Currently traveling. Here’s a good piece from ING:
Germany: How bad is it?
The second half of 2018 saw the German economy grind to a sudden halt. While increasing global uncertainties, looming trade wars and one-off factors like the low water levels in many of Germany’s rivers also mattered, the automotive industry has probably been the most significant driver of the growth disappointment. From fast lane to slow or crawling lane within less than six months, how could this happen?
Let’s start with a reminder: the German economy is not only about cars, but cars do play an important role. Currently, some 2% of total employment is in the automotive industry. However, adding second and third round effects (just think of entire villages close to production plants), between 7% and 8% of the entire German economy is linked to the automotive industry. And there is more. Between 70% and 80% of automotives produced in Germany are exported making automotives one of the most important export goods. Also, one-third of all investments in Research and Development in Germany stem from the automotive industry.
Vehicle production in the EU (000 units in 2017) and auto employment (2016)
Source: ACEA, European Automobile Manufacturers Association
The slowdown in the German automotive industry started in the summer of last year with announcements of city bans for cars with older diesel engines. Some five million cars could become subject to these bans. As a result, demand for diesel cars dropped and precautionary savings of German households increased. More than half a year later, however, there are first rulings that these bans will not be implemented. A complete U-turn looks possible.
Also, the introduction of a new emissions standard (WLTP, worldwide harmonised light vehicles test procedure) and delays in complying with these new standards led to severe disruptions in German automotive production and delivery. Also, the trade war between the US and China and the subsequent slowdown of the Chinese economy have left their marks. However, these marks are still very small and nothing compared with often-heard doomsday scenarios.
In 2018, total car sales in China dropped by some 4% YoY – the first decrease in twenty years. German car manufacturers, however, saw their sales increase by 2%. A slowdown, but not a contraction. In 2018, almost one quarter of all cars sold in China were German. More than one third of all cars sold by VW, BMW and Daimler went to China. VW sold almost 40% of its cars in China.
Contrary to the last crisis in 2008/09, the German automotive industry is currently not suffering from significant excess capacities. Nevertheless, the (German) automotive industry is facing an entire list of challenges. Some are external, like Brexit, the trade wars or a cooling of the Chinese economy; others are sector-specific, like electric mobility, CO2 emission reductions, autonomous driving or car sharing; and some are intertwined. The current trade US-China trade war has already affected German car producers in several ways as BMW is, for example, the single largest US car exporter.
The most imminent threat for the German automotive industry seems to be any Chinese slowdown – given the abovementioned importance of the Chinese markets for German car manufacturers. Here, the fact that fiscal stimulus should lead to an overall rebound of the economy as well as the fact that there is still ample room for growth in the Chinese market (currently some 14 cars per 100 inhabitants, while in Germany it is 56), both bode well for a gradual rebound.
As regards the two other external risks, Brexit and trade wars, the downside risks are far greater than any upside. Aside from short-term disruptions of supply chains for some German car manufacturers, a hard Brexit could lead to a drop of around 30% of German car sales in the UK (according to Deloitte).
The biggest elephant in the room is possible US tariffs on European cars. In theory, President Trump is due by mid-May to follow up on the Commerce Department’s as yet unpublished findings as to whether US auto and auto-part imports are proving a national security threat.
For reference, the three largest German car manufacturers import more than half the vehicles they sell in the US from other countries (Daimler about 50%, BMW around 70% and VW more than 80%). Not all imports come from the EU, they also come from Mexico. German car exports to the US account for between 3% and 12% of the three companies’ annual sales. BMW and Daimler export around 50% of the cars produced in the US to countries outside the US.
Effect of US unilateral import tariffs on GDP (import tariffs of 25% on cars, % of price-adjusted GDP)
Source: IFO Institut, May 2018
The introduction of tariffs on European cars is therefore a very complex and complicated issue. Next to the pure sentiment effect, the actual impact of a 25% import tariff on cars would, according to the Ifo index, lead to a reduction of German GDP by 0.16%. Given the inter-linkages of German automotives and automotive suppliers, the short-term impact could be even higher. In our view, the US administration will try to leverage the threat of tariffs on European cars for as long and as much as possible. This could be done without even imposing these tariffs.
All other structural challenges the (German) automotive industry is currently facing are longer term with unclear implications currently. The only thing that is clear is that the sector will undergo further changes and shake-ups. At the current juncture, this means that cost pressures will probably mount, investment needs will increase and restructurings will occur. How far and when this will play out at the macro level is impossible to tell.
Nonetheless, we believe the German automotive industry could leave the crawling lane in the coming months as some of last year’s braking factors should disappear. A quick return to the fast lane, however, looks unlikely and unexpected collisions cannot be excluded.
Passenger car production plants across Europe
Source: ACEA, European Automobile Manufacturers Association
From Fitch Ratings:
China VAT Cuts May Ignite Price War, Divergence in Auto Market
China’s VAT cuts and ensuing manufacturer suggested retail prices’ (MSRPs) reductions could result in a price war and an increasingly diverging performance of auto manufacturers, Fitch Ratings says. Luxury brands and the best performers in the mass market are better positioned to gain market share, while the already thin margins of weaker brands are likely to be squeezed.
Consumers could anticipate that more brands will cut MSRPs and adopt a wait-and-see approach, clouding the already gloomy outlook for 1H19 auto sales, exacerbating the impact of macroeconomic slowdown, weak consumer sentiment and policy uncertainties. However, we still expect more clarity on stimulus policies to support a market recovery in 2H19 and overall passenger vehicle unit sales to be flat, or grow slightly, in 2019.
The Chinese government lowered VAT rates to 13% from 16% for automobile domestic manufacturers and importers, among other industrial manufacturers, effective from 1 April. Most luxury brands have cut MSRPs by 2.5%-3% in the past few weeks, including BMW, Mercedes-Benz, JLR, Volvo, Lincoln and Audi, passing VAT savings on to dealers and buyers. (…)
Most of the first movers to pass on VAT savings are among the best performers in China’s slowing auto market that enjoyed robust margins over recent years, part of which they can sacrifice to gain more customers. Retail market share of luxury brands expanded to 12.7% in 2018 from 10.6% in 2017. During the same period, the shares of German and Japanese brands in wholesale deliveries grew to 21.4% and 18.8% from 19.6% and 17.0%, respectively. High-profile MSRP cuts following the VAT cut will help these outperformers to attract more customers and continue gaining market share. Furthermore, entry-level premium cars could divert some customers from high-end models of mass-market JV brands that hesitate to cut prices.
In contrast, follow-up price cuts may not meaningfully improve the market positions of weaker JV brands, such as those from France, Korea and some from the US, but squeeze their already thin or even negative margins as deeper price cuts may be required to retain market share. We also expect the downward pricing pressure to spread to Chinese proprietary brands, some of which have moved upward in the product price curve and compete head-to-head with the lower-end JV brands.
Car dealers of the luxury brands and leading mass-market brands are likely to benefit most from the recent price cuts, with improvements in both vehicle sales and margins. While reports of MSRP cuts may attract more show-room traffic, actual retail price changes may not be that significant as dealers will have some flexibility to retain the tax savings by narrowing dealer discounts. Average dealer discounts were elevated at 18.3% at end-2018, according to China Passenger Car Association, compared with 13%-14% in 2016-2017.
1 thought on “THE DAILY EDGE: 9 APRIL 2019”
Random FRED chart:
effective federal funds rate, reserve balances and 10-3 spread
https://fred.stlouisfed.org/graph/?g=nzjs
Another chart, showing the booming economy: It’s taken 10+ years to go nowhere, while the Fed tinkers with stimulating the economy, while politicians talk about growth, or Making America Great
https://fred.stlouisfed.org/graph/?g=nzkW
Comments are closed.