emerging that would reshape the sector for a long time to come. 

The automotive sector was severely hit by the economic crisis. Production plummeted in 2008, and even in 2012 production was still 8% below its pre-crisis level in OECD member countries. Capacity utilisation stood at 70% on average in 2012, well below the historical average in manufacturing of around 80%. The situation has been particularly severe in Europe, where several manufacturers have had to close assembly plants and shed jobs.

While weak demand and the build-up of overcapacity have benefited buyers by squeezing down car prices, there are new question marks over the long-term viability of the car industry in developed countries in particular. This in turn makes the prospect of a major restructuring of the automobile sector all the more likely, with far-reaching implications for employment, local businesses and communities, and the wider economy.

The outlook for OECD car demand is unlikely to improve much anytime soon. Car sales in the OECD area have declined over the past decade and stand 13% below their 2000 level. Falling incomes during the recession have clearly contributed to this, but growth was largely subdued even prior to the crisis, owing to market saturation, rising fuel prices and low population growth. As the same forces are likely to be at play in the years ahead, sales growth in most advanced countries should remain low.

Moreover, growing pressures to reduce pollution and mitigate climate change could lead to higher taxes and congestion charges, thereby pushing up the costs of running a car. The relative benefits of owning a car could diminish too, thanks to tighter driving restrictions in urban centres for instance, and more investment in public transport alternatives. Car sharing and innovations such as Paris’s electric hire cars also offer a choice.

Beyond the OECD countries the picture is somewhat brighter, as car demand is set to continue growing rapidly in emerging countries. OECD countries accounted for 80% of world passenger car sales in 2000, but their share has dropped since, to around 50%. The share of BRIICS* in car sales more than tripled over the same time period and has almost reached 40%. China is the largest market for passenger cars, with a 24% share of world sales, well ahead of the EU at 17% and the US at 18%. Moreover, car ownership rates in emerging countries have room to grow because they are still low by international standards– about 50 passenger cars per 1,000 people in the BRIICS compared with 410 in the OECD area in 2010. That said, rising fuel prices and regulatory restrictions on car ownership to cope with congestion and environmental problems are likely to dampen growth somewhat, even as cleaner vehicles come on stream.

All of these trends will influence where car factories are located. Cars are typically assembled in the region where they are sold, so car production (assembly) will mostly increase in emerging and developing countries. True, cars could simply be exported to these growing markets, but shipping costs, trade barriers, and energy and environmental concerns might continue to make relocation more attractive for most mass-output cars. In 2011, only around 11% of all produced passenger cars were traded among North America, Europe and Southeast Asia.

OECD-based output already concerns the likes of sports and luxury cars, largely for branding reasons–a high-end Audi made in Germany has market appeal! In addition, some “inshoring” may happen– in fact, some car producers are already transferring some production back to their home countries, though the trend is difficult to quantify and predict. Our projections do not show any inshoring, but indicate that in most countries, car production will increase to a level that exceeds what these countries can currently produce (except for some European countries such as Italy and France). As a result, existing car assembly plants may well continue to operate and new ones might be needed. But the future relative competitiveness of particular countries in car production could also prove to be different from what is assumed in our projections. Nevertheless, improvements in competitiveness (market shares) might not be enough to eliminate excess capacity in several European countries, so capacity in these countries might have to be cut.

Another issue to look out for is how the market evolves. The car landscape has not altered as much in two decades as, say, telecommunications, but new competitors could well enter the market given the increasing demand for interconnected “smart” cars–vehicles that communicate with one another and the roadway via the Internet and local area networks, allowing for additional safety, intelligent navigation and energy control. However, development costs are high, which gives existing producers an advantage. Even the bulk of Chinese cars are made locally by joint ventures that are effectively controlled by foreign companies. Can Chinese manufacturers develop, globalise, and follow the Japanese and Korean lead? The question merits further study.

What is clear is that demand is shifting towards more environmentally friendly cars. The kinds of policy actions we are seeing today, in taxes and charges, not to mention fuel and carbon prices, are likely to intensify, boosting the attractiveness of research into alternatives, as well as a flurry of new patents. Associated fuel efficiency and emissions targets such as CAFE in the United States, euro6 in the European Union, JC08 in Japan and Bharat in India will continue to nudge demand towards cars with more efficient combustion engines, hybrid or electric power trains, and lighter and more fuelefficient vehicle designs. According to a 2013 survey by KPMG, electric and hybrid engines are unlikely to take over as the leading technology before the 2020s, as manufacturers around the world are still focusing their R&D on the downsizing of internal combustion engines and the development and improvement of plug-in hybrids. But we have seen predictions proved wrong in the past in other technologies. A breakthrough could alter the picture and give the car industry the lift it needs.

*Brazil, China, India, Indonesia, South Africa

References

OECD (2013), “Medium-run capacity adjustment in the automobile industry”, in OECD Economics Department Policy Notes No 21, November, OECD Publishing.

KPMG (2013), KPMG’s Global Automotive Executive Survey 2013: Managing a Multidimensional Business Model, KPMG.

©OECD Observer No 297, Q4 2013




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