Euler Hermes | September 2015
Key Points
1 E uler Hermes expects further growth
in automotive sales of 4% in 2015, to
17.5 million vehicles; the decline of
unemployment and gas prices as well
as the improvement of consumer
confidence are playing key roles in
the increase.
2 F or 2016, U.S. light vehicle sales could
potentially peak or slightly decline
by 1% vs. 2015 due to an expected
interest rate hike.
3 L ow-cost, foreign auto
manufacturers are continuing to
take market share from Ford and
GM down 25.5 bps year-over-year
compared to July 2015.
4 T
he MPG of vehicles could increase
by 70% by 2025 due to U.S. CAFE,
the shift to aluminum parts, and the
electrification of vehicles. This should
benefit the automotive suppliers
that are able to innovate and provide
value-added, fuel-efficient products.
Automotive
In collaboration with Yann Lacroix
Sector Advisor for
Automotive and Steel
[email protected]
Overview – Strong growth expected for 2015, with a potential peak in
2016 due to increased cost of credit
2015 marks a strong year for the automotive industry as growing consumer confidence and
lower unemployment are driving increased light vehicle sales to an estimated 17.5 million
vehicles for 2015. Though we continue to see a weak price environment for oil and gasoline, a
slight increase in prices could hamper growth for 2016.
However, the real risk lies with the Federal Reserve and the potential rate hike, which could cause
higher cost of credit for consumers. We therefore forecast sales to be down 1% in 2016.
The U.S. Corporate Average Fuel Economy standards (CAFE) are also a game changer: They
require auto manufacturers to increase vehicle fuel-efficiency annually to a designated target by
2025. As the MPG requirements become more stringent, auto manufacturers will be required to
innovate and develop new ways to make vehicles lighter and more fuel-efficient.
This will lead to the increased use of aluminum in lieu of steel and the increased use of electricity
to power vehicle processes. These changes should drive increased sales for auto suppliers who
are able to develop products to support this industry shift.
Increased profitability for auto manufacturers has been driven by the change in the trend of
light truck sales relative to car sales through July 2015 as compared to YTD July 2014. As light
trucks carry greater than 100% higher margins, this should help drive earnings growth for auto
manufacturers should this trend continue.
Current Environment – A declining unemployment rate, increased
consumer confidence, and low gasoline prices continue to drive
increased light truck and car sales
As shown in Table 1, for July 2014 CYTD (calendar year-to-date), 0.95 light trucks were sold
for every car; this has been a changing trend for July 2015 CYTD, where for every car sold,
1.06 light trucks have been sold.
Table 1: Sales of Light Trucks vs. Cars
2015 CYTD
2014 CYTD
Total Number of Cars Sold
4,867,583
4,923,909
% Change
-1.14%
Total Number of Light Trucks Sold
5,164,938
4,675,375
10.47%
Ratio of Trucks to Light Cars
1.06
0.95
11.75%
Average Gas Price (Regular)
$2.73
$3.66
-25.41%
$54.31
$105.23
-48.39%
6442.616
6145.440
4.84%
Average Crude Oil Spot Price
Construction Payrolls
Source: Autodata, YahooFinance, Federal
Reserve Bank of St. Louis Euler Hermes
Industry Outlook:
Ryan Maluski, Credit Analyst
[email protected]
The main driver for the increase in the sales ratio of light trucks to cars was the cross-over
vehicle segment. The increase in July 2015 CYTD sales in the cross-over segment was 14.3%,
to 2.5 million units. This change in trend is beneficial to auto manufacturers as light trucks
come with higher margins and can be attributed to two main factors: Oil price declines,
which drove gas prices 25.41% lower, and increased construction spending. This is a benefit
for light truck manufacturers as light trucks generate greater than 100% higher margin than
cars and therefore increase profitability.
As the unemployment rate continues to decline (down 45%) from a high of 10% in October
2009 to 5.5% as of May 2015 (see Chart 1), a greater number of Americans are employed.
This is driving the increase in total vehicle sales at its pre-crisis level. However, while lower
gas prices were a driver in light truck sales this past year, it is not as strong a driver as the
unemployment rate in increasing total vehicle sales.
Another indicator is consumer confidence, as shown in Chart 2. Increased consumer
confidence — up 277.1% from the February 2009 low of 25.3 to 95.4 as of May 2015
(Consumer Confidence Index) — continues to drive vehicle sales higher as consumers feel
more comfortable purchasing big-ticket items. These two drivers have been and should
continue to be tailwinds for auto manufacturers going forward.
Conversely, the optimism for these increases is somewhat muted due to the increase in
subprime loans, up to 8.3% of all new car loans during June 2015. These subprime loans carry
interest rates of 10% or greater, and the U.S. Justice Department and other agencies are currently
expressing concerns about the risk of extending these subprime loans to higher-risk borrowers.
Source: Federal Reserve Bank of St. Louis, Euler Hermes
Chart 1: Lower Unemployment and Declining Gas Prices Driving Increased Car Sales
Euler Hermes North America Headquarters 800 Red Brook Boulevard Owings Mills, MD 21117 Phone: +1 877-883-3224 Fax: 410-753-0952 [email protected] www.eulerhermes.us
Source: Conference Board, Federal Reserve
Bank of St. Louis, Euler Hermes
Chart 2: Consumer Confidence and Light Vehicle Sales
Many consumers are demonstrating their preference for foreign manufacturers as Ford
and General Motors continue to lose market share in the U.S. to foreign manufacturers. As
shown in Table 2, Ford and GM have lost a combined 25.5 bps of market share from July
2014 to July 2015 while foreign auto manufacturers have gained 39.5 bps of market share.
Another example of the weakness shown by U.S. auto manufacturers was Chrysler’s purchase
by Italian auto maker Fiat, which began buying Chrysler stock during The Great Recession as a
joint rescue of Chrysler and supported by both the U.S. and the Canadian governments. To stay
competitive and to maintain market share, Ford has reacted by instituting a plan to reduce
vehicle platforms, which is expected to decrease manufacturing time and reduce structural
costs by $14 to $15 billion. This will drive increased operating margins with a target of greater
than a 550 bps increase from current operating margins as of December 2014.
Table 2 shows the growth (or decline) in Calendar YTD July 2015 of light vehicle
deliveries and the growth (or decline) in market share year-over-year for the major auto
manufacturers selling in the United States:
Company Name
General Motors Corp.
Ford Motor Company
Toyota Motor Sales U.S.A. Inc.
FCA US LLC
American Honda Motor Co. Inc.
Nissan North America Inc.
Hyundai Motor America
Kia Motors America Inc.
Subaru of America Inc.
Volkswagen Group of America Inc.
Other Auto Manufacturers
Total Light Vehicle Sales
Ford & GM
Foreign Auto Manufacturers
2015
CYTD
1,712,028
1,476,824
1,381,409
1,187,790
875,344
825,929
431,445
349,722
283,722
310,429
764,642
3.9%
2.3%
4.9%
6.1%
2.7%
5.0%
2.5%
5.0%
13.8%
2.8%
6.9%
2015 CYTD
% of US
Market Share
17.72%
15.05%
14.44%
12.56%
8.96%
8.65%
4.41%
3.66%
3.22%
3.18%
8.15%
10,032,521 9,599,284
4.5%
100.00%
100.00%
0
3.9%
5.3%
45.34%
52.67%
45.59%
52.28%
-25.53
39.52
1,778,057
1,510,333
1,448,621
1,260,170
899,325
867,355
442,163
367,263
322,935
319,102
817,197
4,548,560
5,284,560
2014
%
CYTD Change
4,376,642
5,018,423
2014 CYTD
% of US
Market Share
17.83%
15.38%
14.39%
12.37%
9.12%
8.60%
4.49%
3.64%
2.96%
3.23%
7.97%
Market
Share ∆
YoY (bps)
-11.2
-33.0
4.9
18.7
-15.5
4.1
-8.7
1.8
26.3
-5.3
18.0
Percent change calculation based on numeric comparison, not adjusted for selling days in period.
Outlook – Increasing profitability for auto manufacturers offset by
macroeconomic and industry headwinds
In addition to the pending interest rate hike and gasoline prices, several key factors are
driving our light vehicle sales forecast of 17.5 million vehicles for 2015 and the slight decline
of 1% for 2016. In many markets, exchange rates are market-determined and impacted by
Euler Hermes North America Headquarters 800 Red Brook Boulevard Owings Mills, MD 21117 Phone: +1 877-883-3224 Fax: 410-753-0952 [email protected] www.eulerhermes.us
Source: Autodata Corp, Euler Hermes
Table 2: U.S. Light Vehicle Deliveries Calendar Year-to-Date (July 2015)
different macroeconomic and policy factors. The ending of asset purchases by the U.S. Federal
Reserve, shifts in capital flows, unstable non-domestic policy environments, and exchangerate volatility will all continue to have a negative impact on the sales and earnings of many
globalized companies throughout 2015, particularly as the US Dollar gains more strength.
Additionally, pricing pressures are a major concern in the automotive industry. Excess
capacity in manufacturing in all areas of the world and the constant introduction of new
products in key segments will continue to reduce manufacturers’ ability to increase prices.
Going forward, strong competition and excess capacity will continue to put pressure on
auto manufacturers’ pricing power.
Conversely, vehicle profitability is a tailwind as the sales ratio of light trucks to cars continues
to increase due to faster growing light truck sales. As a result, margins should continue to
improve as light trucks generate over 100% higher operating margins versus cars. With
the use of more fuel-efficient parts and the low-price gasoline environment, sales have
increased in this segment relative to smaller cars and should therefore drive increased
profitability for auto manufacturers.
Opportunities – New environmental standards create constraints and
opportunities
Although the CAFE standards were updated in 2011, the goal remained the same: improve
the fuel economy of vehicles on the road. As of 2012, the average fuel economy for new
vehicles was required to be in the range of 27 MPG to 36 MPG based on the wheelbase of
the vehicle. Each year, these requirements will become more strict until 2025, when the
required range will be 47 MPG to 61 MPG depending on the size of a vehicle’s wheel base.
About Euler Hermes
Euler Hermes North America is the oldest
and largest provider of trade credit insurance
and accounts receivable management
solutions. We offer both domestic and export
credit insurance policies that insure against
commercial and political risk in more than 200
countries worldwide. Euler Hermes maintains
a database of proprietary information on
more than 40 million companies worldwide
and is rated A+ (Superior) by A.M. Best and
AA- by Standard & Poor’s.
To contact us today and learn
more about how Euler Hermes
can help your business, visit us at
www.eulerhermes.us or call
877-883-8224.
Due to the government-required MPG improvements, auto supplier parts and innovative
products that can improve fuel efficiency will be in higher demand going forward and a
key driver of sales for auto parts suppliers. Contributing factors for auto manufacturers in
making more fuel-efficient vehicles will be the use of lighter materials such as aluminum
bodies as opposed to steel, and the increase in electrical processes used to power vehicles
(electrification), which will decrease a vehicle’s gasoline consumption.
Auto manufacturers and suppliers must also navigate through potentially-volatile commodity
markets as aluminum prices are currently down 27% to $0.70/lb. from a 52-week high of
$0.96. This type of volatility may reduce margins as hedging costs are incurred. The expected
savings of the U.S. CAFE standards are approximately 80 billion gallons of fuel consumption by
2025 and 160 billion gallons of fuel consumption by 2050 (Department of Transportation).
What this means for your business – Continued caution as globalized
companies experience weaker markets than the expanding U.S. market
As the unemployment rate, consumer confidence and light truck sales all improve, auto
manufacturers should see increased profitability going forward. On the contrary, as the U.S.
CAFE standards continue to improve MPG requirements for vehicles, they will likely drive
increased demand for fuel-efficient parts and products from auto suppliers. But they could
also potentially increase R&D costs for auto manufacturers. Based on these standards—and
in addition to current macroeconomic headwinds such as currency risks, pricing pressures
and excess capacity—caution must be used in extending credit to globalized companies.
Euler Hermes North America Headquarters 800 Red Brook Boulevard Owings Mills, MD 21117 Phone: +1 877-883-3224 Fax: 410-753-0952 [email protected] www.eulerhermes.us