- The automotive industry is slowing faster than expected, and the shift brings massive economic threats.
- The sector represented 20% of GDP slowdown in 2018 and roughly 30% of the year’s drop in global trade, according to the International Monetary Fund.
- Headwinds against automotive supply and demand are set to persist into 2020, as car saturation peaks in wealthier regions and sales in developing markets struggle to pick up the slack.
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The automotive industry is slowing faster than expected, and bringing massive economic threats with it.
The sector experienced a “sharp downturn” in production and sales through 2018, and projections call for a similar decline through this year, according to the International Monetary Fund. The IMF pegged the industry as a major factor in lagging industrial output, and said a prolonged contraction would directly affect the global economy.
People thought the lag in auto sales “would not last as long as it has,” IMF chief economist Gita Gopinath told The Wall Street Journal, adding that barriers to the sector’s recovery “seem more durable than we thought.”
The auto sector represented 20% of 2018’s slowdown in GDP and roughly 30% of the slowdown in global trade, according to the IMF’s latest World Economic Outlook survey released this month. The declines come as certain markets reach maximum automobile saturation – also deemed “peak car” – and headwinds on automotive supply and demand threaten to pull the sector even lower.
Automakers face greater pressures on their margins as regulation and trade tensions hit their core businesses.
Stricter pollution laws are being rolled out across the EU and China, forcing companies to spend more on lower-emissions technology. Tariffs between the US and China also raised the costs of crucial car-building materials, biting into manufacturers’ profits.
The trend toward autonomous and electric vehicles is proving expensive as well. The new technologies require significant research and development costs, as well as overhauled production lines to accommodate battery packs, road sensors, and complex wiring looms.
Auto and auto parts companies have already issued a number of warning signs. Volkswagen lowered its sales outlook Wednesday, anticipating “vehicle markets will contract faster than previously anticipated in many regions of the world.” Parts manufacturer Continental announced a $US2.8 billion writedown Tuesday, WSJ reported, connecting the charge to weaker expectations for the global market.
General Motors recently ended a five-week strike after looking to close plants, invest in autonomous vehicles, and slash its workforce.
At the same time, cars are in less demand among global consumers.
Rideshare services and car-sharing options are replacing personal vehicles in densely populated areas, the IMF said. Car saturation also poses an issue, as populations in developed markets are past their most popular car-buying years, according to WSJ.
Many consumers are also adopting a “wait-and-see attitude” regarding car purchases due to technology advancements and electric vehicle production ramping up around the world, according to the IMF survey.
As wealthier regions’ car sales tumble, developing markets haven’t picked up the slack as quickly as automakers hoped.
China’s car market is slowing as cities grow saturated and tax incentives reach their expiration, the IMF said. Car sales in the country are down 12% over the past year.
India’s consumers are even less interested, with sales dropping 14% over the same period.
Car purchases tend to rise in these markets as income increases, but the uptick hasn’t happened “at the speed we thought,” Gopinath said.
“The demand for durable goods like cars hasn’t come about,” she said.
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