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Global Financial Crisis: CSM Worldwide Adjusts Global Forecasts
- Developed Markets will feel the effects of reduced access to affordable credit and a consumer confidence crisis - U.S. and Western Europe most impacted
- Global BRICs markets feel ancillary effects though lack of global integration is a benefit
- Total global vehicle sales are slated to decline less than 1% for a base forecasts, rise ~3% as an optimistic scenario and decline ~5% as an alternative scenario.
- North America is impacted most severely from the global crisis as 2009CY production is forecast down 9% from 2008CY in our base forecast – reaching an 18 year low of 11.8 million units.
4Q 2008 Production Settings
The 4Q 2008 (October) production settings are slated to be released via CSM Advanced E-files on October 16th and 17th. The financial and economic turmoil has and will continue to spill over in varying degrees to global light vehicle markets. Below is a top-line analysis of our upcoming production settings as a base scenario as well as a pessimistic and optimistic forecast housed in this update.
Global Economic Situation
- Recent economic events will significantly impact global economic growth over the next year, and the situation is still unfolding. It is now almost certain that key economies will be in recession in 4Q 2008 and likely into the first half of 2009. The financial crisis, which was initiated by falling home prices in the United States, has now spilled over into the broader global financial network.
- Lending between major banks has deteriorated significantly, creating a credit crisis which will curtail business investment and consumer spending around the world. International stock markets have experienced losses well beyond 30% from their peaks, and investor confidence continues to fall causing large financial position changes into U.S. currency, U.S. bonds and precious metals. Policy changes by central banks around the world, including a large interest rate cut, have yet to have the desired effect of reinstating investor confidence.
- The only silver lining in this dark cloud may be in regards to inflation. Prior to this crisis, inflation was a major concern for most countries as high food and energy costs created rising prices. However, recent events have affected commodity prices substantially as many investors fear the onset of a global recession will reduce demand for material inputs for manufacturing. Crude oil, steel, rubber and other material inputs have seen significant price declines over the last few weeks, and thus higher inflation is much less likely to occur over the short term.
Global Light Vehicle Market Base
Forecast and Scenarios for 2009 & 2010
Base Scenario
- The global vehicle market continues to suffer a crisis of consumer confidence and available credit which is most severe in North America (specifically the U.S.) but has rippled to other major markets such as Western Europe. Markets outside of these will be affected to varying degrees depending upon access to credit facilities and government intervention in financial markets.
- The impact of this heightened state of deterioration on automobile sales will be significant. Financing for vehicle purchases is getting more difficult as approvals are down and auto lending rates and required ratios are up. In addition, consumer confidence has suffered a setback, reducing the demand for durable goods purchases.
- Recession in key markets is expected until mid-2009 with a slow improvement expected to commence in late-2009 and through 2010.
- Inflation is not expected to be a major issue as energy prices stay below $100 U.S. per barrel over the period and commodity prices decline due to reduced global demand.
- Many OEMs without sufficient cash reserves will be forced to delay or reprioritize (much of this has already occurred) product programs for release in the 2010-2012 timeframe to conserve cash. Further capacity reductions could result beyond those already announced.
- Extreme volatility will continue to affect financial and equity markets through 2008 and into 2009. Greater fiscal responsibility will be necessary in the coming years due to rising deficits and inflation concerns.
Pessimistic Scenario
- The global recession is deeper and longer than the base scenario. It could extend well into 2010 with a slower rise to positive global GDP growth. Crude oil prices escalates and raises inflationary expectations.
- Unemployment increases more quickly – affecting consumer confidence and ability to purchase vehicles. Miles driven also decline due to lower employment and economic activity – reducing the need to replace vehicles as frequently.
- Credit markets rebound more slowly with continued issues for consumers to access affordable automotive credit.
Optimistic Scenario
- Global financial markets overreact and improve through 2009 as investor confidence strengthens. Government intervention and Central Bank coordination has appreciable results on calming financial markets.
- Global economies rebound more quickly with positive growth emerging in mid-2009 – earlier than expected. A resurgence in exports and imports is key in this regard.
- Access to affordable credit improves which also bolsters consumer confidence and willingness to contemplate durable goods purchases.
North America
Base Scenario
- Continued pressure through all vehicle market segments will exist through 2009. Vehicle affordability and access to affordable credit is problematic and broad-based with slow improvement in late 2009 as economic activity rebounds. Pullback by major mass-market OEMs with respect to leasing (allowing for lower monthly payments and financing options) impacts vehicle affordability. Our base U.S. sales forecast is 13.2 million units for 2009.
- Capital will continue to be conserved, driving reprioritization of future product programs – emphasizing those with the greatest potential return. Vehicle globalization (production footprint and vehicle development shift) will continue as U.S., Canada and Western Europe face continued cost and sales growth pressure.
Pessimistic Scenario
- Reduced sales rates (in the 11-12 million SAAR range for the U.S. market) continue into 2009 with a very slow and protracted rebound in consumer confidence with little real improvement to affordable credit access until 2010. Our pessimistic U.S. sales forecast is 12.3 million units for 2009.
- OEMs continue to pare capacity where possible and look to reduce marginal product lines in an aim to reduce the size of the portfolio. Dealer consolidation accelerates as only those with strong balance sheets and brands can survive into 2010.
Optimistic Scenario
- Economic activity rebounds more quickly – driving stronger consumer optimism and access to affordable credit. Our optimistic U.S. sales forecast is 14.1 million units for 2009.
- As the economy improves and inflation is under control - there is a slow but steady improvement in demand through late 2009 and accelerates through 2010.
Europe (less Russia)
Base Scenario
- Consumer confidence is an issue – but two fold. The affordability and access to automotive credit is an ongoing deterrent to stability and growth in European vehicle sales markets, as well as the undefined implementation policies of the European Union emission legislation. How vehicles will be taxed, how taxes will be harmonized between countries and at what tax level is undetermined at this point – giving consumers pause to commit to the market. Our base West European sales forecast is 14.8 million units for 2009.
- Similar to North America, global OEMs will conserve capital for only those projects with the highest global ROI. Additionally, leasing is becoming more problematic as credit is more difficult and vehicle values decline.
- Regional economic issues in Europe seem more pervasive than in other parts of the world. With Iceland essentially bankrupt (value of the krona has plummeted) and with Britain, Switzerland and the Netherlands facing external debt issues, access to financing for consumers and dealers alike will become more difficult through 2009.
- Markets could improve in late 2009 and again solidify in 2010 as consumer confidence and access to affordable credit improve.
Pessimistic Scenario
- Financial issues within the European banking systems causes increased displacement within the system – credit access is slow to improve with no real movement until late 2010 or 2011. Dealer failures increase as financing inventories remains problematic. Our pessimistic West European sales forecast is 14.5 million units for 2009.
- OEMs drive further future product program delays and focus on capacity utilization with a view of paring poorly performing vehicles.
- Slow rebound of the U.S. and other major markets places a brake on exports (lower production) – irrespective of where exchange rates reside.
Optimistic Scenario
- European banking sector issues are sorted out through the impact of coordinated government intervention with respect to liquidity and confidence. Our optimistic West European sales forecast is 15.2 million units for 2009.
- Consumer confidence improves and clarity of the European vehicle emissions legislation acts as an enabler.
Japan/Korea
Base Scenario
- Japan’s vehicle sales market was already on a low trajectory for the past decade as demographics, higher urbanization and low population growth all stunt prospects for the vehicle market.
- Exports to key North America and European markets will slow despite any positive or negative currency shifts as the market slowdown is across the entire portfolio.
- Korea’s domestic market may decline more quickly than Japan due to limited credit access and the presence of a higher proportion of marginal buyers.
- Strong diversification and financial base of both Japan- and Korea-based OEMs will act as stabilizer and slow initiatives to delay global capital-intensive expansion projects.
Pessimistic Scenario
- Sales declines in major export markets are more pronounced – reducing exports across all segments.
- Global financial contagion is stronger - extending the global recession and slowing domestic Japanese and Korean markets.
Optimistic Scenario
- Vehicle exports rebound more quickly as NA and EU vehicle markets expand from a short recession and Japan/Korea domestic markets accelerate from minimal negative effects of slower GDP growth and credit access issues.
Greater China
Base Scenario
- China’s strong foreign reserves and lack of substantive integration into the global financial framework lowers the effects of the crisis.
- Lower exports to developed markets will result though China’s government could focus more resources on bolstering domestic consumption and productivity.
- Lower commodity costs serve to lower the prospects for • inflation or the need for the government to subsidize high fuel costs for consumers.
- Several new vehicle facilities are slated to be added to China’s production network though the investment pace may slow if global OEMs have funding difficulties.
Pessimistic Scenario
- China’s GDP growth, which is slated to dip below 9 percent in 2009 as a base case, declines further and export markets decline substantially.
Optimistic Scenario
- Major export markets (U.S. and Europe) for finished goods rebound quickly towards the end of 2009 and into 2010.
Russia
Base Scenario
- A crumbling equity market is troublesome but not as closely linked to vehicle sales growth in several emerging markets including Russia.
- Strength of oil (despite declining crude prices of late) act as an enabler for stability within the Russian vehicle market. Several OEMs will be launching facilities in 2009 and 2010 to bolster their market presence.
- Markets may eventually regain their growth trajectory in late-2009 and 2010 as consumer confidence improves and access to affordable credit is enhanced.
Pessimistic Scenario
- Access to credit is further constrained as the global contagion increasingly affects Russia.
- OEMs slow capacity expansions as capital is conserved from a global perspective.
Optimistic Scenario
- Oil prices stabilize and the financial sector snaps back more quickly with limited contagion from global markets.
India
Base Scenario
- Inflation difficulties in India through the summer were starting to act as a brake on growth though these are abating somewhat due to commodity prices declining with slipping global demand.
- India can be regarded as a closed economy with several self-sufficient financial systems and growth stemming from increased productivity – shielding it from the full effects of the financial crisis.
- Several new vehicle manufacturing projects are underway for launch in 2009 and 2010 – there are no signs of substantive delays with respect to these projects. New consumers will be attracted to the market with the introduction of the Tata Nano in 2009.
Pessimistic Scenario
- Global contagion has a pronounced effect up the access to capital for growing Indian concerns, slowing GDP growth.
Optimistic Scenario
- Global export markets rebound, enabling for Indian production to rise – yielding stronger internal growth.
South America
Base Scenario
- Forecast accounts for the onset of higher borrowing costs for Brazilian consumers and a decline in commodity costs (oil and agricultural products are Brazil’s major exports).
- Internal growth dynamics are still stable as Brazil’s stronger currency already slows the ability to export non-commodities such as vehicles or machinery.
- Lessons learned from the financial crisis of the late 1990s places Brazil on a stronger fiscal footing to face the current crisis.
- Several new vehicle facilities, adding to overall capacity in Brazil and Argentina, are not expected to be impacted in a substantive fashion.
Pessimistic Scenario
- A decline in the value of the Real to the U.S. dollar and the Euro could spark higher interest rates and higher import inflation – slowing economic activity and the vehicle market.
Optimistic Scenario
- Brazil is able to shield itself from the loss of confidence in the financial sector and control import inflation through the presence of stronger external currencies.
For questions, please contact Michael Robinet, Vice President, Global Vehicle Forecasts, at +248 380 9000 or michaelrobinet@csmauto.com.
Henner Lehne, Director, Global Vehicle Sales Forecasts, at +49 (0) 6172 66 26 30 or hennerlehne@csmauto.com.
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