slower sales Brakes on Car Buying in 2017

Growth in the auto industry is expected to continue but slow worldwide in the year ahead. Policy changes in the United States and China could have an impact on the success of VW, BMW and Mercedes.
Chinese consumers account for more than a fourth of global car sales.

In the new year, auto makers around the world will have to put up with only modest growth. In 2016 growth was 5 percent, with 82 million passenger cars sold worldwide. In 2017, however, growth is set to be only 3 percent, mainly because China’s growth is slowing.

Last year most producers still benefited from significant tax cuts from the Chinese government. Beijing had halved the purchase tax for small and mid-sized vehicles with engines of 1.6 liters and smaller. That boosted sales figures in China last year by a good 14 percent - a figure that established auto manufacturers in North America and Europe can only dream of.

"2016 was an outlier, also because many consumers moved forward their planned car purchase in order to take advantage of the tax benefit," said Christoph Stürmer, chief analyst at the business consultancy PwC.

Whatever happens in China directly impacts the German car industry and its suppliers. For years, the world's second-largest economy has been a growth driver for German luxury carmakers BMW, Mercedes-maker Daimler and VW's subsidiaries Audi and Porsche. Volkswagen itself is also the biggest seller of passengers cars in China, where it has two major joint venture operations and sold almost 4 millions cars last year.

There was concern among the car makers that the Chinese government might completely eliminate the tax cut in 2017. But so far Beijing seems to be taking extra care with the industry. In the new year the tax reduction will be 50 percent less and carmakers will therefore continue to benefit from the indirect subsidies.

Almost a third of all new vehicles worldwide are sold in China now, with its massive population of 1.3 billion people.

Experts now predict a slight slowdown, rather than the initially-feared slump in demand for cars in China. Ferdinand Dudenhöffer at the CAR Institute of the University of Duisburg-Essen expects growth of 5.3 percent for China in the new year. That’s about 24 million cars sold. Similarly, the German Association of the Automotive Industry (VDA), predicts 24.2 million newly-registered vehicles.

Almost one third of all new vehicles worldwide are sold in China now, with its massive population of 1.3 billion people. According to the OECD, however, China is still only responsible for 17 percent of the global economic output. “The dependence on China is thus significantly higher with cars than for the entire world economy," Mr. Dudenhöffer said.

With a market share of approximately 13 percent, Volkswagen is the market leader in China, selling nearly four million cars every year with its joint ventures FAW-Volkswagen and SAIC Volkswagen and luxury brands Audi and Porsche. Honda is second, with a market share of just 5.5 percent.

In the wake of VW's diesel emissions scandal, the good sales numbers in China have become especially important for the Wolfsburg-based carmaker. The company needs those billions earned in China to deal with the effects of the scandal in other parts of the world.

At VW’s headquarters the worry is that the company might become too dependent on China. The company’s record high sales figures are unique to that market. In contrast, business in other parts of the world has become much more difficult. For Volkswagen's head of sales Jürgen Stackmann there’s only one thing to do: "We have to expand our sales correspondingly in the rest of the world."

In the other key auto markets, especially in Europe and North America, sales are expected to be decidedly slower than in China. In those two regions, experts are expecting stagnating sales, or, at the very best, a slight increase.

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The domestic German market still saw good growth in 2016 at almost five percent. In the new year, things will be more difficult. The auto industry researchers at the University of Duisburg-Essen predict that the car market in Germany will not grow at all in 2017.

The auto experts of PwC warn that in the new year the bad political prevailing mood could be reflected in the European auto industry. The presidential and parliamentary elections in France and Germany could have an impact and in the worst case lead to shrinking sales figures, they said. "Given the numerous election campaigns, the mood of consumers could likely deteriorate again. This will also be felt by the auto industry," the PwC experts write.

After seeing a strong economic upturn over the past three to four years, the United States is likely to have reached its peak in auto demand in 2016, which is why most industry experts believe that sales there can’t go up in 2017.

There’s one reason that Mr. Dudenhöffer is optimistic about the auto industry in the United States and that’s President-elect Donald Trump. He’s anticipating an industry-friendly policy from Mr. Trump. Car manufacturers might benefit from economic stimulus programs and less stringent environmental policies, he said, and predicted that the U.S. car market will grow by 2 percent in 2017, and sell 18 million vehicles.

Positive developments are also expected in Brazil, the most important market in South America, and in Russia. Both countries are expected to overcome their economic crises. In Brazil, the economy is expected not to shrink in 2017 for the first time in years, and car sales figures are not expected to decrease. Even stagnation would be a decent result for the long-suffering Brazilian car industry.

The economic crisis in Russia should clearly be a thing of the past in 2017. The CAR Institute is forecasting a 4 percent growth of car sales. Some producers, like BMW, are already preparing to restart production again in Russia.

 

Stefan Menzel is the managing editor of Handelsblatt’s website and closely follows the car industry. To contact the author: [email protected].