Growth Markets: Opportunities and Challenges for the Automotive Industry

Thursday, 09 February 2017

While growth markets are the engines driving auto industry volumes worldwide, it is also an uneven market landscape – with China, India, Southeast Asia and North Africa leading the pack, whilst Eastern Europe shows signs of stabilisation and South America and South Africa continue to struggle. 

This week, Christoph Stürmer, Global Lead Analyst, Autofacts and Stella Lau, Automotive lead, PwC Growth Markets Centre, break down the various reasons why this is so.

Despite the overall cool down of automotive demand globally, growth markets are expected to remain the main engine for volume growth in the automotive industry worldwide, driving an 18.8M increase in vehicle assembly volumes from 2016 to 2023.

This automotive trend is in line with PwC’s recently launched the World in 2050 report, titled “The Long View: How will the global economic order change by 2050?”, which states that emerging markets will continue to fuel the growth of the global economy, and predicts that China will be the largest economy in the world, accounting for 20% of global GDP, followed by India, with 15%.

 

 

 

In the automotive world, we are seeing positive developments too in China and India – together with parts of Southeast Asia and North Africa. However, the global landscape is uneven – with Eastern Europe showing signs of stabilisation and an uncertain path ahead for South America and South Africa. Due to highly specific regulations, some major developing markets are only loosely connected to global trade flows and therefore require dedicated strategies and investments.

Strong sales in China

Among a tepid macroeconomic environment, the Chinese automotive industry has demonstrated robust double-digit sales growth as it continues to receive strong government support with ad-hoc tax incentives.

Sales growth has been highly dynamic, at almost 15% for the full year – the highest single-year increase since 2013. Most of the growth is attributed to purchase tax incentives that are gradually being taken back to original levels, which have led to a surge demand for small-engine vehicles of 1.6L and below. Sales of these engines grew a dramatic 22.5% year-on-year (YoY), reaching 15.6M units.  

This created a significant increase in local production, by almost 3.5 M units – which has provided the long-awaited relief to the low plant capacity utilisation of several local Chinese manufacturers, while increasing the market share of domestic brands.

For the long-term, we expect the market to reach an annual production level of about 35M light vehicles in 2023 with 3.8% YoY Compound Annual Growth Rate – assuming no major changes to export initiatives. This new sales volume would drive the total number of vehicles in China to reach 350 to 500M units by 2023, which is still a low national motorisation rate by global standards.

Positive developments in India

Domestic demand in India has mostly been positive with light vehicle sales in the country rising by 3M units or by 8% YTD till November 2016. In addition to domestic sales, exports have also been in focus - in the first eleven months of 2016, exports increased by 15.6%, leading to further growth in production.

However, with the recent demonetisation of old large-denomination rupee notes in November 2016, sales of vehicles across all segments have plummeted. Sales increased by a mere 0.6% y-o-y in November and are expected to have suffered even further in December.

Nevertheless, this is expected to be only a temporary situation. India’s economy is expected to grow at a robust pace in the coming years, as most economic indicators predict a positive outlook driven by strong consumer demand and supported by a large pipeline of economic reforms by the Indian government, including the introduction of the common nation-wide Goods and Services Tax later in 2017.

Pockets of growth opportunities in Southeast Asia (SEA)

The top two automotive markets in SEA – Thailand and Indonesia – showed a slow recovery in 2016, but is still far from the momentum reached a few years ago.  Nevertheless, Thailand’s focus has been on exports globally even as domestic demand declines, while Indonesia is easing monetary policies to drive the economy and increase consumer spending. Malaysia, the third largest market in SEA, also showed significant decline in 2016. On the other hand, smaller markets, such as the Philippines and Vietnam, experienced continued robust double digit growth from the previous year. 

While the SEA region is expected to continue to play a key role in supplying midsize pickups globally, some countries such as Thailand, Indonesia and Malaysia have offered significant incentives for the assembly and sales of small and fuel efficient passenger vehicles, resulting in a dramatic increase in assembly volumes. Between 2016 and 2021, Autofacts forecasts total assembly volumes in SEA to increase by nearly 50%, from 4.0M to 5.9M units in order to cater for domestic and export markets.

Expected growth in increasingly investment-attractive North Africa

North African states have seen a number of major investments within the automotive sector in recent months and are expected to remain attractive. For example, Renault signed a deal with the local government of Morocco to increase local production of spare parts and the PSA Group is also to open a new assembly plant on the Atlantic coast of Morocco to take advantage of its low cost yet well-educated and skilled labour force.

In light of this, Autofacts forecasts an annual growth rate of 7.4%, to almost 450k units by 2023 in Morocco. Equally compelling is the growth rate expected for Algeria, with an expected assembly output of more than 130k units, an annual increase of 25%, by 2023.

Meanwhile other growth regions continue to struggle

Signs of stabilisation in Eastern Europe

Total light vehicle production for the Eastern European region is expected to increase, mainly driven by the low-level stabilisation of the Russian market. Even though the new car market in Russia continued to decline as sales dropped 12.1% (YTD November 2016), there are cautious signs of stabilisation. November 2016 was the first month in two years that there was an increase in sales.

A further growth in sales can be expected due to two factors. First, Russia has an aged vehicle fleet, as more than half of its cars on the road are older than 10 years. Also, Russia’s oil-dependent economy is expected to grow again, thanks in part to a recovery in oil prices. This is expected to drive increased consumer spending, including vehicle sales. As such, the overall expected growth of Russia’s car sales in 2017 is at 7.2%, amounting to an estimated 1.5M units – nevertheless, it is still 50 % of the 3M units sold in Russia in 2012.

New car sales in Turkey were negatively affected in 2016 by political unrest, leading to a YTD November growth of 3.7%, compared to 30.8% growth in the prior year and the long-term growth in Turkish car sales is expected to remain volatile with a forecasted sales decline of 3.7% in 2017.

South America slips even deeper

Automotive assembly and sales in Brazil continue to show no improvement. Light vehicle sales in Brazil declined 21% YoY through December 2016, and will likely continue to suffer as long as consumer confidence stays low, credit is not available, and purchasing power is not in line with current market prices.

The new government’s economic austerity plan has done little to spur new investment as the country continues to be engulfed in major corruption scandals and unemployment problems. As the new government is reconsidering the extreme isolationist polices of its predecessors, local investments are largely on hold.

South Africa to remain complicated

2016 turned out to be another challenging year for the South African automotive industry with domestic new vehicle sales progressively under pressure, due to rising inflation and interest rates deterring purchases. This is offset by strong export volumes – in 2016, 62.3% of South Africa’s production was tagged for export to more than 85 different destinations, including the US, UK, Japan, and Australia. 2017 is expected to be another challenging year but production levels driven by vehicle exports should grow and one could expect assembly in South Africa to increase by 10.3% to 608,000 units, in 2017.

While emerging markets continue to mature and be the engine of growth for the global economy, these environments do remain complex and in flux, resulting in an uneven market landscape for the automotive industry.  

 

 

Christoph Stürmer | Global Lead Analyst, Autofacts
Website |  +496995856269

Stella Lau | Automotive Lead, PwC Growth Markets Centre
Website |  +6562364235

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