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A macroeconomic approach to the recovery of the automobile markets: USA, China, Europe. Bruno Jetin, Institute of Asian Studies, University of Brunei, GERPISA International Steering Committee, 13-14 January 2017, ENS Cachan. The global automobile market has recovered from the crisis.
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A macroeconomic approach to the recovery of the automobile markets: USA, China, Europe. Bruno Jetin, Institute of Asian Studies, University of Brunei, GERPISA International Steering Committee, 13-14 January 2017, ENS Cachan
Factors of growth Real income growth and decrease of unemployment Pent-up demand Very low interest rates Low price of oil
The US recovery: Auto sales have been supported by a strong improvement of the labour market and, after a 5 year-delay (2009-2014), a 5.2% real household income growth in 2015.
US employment levels have recovered significantly, +15 m jobs since a 2010 low, edging closer to full employment (3.9% in October 2000)
Wages have been slow to recover but since 2015are finally accelerating
Three caveats: Quality of employment and labour force participation rate A broader gauge of unemployment and underemployment has failed to return to it pre-crisis levels. It was 9.2% in December 2016 (6.4m people) , the lowest level since April 2008, but elevated compared with the 8.4% level before the recession began in late 2007. It means that there are still many workers who work part-time for economic reasons and are underutilised. The workforce participation rate delivers the same message. It measures those in work or looking for a job. It bounced back since it hit a trough of 62.4% in September 2015, yet at 62.8% it is well below the near 66% it had before the Great Recession or even the rates just before the 2008 and 2012 elections.
Impact on the auto market The automobile market has recovered mainly because employment has improved drastically and people need a vehicle to work. But because real income has stayed low before finally improving, consumers have relied more on the exceptionally favourable financial market conditions to buy cars and in particular big ticket SUVs. They have also been encouraged to buy SUVs by the very low price of oil. Leasing has increased to high level (29.5% on new cars) because it weighs down monthly payments and enable customers to buy more expensive vehicles.
Impact on the auto market Loan terms have extended to new records. The very low interest rate coupled with longer loan terms has also enabled many people to buy a new vehicle that they might not have been able to afford it before. The average term for a new car in 2016Q3 was 68 months up from 62 in 2009Q3. For subprime borrowers it reaches 72.1 months up from 68.1. (Source: Experian, the state of auto finance). But the average monthly payment has increased to $495 in 2016Q3 up from $422 in 2009Q3. (subprime $511 up from $428).
Impact on the auto market This exposes the market to some risks: The expansion of lease means that there will more vehicles on the used car market sold at a low price and carmakers may incur losses. Although finance is creative, there is a limit to the extension of the loan term. Customers end up paying high charges on interest rates with a final pay back higher than the value of the vehicle. The increase of car loans to a growing number of customers with low income leads to a decrease of the quality of loans.
Impact on the auto market This negative evolution affects mostly subprime borrowers. The number of repossessions hit 1.6 million in 2015, the third highest level on record for data going back 20 years, falling short of the 1.8 million and 1.9 million peaks seen in 2008 and 2009 respectively. It is expected to rise to 1.7 million in 2016 according to Cox’s Automotive.
Subprime Auto loans According to the FED of NYC, the vast majority of subprime loans are originated by auto finance companies. Auto loan balances broken out by credit score reveal that balances associated with the most creditworthy borrowers—those with a score above 760 (in gray below)—have steadily increased, even through the Great Recession. Meanwhile, the balances of the subprime borrowers (score<620, in light blue below), contracted sharply during the recession and then began growing in 2011, surpassing their pre-recession peak in 2015
Rising subprime auto loan delinquency The overall ninety-plus day delinquency rate for auto loans increased only slightly in 2016 through the end of September to 3.6 percent. But this masks a sharp divergence for loans broken out by the borrower’s credit score at origination. The worsening in the delinquency rate of subprime auto loans is pronounced, with a notable increase during the past few years.
Rising subprime auto loan delinquency This affects particularly auto finance companies and other independent finance companies who specialised in subprime auto loans. Their delinquency rates worsened by a full percentage point over the past four quarters, while delinquency rates for bank and credit union auto loans have improved slightly. This impacts negatively the performance of their portfolios. A large number of households, roughly six million individuals at least are ninety days late on their auto loan payments.
Impact on the auto market This is rising concerns about a crisis in the auto loan market and in particular in the automobile Asset-Backed Security (ABS) market. After the financial crisis, home mortgage lenders have been required by law to verify that applicants can repay their debt, but car lenders do not have that obligation. In the 12 months ended in June, only 5.2 percent of car loan applications were rejected, down from 11.1 percent in the 12 months ended in October 2015, according to research from the Federal Reserve Bank of New York.
Fears rise over loan crisis The fear concerns the growth of newer, non-bank issuers of subprime Auto ABS that rely heavily on securitisation as a source of funding. If losses on auto loans continue to climb, investors will stop buying bonds issued by these new and less diversified issuers. If their access to funding stops, it could impair the credit quality of existing bonds and ricocheting through the market, raising borrowing costs for other issuers as well.
Perspectives of the US market for 2017 Despite these concerns, the US auto market is expected to plateaued around 18 millions units in 2017 or slightly increase if the new Trump administration induces more confidence among customers like the ”Trump bump” of “November-December” 2016. But the vast project of investment in infrastructure, if voted by the Congress, is not expected to have a significant positive impact this year. Another uncertainty is the pace of increase of the interest rate by the FED and its impact on consumer spending.
China: general context Growth is slowing down and the government is trying to rebalance the economy towards the domestic market. The automobile industry plays a key role in this endeavour. The auto market is maturing and consumer behaviour is changing and converging to the one prevailing in advanced countries. According to a McKinsey survey of over 3,500 consumers in March 2016, Chinese car buyers are becoming more practical and less status-conscious than before, are more willing to buy a used car (47%) to get a lower price on a given car (56%)or to get a better car for the same price (37%).
China: general context Yet, 53% declare that they want to upgrade their cars with their next purchase. This may imply shifting from Chinese to foreign brands but not always, and from cars to SUVs which are booming. SUVs sales have increased by 45% between 2014 and 2015, reaching 6 million vehicles in 2015 or one third new light vehicle sales. These customers are confident that their income will rise in the next five years. They can borrow easily to buy cars. Households’ debt is low (40% of GDP), and so is debt service payment (7.6% of disposable income versus 15.4% in the USA in 2015). Loose monetary policy has underpinned a borrowing boom and the lending rate is at record low of 4.9% and banks are eager to lend. Many carmakers, especially foreign, hope that an increase in the value of the car will compensate the decrease in growth rate of the market.
China This explains why, despite China’s economic slowdown, the automobile market is performing well. Auto sales have increased by more than 12% a year over the period 2000-2014. From 2014 to 2015 by 4.7% and from 2015 to 2016 by 8%. Sales of light vehicles reached 24.6 million in 2016. Mc Kinsey projects that from 2015 to 2020, the annual growth rate remains at 5%. Chinese average car age is still very low. By 2017, the average car age will be 4.5 years old which will increase demand for aftermarket parts and services. Due to its strategic role, the Chinese government is very attentive of the evolution of the automobile market. This is why, in October 2015, it decided to boost sales with tax incentives when it appeared that market was slowing too much.
China There was a cut of 50% on pollutant emissions (from 10 to 5%) on small engine car (up to 1.6l) making vehicle purchase more attractive. The government decided to extend the cut until the end of 2016. This created a rush in the last months of 2016 leaving many consumers without stocks on small cars. The problem with these incentives is that they lead to a slump in the market when they end (see for instance the case of Thailand). This is why the Chinese government decided to extend the tax cut again in 2017, but increasing the rate from 5 to 7.5%. This tax incentive was very effective in boosting sales. This advantageous tax system enabled the Chinese brands to look for consumption among less affluent households especially in the interior of China. There will be a slowdown in sales when the tax cut will end and we will see then if real income rise and low interest rate will be enough to secure a long-term 5% growth rate.
China and new energy cars The government also provided state subsidies of up to 15,000 euros for the purchase of electric cars until 2017 in order to reach a target of having 5 million electric cars on the roads by 2020. Subsidies will decrease progressively and be removed by 2020. They cannot be maintain if the electric car market takes off because it would be too costly. A government directive also requires banking institutions to lower the down payments for New Energy Vehicles (NEV), and another request that public institutions add more NEV to their car pools. As a result, 330,000 NEV vehicles were sold in 2015. Many of them are bought by local governments and SOEs for use as delivery vans, or in local ride-sharing schemes, giving China’s green carmakers a kick start.
China and new energy cars The Mc Kinsey report shows that although Chinese consumers are interested by electric cars, and are loyal to them once they have bought one, they are still reluctant to buy one due to the lack of power stations and the time it takes to charge the battery. This may change in the future: China has already 85,000 charging stations, against 10,000 in the US and 20,000 in Europe. Range is improving to 200 miles between charges.
China and new energy cars These NEV are not Teslas. They are quite basic and cheapand produced by Chinese brands: 25 companies producing 51 models of electric cars. They are giving China the first-mover advantage in the regulation, technology and manufacturing of NEVs, in particular electric cars, while European carmakers are struggling to rebalance their product mix away from diesel. China has become the largest global investor in Lithium resources. This should enable China to leapfrog US and Europe technology in the production of pure electric cars which are much more simpler and cheaper to produce than hybrid vehicles which involves two engines requiring costly and complex components produced by Bosch or Delphi. Additional reason: pollution. Automobiles are responsible to around one third of pollution and even if only coal is used to generate electricity to charge an EV, the emissions are 20-30% lower than those of a comparable petroleum vehicle. China can compelled to lead the EV market.
Europe The European automobile market has benefited from the economic recovery of Germany and Great Britain. In 2016, Euro area unemployment fell to its lowest since July 2009. EU 28 is at 8.3%. However, the future is very hard to predict in Europe due to the political and economic consequences of Brexit on one side and the political uncertainty caused by elections in 2017 in two key EU markets. So far, businesses and consumers in the eurozonehave shrugged off the prospect of a tumultuous 2017,registering the highest levels of economic confidence seen in the bloc since 2011. The European Commission’s measure of economic sentiment in the single currency area rose by 1.2points to 107.8 in December, led by healthy bumps in France, the Netherlands and Germany. The European Central Bank unveiled an extension of its stimulus measures to lift growth and inflation by buying assets until at least December 2017.
Europe Many analysts and experts had argued that leaving the EU would inflict huge damage on the UK economy. So far, official figures for UK GDP show a continuous expansion with a growth rate remaining steady at about 2%. The fall in Sterling have served well the industry and has given a boost to car exporters and their profits made overseas. But it is premature to conclude that the UK will sail happily through Brexit. On the medium-term, the fall in Sterling may trigger inflation and a change in monetary policy and negotiations regarding Brexit will start only in March 2017.
Europe Mathias Wissmann, the VDA’s head expects that sterling depreciation will make cars 10-15% more expensive and added to political uncertainty, this will lead to a fall of 8% in UK auto sales down to 2.4 million units. This will have a negative impact on the German car industry which counts Britain as its largest single export market, (10% of BMW global revenue).
Europe For 2017, The VDA expects the German car market to grow at the same pace as in 2016 thanks to Germany’s strong economy and booming labour market. The end of subsidies in Spain should lead to a reduction of sales of around 10%. The French market is expected to rise 5% in 2017 and reach 2.1 million units.
