Motor vehicles: Can Europe keep pace with the US

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Motor vehiclesCan Europe keep pace with the US?
Keith Edmonds Oxford Economic Forecasting

• 26 May 2004
• Tel [phone]
• Email kedmonds_at_oef.co.uk

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Can Europe keep pace with the US?

• US motor vehicle sector grown faster than either
  Europe or Japan since 1980
• but Europe performed better over past decade
• Forecast sees US catching up as European vehicle
  output moves east
• Forecast in detail
• US output shows resilience early in 2004 but risk
  of extended dip?
• European sales pick up but output sluggish at
  start of 2004
• What about Japan?
• Can anyone keep up with China?
• Downside risks to the central forecast

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US outpaced Europe Japan since 1980
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but Europe performed better over last decade
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Similar pattern in car and truck registrations
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Forecast sees US catching back up
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as European production moves east
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attracted by lower corporate taxes
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and lower wage costs
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Important new facilities in the East

• Slovakia
• Output to more than triple from 250,000 units
  last year by 2008 as both Peugeot and Hyundai
  build plants each with a capacity of
  250,000-300,000 vehicle per annum
• Plus existing VW facilities stepping up output.
• Czech Republic
• Output to almost double to over 700,000 units by
  2006 as Skoda (VW) continues to expand and new
  Toyota-PSA joint venture comes on stream
• Hungary
• Output to double to annual 250,000 units in 2007
  with expansion from Suzuki and new Fiat plant,
  while Audi output dips
• Poland
• Output up by two-thirds to over 500,000 units per
  annum as VW steps up CV production Fiat
  produces more

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Forecast in detail US

• Q1 saw further gain in output, especially in
  parts, on top of sharp rise during 2003. Provides
  good starting point for rest of year with orders
  also rising
• but inventories have risen to high levels
  (especially for trucks)
• Incentives sustained demand in slowdown, so
  impact of recovery will be muted
• Also higher raw material costs raising pressure
  to increase prices
• Tax refunds peaked in Q1 plus higher fuel costs
  shocking buyers
• Expect output growth to slow to 3½ in 2005 from
  6 this year
• Detroit to add to payrolls for first time in
  three years?
• Key risk is that unexpected sales weakness
  involuntary inventory build-up extend anticipated
  Q2 output dip into 2004H2

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Both US output and orders trending higher
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but inventories have risen, requiring correction
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especially for trucks
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Higher raw material costs raising pressure on
prices
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Petrol at US2/gallon gives pause for thought
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Payroll retrenchment at an end?
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Forecast in detail Europe

• Car registrations trends in continental Europe
  now more encouragingbut comparison is with
  period around Iraq war
• and output sluggish at beginning of year
• Orders trends positive in Italy and Germany new
  models to help
• UK sales still holding up well but set to decline
  as rates rise
• and motor vehicle output on trackunlike
  disappointments in other sectors!
• For W. Europe, now expect output growth to be
  just over 1 this year, rising to 3½ in 2005

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European car registrations picking up at last
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but gains concentrated in smaller countries
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while Germany only showed signs of pick-up in
April
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Output starts 2004 weakly
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but orders data foreshadow pick-up
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with growth stronger in 2005 2006
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when UK car production is seen easing back

• Car output seen rising to 1.7mn this year but
  falling away in 2005 2006
• New models coming fully on stream produce modest
  gains thereafter but output is still likely to be
  below current levels
• BMW to add Mini cabriolet this year but Minis
  popularity likely to wane in subsequent years
• New Honda models to provide boost starting in
  2006
• New MG Rover 45 projected to start production in
  2006
• Nissan to start building new Micras in 2006 but
  replacements for Almera Primera may go to
  France
• Peugeots Ryton plant to prove vulnerable to
  group over-capacity once new 300,000 car
  Slovakian plant comes on stream

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UK growth to slow further after good start to 2004
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UK car CV production forecast

• Toyota output boosted this year by 3-shift
  working
• Fords Land Rover group to see strong growth with
  new Discovery Range Rover sport
• CV production started 2004 strongly and is
  expected to top 200,000 units, with robust gains
  seen continuing through 2005
• GMs Luton plant build of Vivaro Trafic plus
  LDVs announced investment underpin the bouyant
  short-term outlook
• but expected loss of next generation Ford
  Transit to Turkey plant plus Ryton closure to
  lead to sharp output losses from 2006

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What about Japan? Emissions boost to CVs unwinds
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with export growth vulnerable to any slowdown
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Can anyone keep up with China?
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Forecast risks

• Concentrated on the downside
• Threat to profitability from rising incentives
  and raw material costs
• US higher petrol prices, stronger inventory
  correction
• Heavy exposure to China for incremental output
  and profit growth
• On the upside, Europe may beat expectations as
  consumption finally revives

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Forecast summary