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Slowing Growth May Bring End To Sales Euphoria

Slowing Growth May Bring End To Sales Euphoria.

Brexit Turmoil Avoided So Far, But Nissan, JLR Worry.

“European and global auto sales are close to the peak of the cycle, in our view, and we see cyclical risks from slowing global growth”

Initial sales prospects look good for Europe as the crowds at the biennial Paris show swarm over the new products, but the longer haul could be buffeted by slowing global growth, burgeoning trouble for Volkswagen after dieselgate, worry about new upstart entrants and possible Brexit complications.

The industry is facing a tumultuous technology upheaval, particularly in Europe as the developing scandal over the health threat from noxious diesel emissions threatens to torpedo plans to meet harsh carbon dioxide (CO2) emission rules starting in 2021. That will cost money, as will as efforts to produce, electric and autonomous cars and internet connected ones too.

And then there’s the nightmare that this move to new technology might lead to a brash and rich outsider, from Silicon Valley say, blindsiding the industry with a new product or deal which would isolate and bankrupt them, or using its huge profits to capture strategic players. News last month that Apple might buy McLaren turned out to be a damp squib though.

The industry is relieved that the predicted economic catastrophe if Britain voted to leave the EU (Brexit) never materialized. But during the show some corporate leaders voiced their unease. Renault-Nissan CEO Carlos Ghosn said he wanted compensation from Britain if any extra taxes were payable after it leaves the E.U. JLR strategic director Hanno Kirner worried that if Britain left the Single Market it might make the company uncompetitive. BMW sales chief Ian Robertson, vocal in opposing Brexit, said demand in Britain had not yet been affected. 

And it’s not only worries about Brexit that concern an investment bank like Morgan Stanley.

“European and global auto sales are close to the peak of the cycle, in our view, and we see cyclical risks from slowing global growth. European (economic) growth expectations have clearly fallen in the past few months, and the minimal production growth expected for the second half may prove problematic for suppliers,” said Morgan Stanley analyst Harald Hendrikse in a report.

Hendrikse also worried about the uncertainty surrounding possible central bank action, European bank weakness, the U.S. election and political risks from the Italian referendum on December 4.

JATO Dynamics Ltd was bullish, but pointed out European sales weren’t likely to reach pre-economic crisis levels any time soon.

“European new car registrations are continuing to grow and we are moving forward, after the challenging years of the economic crisis. However, despite improving results, the market is not forecast to exceed the sales volume of the pre-crisis years before 2020,” JATO said in a report.

Professor David Bailey of the Aston Business School in Birmingham, England, said there was no catastrophic collapse in the U.K. following Brexit.

Bailey wasn’t certain how the European market would hold up.

“We don’t know how European sales will pan out. It’s done better than many expected this year though,” he said.

Industry forecaster IHS Markit predicts good growth for 2016, but hesitates a bit for next year, worrying about the details of Brexit negotiations between Britain and the E.U.

Dip next year
“E.U. car registrations (sales) will grow over 5.5% in 2016 to 14.52 million. In the longer term, there remain too many criteria that are dependent on the outcome of Brexit to give anything more than a range of probable scenarios. For now though, we anticipate that registrations in the E.U. will dip to 14.43 million (in 2017), before seeing growth return in 2018 but only taking it to 14.46 million,” IHS Markit said in a report.

LMC Automotive expects 5.4% growth this year in Western Europe.

“Consumer confidence remains relatively robust in most countries in the region, though U.K. confidence has taken a knock in the last couple of months following the E.U. referendum result,” LMC Auto said in a statement.

AlixPartners Managing Director Andrew Bergbaum said the European market is in good health with low interest rates persuading people to buy cars. The U.K. market is likely to get more expensive following the devaluation of sterling after the Brexit vote, but the market generally is doing well.

“We see Western Europe continuing to grow – albeit slowly. Brexit worried everybody but we haven’t seen any noticeable impact yet. The depreciation of sterling is likely to affect the car industry – the majority of cars …….. are imported and they could get more expensive,” Bergbaum said.

The industry is looking at new ways to make money offered by so-called mobility services. All the big manufacturers are looking into this as traditional car ownership patterns change.   

Mobility margins
Ford recently said its mobility services – for instance car sharing, car clubs, short-term rental – would eventually generate 20% profit margins. That’s way more than car makers usually generate, and explains why new entrants are sniffing around trying to grab the business.

“New players like Google, UBER, and Alibaba are trying to get their feet into the auto arena,” said Professor Stefan Bratzel, from the Center of Automotive Management in Bergisch Gladbach, Germany.

Meanwhile, Morgan Stanley, in a separate report from its Capital Goods team, said the global auto business had been supported since 2015 by a convergence of positive factors like low unemployment, interest rates, fiscal incentives and price discounts pulling demand forward.

“A weakening (economic) cycle will have more than just a topline (sales) impact – margins and pricing could also come under pressure,” the report said.

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