The speed and severity of the downturn took many people by surprise in 2008. Many original equipment manufacturers (OEMs) were faced with increasing inventory level of vehicles at a time when demand was falling sharply. As a result OEMs had to cut down output, which resulted in a dramatic fall in the assembly, especially in the first quarter of 2008. This correction continued right through the first quarter of 2009 and now most of the OEMs are matching their output with demand. The OEMs accommodated the output reductions through temporary plan closures, shift reductions, and short-term workings. Before the credit-crisis, a number of plants in Europe were already at risk and, therefore, some OEMs could take the opportunity to make much-needed permanent capacity reductions.
PricewaterhouseCoopers Automotive Institute projects that of the top 10 alliance groups, only three will achieve growth by 2012 as compared to the 2007 output. Volkswagen would grow due to contribution of its aggressive product portfolio expansion, which will see a number of new models launched across all the brands over the next few years. Daimler will grow a little more on the back of further product expansion with its new Mercedes small car range. Hyundai will see significant growth due to expansion of its Slovakia plant and the opening of its new Czech Republic plant, as well as by its increased focus on Europe.
There are structural changes within the EU market, which are helping the small car market grow. The key driver behind this growth is the increasing focus on CO2 emissions, which is leading to preferential taxation for fuel-efficient small cars. In addition, there are many scrappage schemes that are linked to lower emission and small cars. Further, small cars tend to be cheaper and are, therefore, most accessible to customers under scrappage schemes. These structural changes have resulted in growth in the small car segments and have benefited new EU member countries, whose plants predominantly produce small cars.
Economic stimulus packages announced by various countries will have positive impact and help reduce the economic downturn. Also, the tight liquidity will start to ease in the coming years. Overall the labour market outlook will improve with reduction in unemployment rate. In the long run, the UK, Germany and other key markets, including new markets, would recover to near or equal previous peak sales. If the stimulus package fails to ignite economic growth major economies may fall into deeper and longer recession with no hope of recovery until 2011. Continuing credit-crunch could lead to reduction in the overall bank lending. In addition, after the initial interest, the scrappage schemes may fail to sustain growth.
In a nutshell, 2009 will see further decline in sales and production volumes. Consistent recovery is expected from mid-2010; however, we are unlikely to see production volumes until the next year.
The author is leader, automotive practice, PricewaterhouseCoopers
