Car sales are falling worldwide, global recession imminent?

New car sales are falling in 18 out of the top-25 largest car markets and analysts are not expecting results for the rest of the year or even the next year to be any better.

The first six months of 2019 saw 44.75 million vehicles sold worldwide, 6.8 percent lower than the same period last year.

Of greater concern is that China’s auto industry is reporting negative double digits, slowing by 12.4 percent.

China is the world’s largest car market, selling close to 30 million cars every year and for most manufacturers, it is the largest and most important market. A mere sneeze in China’s economy could have repercussions in jobs worldwide.

After nearly 20 years of unprecedented growth, China’s auto sector is now running out of fuel. The slowdown is worrying but at the same time, not surprising. Warning signs were visible since last year and China’s auto sector have been contracting for 14 consecutive months.

The slowdown is made worse by the on-going trade war between USA and China, the world’s two largest economies.

President Trump threatens to slap up to 25 percent in import duty on a large variety of imported goods – from agricultural produce to manufactured goods - and President Xi has also responded in kind.

Even Japan and the European Union are also caught up in the crossfire between Trump and Xi.

For now, Japan, Germany and even Thailand and Malaysia are still registering positive growth but the consensus is that every manufacturer will need to brace themselves for a slowdown in 2020.  

The outlook is especially bleak for European manufacturers, many of whom are already struggling to meet the looming deadline for the European Union’s (EU) incoming 2021 regulations on fleet-wide average CO2 emissions of 95 g/km, which corresponds to an average fuel consumption around 4.1-litre/100 km.

The specific fleet-wide CO2 target differs from one manufacturer to another, depending on the manufacturer’s sales and product mix. Either way, manufacturers are finding it impossible to meet this target without electrification, which will raise the selling price of many price-sensitive models.

The problem is that the economics of battery electric vehicles (BEV) are not yet optimal. Charging infrastructure is also spotty and consumers prefer larger SUVs/crossovers over small cars, thus making it even harder for manufacturers to bring down their fleet-wide average emissions.

The EU however, is indifferent to this and come 2021, manufacturers who don’t meet the target risk paying billions of Euros in fines.

The new CO2 regulations apply to all car manufacturers operating in the EU, not just European ones. However the product/market mix of European manufacturers also mean that German brands are at greater risk than Asian ones.

The need to increase R&D spending to develop more electrified models will also weigh down heavily on the earnings of many European manufacturers. A slowing global economy will apply even more pressure and put jobs at risk.

Closer to our region, Indonesia’s car market – the largest in the ASEAN trade bloc - contracted by 13 percent to register 481,577 vehicles. Although the slowdown was mostly related to consumers delaying their spending in the run up the Presidential election, car sales are not expected to improve post-election because consumer demand remain weak.

Thailand had a good first half, growing by 7 percent but Toyota Motor Thailand, the largest car manufacturer in Thailand, has warned that sales were already showing signs on weakness in June and July, again mostly due to poor consumer sentiment.

"Difficulties for the Thai market include the GDP growth downgrade, auto loan inspections from the central bank and the simmering US-China trade war," said Toyota Motor Thailand’s President Michinobu Sugata in a press conference at the launch of the all-new Corolla Altis.

As for Malaysia, the headline figures are still healthy but the latest report shows that year-to-date August 2019 sales is 6 percent lower than the same eight-month period last year.

A closer look at the numbers also suggests that trouble is brewing in Malaysia. Sales of luxury cars, which was previously perceived to be almost recession-proof, are slowing.

Based on the latest available sales breakdown by brand (year-to-date July 2019 only, August numbers to be announced next week), Mercedes-Benz contracted by over 30 percent, while BMW shrank by 10 percent.

Yes, the lack a locally-assembled 3 Series - which was only announced this week – as well as a reduced C-Class line-up (now only C200 and C300, AMG C43 aside) contributed to the slowdown, but when Porsche shrinks by 30 percent, something isn’t quite right.

Volvo is one of the few bright spots, growing by 30 percent but one needs to account for the low base effect as Volvo had sold just slightly over 1,000 cars in the first seven months of 2019, and it is still expanding its dealer network.

Meanwhile, Perodua grew marginally by just 0.5 percent. Proton grew by 32 percent but remember that this was buoyed by the 4 new/updated Proton models launched this year – Saga, Persona, Iriz, and Exora – thus giving Proton a boost every quarter.

Proton sales are expected to slow next year once the initial interest new models normalize, although the slowdown will be tempered by the upcoming locally-assembled Proton X70, which should prop up Proton’s overall numbers.

Meanwhile, the middle ground continues to thin. Toyota contracted by 10 percent, Honda and Nissan by nearly 23 percent.  

In other words, consumers are still spending, but they are more careful with their purchase now. We are seeing less emotionally driven purchases but more carefully calculated, good value for money purchases.

Expect 2020 to be a year of thinner wallets and tighter belts.