A Smooth Race Never Made a Skilful Racer

Europe’s auto industry has been hit hard by the outbreak of the COVID-19 pandemic and its aftermath which led many factories to temporarily shut down production. Now after the lockdown period is behind us, car and car part manufacturers in Europe are faced with a challenging new environment, weighted by a low demand side which was not that great to begin with.

Let’s start off by viewing the number of newly registered vehicles in Europe and Russia. The European automotive industry – with the exception of the recession in the early 1990s and the financial crisis in 2009 – has continuously been growing since 1980. However, it only (fully) recovered from the financial crisis in 2017. In 2019 Europe recorded a 0.9% YoY increase in the number of newly registered vehicles as the pressure of new regulations and the slowdown of the global economy took its toll. Namely, European car manufacturers were battling a slowing European economy, where the biggest market (Germany) was at risk of sliding into a recession and U.K. buyers still await the outcome of ongoing Brexit talks. Furthermore, alongside the economic fallout from trade tensions between the U.S. and China, carmakers were feeling the pinch from the shift to electric cars. Then, as if all of the abovementioned wasn’t enough, 2020 decided to throw a curveball to the industry by adding a global pandemic into the mix.

Number of New Passenger Cars (Units, T12M)

As seen on the chart, Europe recorded just one month of YoY growth in newly registered vehicles (passenger cars and LCVs) in 2020. Such a declining performance is, of course due to the COVID-19 pandemic. However, it still paints a worrying picture that the pent-up demand did not play a larger role after the lockdown had ended.  

New passenger cars in EU (monthly basis) %
New passenger cars in Russia (monthly basis) %

On the other hand, when looking at the historical changes in the number of new passenger cars on the Russian market in the period from 2009 until today, one can notice that that the EU and Russia usually show inverse trends. After the slowing of sales in 2013-16 against a backdrop of general macroeconomic decline, the market began recovery in 2017. In 2018 the sales picked up by as much as 20% YoY in the first five months of 2018 to slow down later due to a worsening macroeconomic situation, with monthly growth declining to a range between 5.6%-11.0%. Average annual growth totalled 12.8% in 2018, only slightly up from 11.9% in the previous year. However, note that the strong growth was affected by several outside factors such as government incentives that remained in place under some programs and measures to increase car lending, coupled with an anticipated rise in the VAT rate and car prices in 2019, as well as fears of new economic restrictions. And just as expected, 2019 brought an economic growth slowdown, lower oil prices, the devaluation of the Russian ruble and a higher VAT which rose to 20%, all of which contributing negatively to the demand side. As a result, in 2019 the number of newly registered cars shrank by 2.3% YoY. When observing the T12M number of new passenger cars, it appears that Russia’s new vehicle market has recovered faster than the EU market. However, the prospect of further declines can never be ruled out in a market that has so frequently been impacted by geopolitics. One should also note that rising sales of cars in Russia can also indicate a fear of future ruble depreciation, thus pulling forward demand due to concerns about future price increases.

What can we expect in 2021?

A market recovery is expected; however, it remains to bee seen if it will be as strong as some surveys suggest (double-digit growth in 2021 due to the depth of 2020’s decline). Meanwhile the recovery is expected to be fuelled by low interest rates and attractive financing deals. Furthermore, Government-led infrastructure spending will also buoy sales of new commercial vehicles, which will outpace those of cars.

Regarding key trend which we can expect to see in 2021, the most obvious one is restructuring. As entire value chains have been seriously affected by the outbreak of COVID-19, automakers will have to accelerate their consolidation and restructuring plans in 2021 in order to repair their severely damaged finances. Notable mentions which can serve as an example are Honda, who will close their Swindon plant in the UK, formerly the company’s only EU car factory and Nissan who will close a large facility in Barcelona, which primarily makes electric vans and pick-ups. As a result, one can expect a negative effect on suppliers of these plants. Other key trend to watch would be the expected rise of electric vehicles boosted by the generous incentives and subsidies on offer in the EU in 2021 as governments try to fuel a green recovery.

Filip Gracin
Category : Blog

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