How Will the European Automotive Industry Respond to the Stronger Euro?

Transcription

1 Automotive How Will the European Automotive Industry Respond to the Stronger Euro? Nigel E Griffiths Director, Europe Detroit, October 8, 2003 Copyright 2003 Global Insight, Inc.

2 Europe Offers Mainly Competitive Opportunities Rather Than Market Growth 1. Market Conditions 1. Market review 2. Update on regulatory environment 3. Production trends 2. The Dollar/Euro Issue 1. How big a problem? 2. OEM exposure 3. Industry Response Copyright 2003 Global Insight, Inc. 2

3 W. European Passenger Car Market: Trend Still Sliding Annualised Selling Rate 000 s (SAAR) But early summer beat expectations and Sept may be a nice surprise Jan-00 Jul-01 May-01 Mar-01 Jan-01 Nov-00 Sep-00 Jul-00 May-00 Mar-00 Jan-03 Nov-02 Sep-02 Jul-02 May-02 Mar-02 Jan-02 Nov-01 Sep-01 Trend selling rate below 14m units since Feb 03 Jul-03 May-03 Mar-03 Sep-03 Copyright 2003 Global Insight, Inc. 3

4 The Legislative Environment for European Auto s Global Insight New scrapping Automotive incentive in Italy UK Co2 Tax End of scrapping incentive in Spain Widespread changes to Car Taxation P* New EU convergence fuel duties P* Lapse of Block Exemption EURO 4 Legislation Euro-4 4 early compliance Government Incentives EU Enlargement End of Life Recycling Directive? EURO 5 Legislation 120g/km Co2 140g/km Co2 OEM commitments on fleet average P* = Proposal Copyright 2003 Global Insight, Inc. 4?

5 W. European Markets Show Yet Another Broadly Based Retreat (Jan-Aug 2003 Sales off by 225,000 Units) 10% (+23%) % Change Vehicle Sales 5% 0% -5% Average Decline 2.3% -10% -15% (-22%) Portugal Denmark Switzerland France Belgium Greece Norway Ireland TOTAL Germany Netherlands Spain UK Italy Austria Sweden Finland Copyright 2003 Global Insight, Inc. 5

6 Car Sales (m) The Long View : Little or No Positive Momentum Over the Next 12 Months, Economic Signals Alone Would Suggest Another Wash-out Year in Late 80's Boom Time '93 Recession 9 Early 80's Recession 6 70's Oil Shock Near recession in the Eurozone means W.European Market dips below trend for next few years '01 '03 '05 '07 Copyright 2003 Global Insight, Inc. 6

7 Car Sales (m) 9-11 Two Years On : W.E. Near-term Horizon Comparing Car Forecasts 15.0 Initial market decline shallower than expected Slow Global economy, 14.5 Iraq War Eurozone stagnation 14.0 So the bottom of cycle Italian Incentives is Spring 2004, not Sep '03 Sep ' Copyright 2003 Global Insight, Inc. 7

8 EU Car List Prices are Rising but OEM s are Finding it Hard to Make Even 1% Gains Stick Tactical Price Promotions are on the Increase Boosting Affordability and Generating Showroom Traffic % chg in list car prices 2.00% 1.50% 1.00% 0.50% 0.00% -0.50% -1.00% Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Copyright 2003 Global Insight, Inc. 8

9 Peak Launch Volumes (000s) New Models Should Help Underpin Market by Mid ,500 3,000 2,500 2,000 1,500 1, st Year Average of 2nd Year Launch of new models in their first full year of sales i.e. aggregate peak launch volumes Copyright 2003 Global Insight, Inc. 9

10 For 2004 Europe is Dependent on Continued Recovery in Central Europe and an Upturn in Germany. Elsewhere We See Patchy Weakness % chg in LV sales 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% -6.00% -8.00% Cz. Rep. Hungary Poland France Germany Italy Spain U.K. W.Euro Copyright 2003 Global Insight, Inc. 10

11 Trend Rates of Car Production in W.Europe Have Been Falling Back Since Summer The Slide Has Moderated This Year Near the 14.4m LevelL 15,200 15,000 14,800 14,600 14,400 14,200 14,000 13,800 13, J F M A M J J A S O N D 2003 (Above :Trend annualized production running rate after seasonal and irregular adjustment) Actual Build Volume (000 s cars) 4,000 3,800 3,600 3,400 3, % -2.5% % -2.0% 3,000 Q1 Q2 Q3 Q4 Copyright 2003 Global Insight, Inc. 11

12 18,000 17,000 W. European Production in Weak Patch Now But Should Pick up Strongly in the 2 nd Half of 2004 TRENDS IN WEST EUROPEAN CAR PRODUCTION FORECAST TO DECEMBER 2006 Monthly evolution of the annualised rate in 000s 16,000 15,000 14,000 13,000 12,000 11,000 10,000 9,000 Note: Last Actual Point July 2003 Jun-90 Dec-90 Jun-91 Dec-91 Jun-92 Dec-92 Jun-93 Dec-93 Jun-94 Dec-94 Jun-95 Dec-95 Jun-96 Dec-96 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Copyright 2003 Global Insight, Inc. 12

13 European L.V. Production has Softened Each Year Since 2000 But is Still at 18m (West( and East excl. Russia) 22,000 20,000 18,000 16,000 14,000 12,000 10, East European prod growth + 10% p.a West Europe Prod growth + 1.1% p.a. Copyright 2003 Global Insight, Inc. 13

14 Our Combined European Production Forecast also Depends on Continued CBU Export Gains to World Markets in Parallel With a Modest Recovery in Imports 3,500 3,000 2,500 2,000 1,500 1, ALFA ROMEO '00 '01 '02 '03 '04 '05 '06 '07 '08 Imports Exports Volume Export Growth by Brand from Europe AUDI BMW CHRYSLER CITROEN FIAT FORD HONDA JAGUAR OPEL PEUGEOT PORSCHE RENAULT SAAB SEAT SKODA SMART TOYOTA VOLVO VW LAND ROVER MERCEDES-BEN Copyright 2003 Global Insight, Inc. 14

15 Short-term term Euro Appreciation Has Caused Concern That European Autos Industry is in Trouble Mar-01 Competitor Currencies Per Euro Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 $ Yen Won Euro appreciation over the last 2 yrs against :-: $ +23% + 11% Yen +18% Won +11% Copyright 2003 Global Insight, Inc. 15

16 Relative Strength of the Euro Hits Global Competitiveness of Auto Assembly in West Europe est Germany UK USA Japan Currency movements in last 12 months alone mean that assembly costs in Eurozone have increased by :- $100 per car relative to Japan s car plants $170 per car relative to US assembly plants Wages (Including Social Costs) Per Hour in Euro Source : VDA / Global Insight Copyright 2003 Global Insight, Inc. 16

17 Longer View is Not So Alarming Longer-term the current Dollar-Euro rate is not exceptionally high. its just that the European OEM s exposure to further rises is much higher than in the past $ per Euro Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q3 Copyright 2003 Global Insight, Inc. 17

18 Currency Blocks & Auto Trade: European Exports m 210K..but still only 10% of European production is for Dollar-block countries 77K 130K 100K 250K Copyright 2003 Global Insight, Inc. 18

19 Currency Blocks & Auto Trade: European Imports k 930K 15k 40K 590K Copyright 2003 Global Insight, Inc. 19

20 Why the Rise of Euro is Unlikely to Drag Down European Production in the Short Term /5 2004/5 1. Domestic Auto s market partially insulated - by cheaper commodity and raw material prices - by lower interest rates 2. Falling Auto exports to dollar linked markets will not be a major factor - mainly premium brands: less price sensitive - list price adjustments rare anyway - OEM s have significant hedged positions to limited opportunity for capacity re-mix - 35% of European exports to US not from Eurozone countries 3. Imports pose more of a threat but not a major one - even a 20% rise in imports only reduces European production by 1.7% - Japanese OEM s only barely profitable in Europe and virtually half of their sales come from European based transplants, Yen not as weak as Dollar - Diesel defences are still high - collapse of Cancun round keeps common external tariff in play Pressure will be on profitability Copyright 2003 Global rather Insight, Inc. than production volume 20

21 Global OEM Profit Margins (EBIT/Sales) 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% f European American Euro Components Source: UBS Warburg, ING Copyright 2003 Global Insight, Inc. 21

22 But OEM s Will Start to Adjust Strategies as the Dollar Threatens to Slide Further Natural Hedge - Traditional : Production at point of sale Natural Hedge - Parallel Integrated trade - production logistics: Balance exports with reverse imports Cost Reduction 1. Offshore assembly 2. Offshore component sourcing 3. OEM Productivity drive 4. Specific cost-down programmes Copyright 2003 Global Insight, Inc. 22

23 Exports to and from Europe by OEM Porsche Porsche Pure export exposure, Attempts to hedge by Financial instruments Exports from Europe Imports to Europe VW Group VW VW is high net exporter but will start to use its plants in Mexico and Brazil to create a natural hedge by parallel exports back to Europe Copyright 2003 Global Insight, Inc. 23

24 VW: Strategic Response Threat Response High export exposure intensifies price competition JETTA BEETLE NEW BEETLE GOLF Production outside Europe and import back into market to offset exposure VW- Mexico production at Puebla Shift production to East Europe for Light Commercial vehicles and SUV s JETTA EXPORTS Reduce capital expenditure BACK TO EUROPE Rigorous cost control Enhance Brand perception Copyright 2003 Global Insight, Inc. 24

25 Exports to and from Europe by OEM Exports from Europe Imports to Europe BMW Despite Spartanburg exports, BMW may have little choice but to increase investment outside Europe if the Euro continued to rise long term DaimlerChrysler New export programmes from US will help but only partially offset incremental exposure from European plants Copyright 2003 Global Insight, Inc. 25

26 Exports to and from Europe by OEM Exports from Europe Imports to Europe Ford-PAG High net exporter from Europe, but exposure limited by PAG plants being mainly outside Eurozone GM-inc Daewoo GM has limited export exposure due to localised production. Addition of Daewoo balances net position at a group level Copyright 2003 Global Insight, Inc. 26

27 Improvements to Assembly Plant Labour Productivity European Productivity Index: OEM s are preparing for increased cost based competition and weaker markets (World Markets Research Centre -Global Insight) Average productivity growth at OEM assembly plants has been 3.0% p.a. (last 5 years) Big improvement last year saw a 8% productivity growth. This was more like +10% on a volume adjusted basis VPP, Vehicles per Assembly Worker '00 '01 '02 Copyright 2003 Global Insight, Inc. 27

28 Improvements to Assembly Plant (Fixed Cost) Productivity Push for Higher plant utilisation rates :- Single Platform plants But multiple models and body-styles with managed launch dates to keep plant utilisation at a high long-term average Turntable plants with high flexibility to switch capacity from one line to another GM s Zaragoza Plant CORSA MERIVA TIGRA CC Copyright 2003 Global Insight, Inc. 28

29 PSA : Strategic Response Threat Response CBU Export exposure very small Announce new green-field capacity in East Europe Main concern is cheaper price competition on domestic market SUB-NBC 207 C15 CITY CAR C1 Production in Central-Eastern Europe '02 '03 '04 '05 '06 '07 '08 '09 '10 Joint Venture in East Europe for small car Increase local content in S. America to reduce component part exports from France Copyright 2003 Global Insight, Inc. 29

30 Comparative Wage Costs in Automotive Assembly for 2002 Wages (Including Social Costs) Per Hour in Euro Italy Spain France Sweden UK Austria NL Belgium Germany Portugal Poland Slovakia Czech Rep Source : VDA / Global Insight Copyright 2003 Global Insight, Inc. 30

31 Estimated Pure Labour Assembly Costs Per Car Shows the Pull of Eastern Europe Global Insight estimates of OEM wage content for assembly of a typical small/medium car 1200 Euro Per Car European Avg Potential $ 600 per car cost saving 0 Germany Belgium NL Austria Sweden France UK Spain Italy Portugal Poland Slovakia Czech Rep Copyright 2003 Global Insight, Inc. 31

32 Production Focuses on Small Segments SUVs and LCVS Change in Production in CE and Turkey Sub-NBC Twingo Small MAC Touareg Vitara Fiat SUV Ignis X-90 New Caddy Corolla Verso Transit T A B C1 C2 CDV MIC E2 E1 D2 D1 Copyright 2003 Global Insight, Inc. 32 MPV-C PUP MVAN SUV

33 High Level of Co-operation operation and Flexibility in C.E. Production Technology Overlap: Platforms Corporate Overlap: Shareholding Strategic Overlap: Joint objectives High level of technological, corporate and strategic overlap gives high degree of efficiency and flexibility of production through: Platform sharing Plant sharing Economies of scale Gives rise to : Joint ventures Multiple badging of models Multiple brands at plants More overlap means more co-ordination: VW all aspects of production Opel/Suzuki/Fiat investment co-ordination PSA/ Toyota specific projects Platform Sharing Agila/Wagon R/Concept S Audi MAC/Touareg Fiat SUV/Vitara City Car/ C1/ Sub-NBC Bora/Golf Polo/Ibiza Joint Venture Investments PSA/Toyota Kolin Rebadged Models Opel Agila/ Suzuki Wagon R Suzuki Vitara/ Fiat SUV City Car/ C1/ Sub-NBC Multi-brand Plants VW- Bratislava Suzuki - Esztergom PSA/Toyota - Kolin Copyright 2003 Global Insight, Inc. 33

34 Component Industry is Flocking East in Order to Accommodate OEM Demands for Price-down Contracts Global insight European supplier investment survey 2003 All Suppliers in Survey EE WE Covered 79 new investments and capacity increases in the auto components industry in the 12 months to Sept 2003 ($2bn) TIER 1 MAKE UP 60% OF THE NEW INVESTMENTS Tier 1 Of the 79 only 32 were in Western Europe (40%) 47 were in Central & Eastern Europe (60%) EE WE TIER 2-3 ARE EQUALLY LIKELY TO SHIFT INVESTMENTS EASTWARDS EE WE Tier 2-3 Copyright 2003 Global Insight, Inc. 34

35 Aisin Bitron Europe, Behr, Borgers, Continental, Dana, Denso, Dura Automotive Systems, Eaton, Furukawa Electric Autoparts, Grupo Antolin Bohemia, Grupo Industrial Alfa, Koito, Leoni AG, Ronal, Sumikei Czech, Valeo, Viza Automocion AKS, Autoliv, Bridgestone/Firestone, Delphi, Faurecia, Hutchinson Worldwide, Johann Berger, NGK Insulators, Simoldes of Portugal, Valeo Brose, Hella x 2, Dana/Emerson, Leoni AG Arvin Meritor, Stanley Electric New Component Investments in the Last 12 Months in Continental x 3, Michelin, Pirelli, Vale Le Belier (now Serbia) Delphi, Denso, OSL/Unipres Copyright 2003 Global Insight, Inc. 35

36 Conclusions Tactical incentives are stabilising the drop off in car sales But sustainable market recovery in Western Europe unlikely until 2 nd half 2004 Profitability and pricing under continued pressure unless Euro rise is checked But short term production levels not threatened by weaker Dollar and will be aided by growing demand in Eastern Europe The Euro-block of 20m units is large enough and insulated enough so that medium term recovery in core European markets will be far more important drivers for auto production than negatives from an appreciation of the Euro Imports will increase but so to will exports Strategic capacity shifts would occur longer term but so far announced projects provide only a 1/4m direct net loss to Europe long term Shift of component companies to Central & Eastern Europe may create virtuous circle as OEM assembly follows Copyright 2003 Global Insight, Inc. 36

37 Automotive Thank you! Nigel E Griffiths Director, Europe nigel.griffiths@globalinsight.com Tel: Copyright 2003 Global Insight, Inc.