Nomura Investment Forum Asia: Covid-19 will Reshape Global Auto Industry

As with most other industries, the lockdowns imposed due to Covid-19 have resulted in a change in global commuting patterns. Is the worst behind us?

In March and April this year, we saw a reduction in global car sales (with the exception of China) by 39% and 40% respectively. This has, by far, been the biggest drop we have seen, even compared to the global financial crisis in 2008. However, China and Korea started contributing to growth and thus, we are starting to see some recovery.

Global demand is expected to decrease by 17% in 2020, followed by a 13% increase in 2021. Unfortunately, even with growing demand, we do not anticipate numbers to reach 2019’s level very soon. This also varies from market-to-market. Markets such as China and the United States would recover much more quickly, especially with stronger balance sheets of banks and the ability to boost their economies through fiscal policies is quite significant. On the other hand, in markets such as Southern Europe, ASEAN and India, recovery could be quite slow, due to weaker banks’ balance sheets and the heavy dependency on tourism.

Additionally, it is worth noting that despite countries begin to ease lockdown measures, people have minimized their usage of public transport. Train usage in Japan and Korea have lowered 25-30% than before the pandemic.

China

Looking at the shipment for this year, we expect an 11% year-on-year decline, with an 8% recovery in 2021. Despite the low numbers in Q1, we started seeing some recovery in April, in the lower single digits. This is due to the fulfilment of backlogged orders in February and March.

As things start to ‘normalize’ in the next few months, we are looking at a flattish recovery, consistent with April. However, despite the slow start to the year, numbers are leaning towards the positive and we expect a 5% in Q4 of this year due to a number of reasons like local government stimulus measures such as government subsidies. These will primarily benefit local residents, resulting in a mere 10% impact.

Finally, while there has been a divergence in the market share changes of brands in the last few years, Covid-19 has increased this further. The winning brands in China as Toyota, Honda and Volkswagen, while US brands like GM and Ford have been lagging. Luxury brands such as Lexus and Volvo are delivering double-digit sales volume growth, bigger than the whole industry. Overall, brands higher in recognition and better quality models will emerge as winners.

Korea

In May 2020, auto demand in Korea is flat year-on-year, compared to Chinese auto demand down by 35%. Despite Covid-19, the auto demand in Korea is driven by: government consumption tax cut, strong new model launches by Hyundai Motors and Kia, and consumers’ preference for private modes of transport to avoid public interactions.

The global inventory for Hyundai Motors and Kia has gone up by about a month compared to a year ago. We expect the global inventory to stabilize over the next year as lockdown measures ease in the US and Europe, and new models from Korean automakers are finally being delivered to dealers and consumers. We expect inventory levels in the two regions to fall in the next two to three months.

India

For India, it looks like it will be a tough year. We are expecting a drop of close to 15% in sales for the industry this year, at the back of an 18% drop in volumes that we saw last year. We are also seeing a drop of 25% for heavy commercial vehicles. The GDP is expected to drop 5% in 2020, thus having a sharp impact on demand, along with the impact of the rising number of Covid-19 cases.

The rural segment is likely to do better. This is due to the government incentive largely focused towards rural India and almost half of the actual fiscal spending will go towards procurement of food grains and Rural Employment Guarantee Schemes.

With regards to the passenger vehicle (PV) demand outlook, in India, the buyers of new cars contribute to almost 50% of volume. This is the population that reaches the income bracket of buying cars for the first time. Therefore, it is important for income levels to grow in order to subsequently encourage increase in PV demand. Replacement demand, which represents the population looking to replace their PV, is quite low. They make up for about one-third of the total volume, compared to 80-90% in developed markets.

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