Car crash in the motor industry?

Assembly line

Last year was not a good year for the world motor industry. Passenger car sales fell by 13% in the USA, by 9% in the UK, by 4% in China, by 3% in France and by 0.2% in Germany. In the USA higher interest rates reduced people’s willingness to take out car loans. In China a money squeeze and higher taxes on vehicle purchase cut demand. In the UK higher Vehicle Excise Duty and threatening noises against diesel cars led to a big fall in diesel car sales which petrol car sales did not fully replace. The squeeze on car loans did not help. In the Euro area changes to emissions regulations, a shift in attitudes towards diesels and a shift in monetary policy affected sales. The European market was weaker towards the end of the year.

We have moved on from the world where people said that what was bad for General Motors was bad for the US economy. The US had a good year for growth in 2018, with rising incomes and profits increases despite the downward pressure on car sales. Light trucks helped within the motor industry, whilst all conquering technology swept on with many new jobs and higher incomes in its wake. China experienced an unusual fall in car sales but managed overall growth on the official figures of more than 6%. The German economy was brought low partly by the poor performance of cars in the second half of the year. As a leading exporter to the US, China and the UK with some disruption at home as well, the car troubles helped produce a negative quarter for growth overall in the third quarter, with the final quarter of the year still weak. Italy’s fall in car sales was accompanied by a dip into general recession.

The problem is the industry has to ask if this new pattern is a sign of things to come, and not just a temporary dip. Governments are now hostile to conventional vehicles, and wish to tax and regulate diesel and even petrol cars off the road. They are demanding rapid progress to electric cars. The industry faces a big challenge, with the need to spend a lot on improving the electric car offer and on new production capacity. They face competitive attack from new electric car companies and from technology giants wishing to enter this new field. Honda announced the closure of its Swindon plant in the UK this week, following a twelve-year run of decline in European sales. They saw output more than halve over the time period. They have decided to have no more manufacturing capacity in Europe at all, and announced the closure of their Turkish factory at the same time. Nissan has announced it is consolidating some production in Japan rather than creating new capacity in the UK, given the falling diesel sales and the mood for electric cars amongst governments. The car companies have just spent large sums on creating clean diesels, accepting the challenge to reduce or eliminate emissions, and have been disrupted by the sudden change in government attitudes towards the diesel car.

The industry also has to find ways of persuading the car buyer that an electric car is what they want. The public is not rushing to buy despite the generous subsidies many governments are offering, and despite the absence of fuel duty on the electricity needed to run them. The three main issues that put people off are cost, range and recharge arrangements. Many of these cars remain expensive and may do so until they sell in bigger volume. One well known small electric car is said on the material issued by its maker to have a range of 125 or 160 miles. Others also have restricted ranges compared to a diesel competitor. Charging times are also often quite long. The companies that manage to slash charge times and to extend the range their car can do on a single charge materially will do best at promoting these new vehicles.

Meanwhile the growing preference to rent or hire, not buy might lead to a world where we collectively want fewer cars. As the autonomous vehicle edges cautiously from private track to street trials, so a vista opens up of some people calling a vehicle for a given journey from a fleet of hire cars, rather than owning their own. Most of what is happening to the car industry is a big case of industrial change forced by a change in government policies and consumer preferences. Some of the traditional firms will fail to adapt, and various factories will be switched from car production to other uses. As we have seen, you can have a fall in car sales but still have a decent economic recovery and a positive stock market. Germany is the economy most at risk owing to the significance of car manufacture and export to it. As Mr Trump reads the report into the international car trade, Germany needs to consider how it will reply should Mr Trump demand a different trade system in cars under threat of imposing tariffs. The president dislikes the higher tariffs into Germany than into the US, and thinks the current trade imbalance reflects an unfairness in the current trading system. If the US opens trade proceedings against the EU and Germany it will be another negative for this sector under pressure.


The above article was previously published by Charles Stanley on 22nd February 2019