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Turmoil In Emerging Markets Will Roil Big Manufacturers

Brazil Slipping, Turkey, Russia Too.
Thank Goodness For China, But Will That Last?

Emerging markets looked like a license to print money for hard-pressed vehicle makers for a while, but times are changing as economic frailties curb demand and foreign exchange turbulence makes business volatile and unpredictable.

Traditional markets are bringing in the profits with U.S. sales sprinting ahead and Europe’s reviving more slowly, while China’s expansion continues, albeit it with investors becoming more nervous about the possibility of the long awaited banking meltdown.

A report by LMC Automotive entitled “Are Emerging Markets the new Achilles heel of the Automotive Industry” points out that several emerging markets are underperforming and the outlook for vehicle sales in previously high growth markets is being downgraded.

“While the U.S., China and Western Europe continue to be likely sources of expansion in 2014, driving our outlook for the year, a number of large and previously dynamic emerging markets have moved from growth to stagnation, or even outright contraction,” said Pete Kelly, managing director of LMC Automotive.

Blame the Fed
Kelly said emerging market uncertainty was generated by the U.S. Federal Reserve’s declaration in 2013 it may begin tapering off asset purchases under its quantitative easing programme. This has led to higher interest rates in emerging economies which exaggerated underlying economic weaknesses and threatens to choke off investment funds.

Brazil and Argentina’s prospects have been choked off. Car sales in Brazil have stalled, and prospects for a rapid expansion have been delayed.

“In Brazil, the expansion by a number of vehicle manufacturers that are underway are aimed at raising overall capacity by 1.3 million by 2016 versus 2013. This may have made commercial sense 18 months ago, but it may now contribute to a fall in overall South American utilization to 63-65 per cent by 2016. Demand risks appear to be on the downside, so this situation could worsen” Kelly said.

Russian demand is expected to drop as the Ukraine crisis bites. Sales in Turkey dropped 30 per cent in March. India is fragile, with little prospect for growth this year.

“Chinese sales are continuing to expand rapidly – sales were up 10 per cent year on year in the first quarter of 2014 – and assuming a banking crisis does not emerge, should post solid growth this year,” Kelly said.

Foreign exchange losses are beginning to feature as big numbers in the financial results of many big auto manufacturers, with the likes of Renault with big emerging market operations looking exposed.

Yuan weakness
International Strategy and Investment (ISI) pointed out last week that weakness in China’s currency could take big bites out of German company’s profits with big revenues there. BMW sales in China last year were €15.3 billion, VW €23 billion and Daimler €10.7 billion.

“Sequentially, the Yuan has weakened from 8.30 to 8.50 versus the euro in the first quarter. If sustainable, the recent yuan weakness could take off two to four per cent of German manufacturers group EBIT this year. This is of course is in addition to the weakness of other emerging market currencies. VW is most exposed based on our numbers,” ISI said.

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