Changing market conditions are putting too much pressure on the automotive industry worldwide. Payment risks are rising, while the number of bankruptcies is expected to continue rising in the coming years.
This is according to Atradius' Market Monitor for the automotive industry. In this Market Monitor, the company charts the performance of prospects for the global automotive sector. Among other things, the market survey shows that payment risks in the German automotive industry have not been this high since the financial crisis. The risk of default by customers more than doubled in 2019 compared to two years earlier.
'Fat years' in Germany are over
Germany has had a number of 'fat years', reports Atradius, which were characterised by few insolvencies and payment delays. These years are now over; in 2018, car production declined by 9.3 per cent and this decline will also continue in 2019, according to Atradius. Several major challenges hit the German auto industry extra true, including falling sales in China, looming US import tariffs and the rise of both e-mobility and shared cars.
Larger suppliers appear, at first glance, to be in a good position to adapt to changing market conditions, according to Atradius. The parties are seeing their turnover and profitability decline, but are still a "significant player" in the global market. The companies have been able to build financial buffers thanks to good returns in the past, which now allow them to invest in research and development. Atradius calls these investments necessary to stay ahead of the competition in new trends and technologies, such as electric motors, connected driving and autonomous vehicles.
Especially smaller suppliers in the German market may face higher credit risks. The number of payment delays among these companies has increased since the end of 2018 and this trend is expected to continue. Atradius expects the number of insolvencies to increase by 2 per cent in the next 12 months.
China remains largest sales market
With 23 million cars sold per year, China is by far the largest car market in the world. The Chinese market is expected to continue to grow in the long term. However, Atradius also points to sharply declining sales and deteriorating credit risks in a number of segments. The outlook for the sector has therefore been revised downwards.
For now, the Sino-US trade conflict has little direct impact; car imports and exports accounted for 4.1 and 4.6 per cent of sales in 2018, respectively. Indirectly, however, the effects of the trade conflict are being felt. For instance, the conflict is causing lower economic growth and increasing uncertainty among businesses and consumers.
For instance, after years of strong growth, domestic lapses fell by 2.8 per cent in 2018 compared to a year earlier. The first half of 2019 even saw a decline of 12.4 per cent. This downward trend is likely to continue in the second half of 2019 and early 2020. The main reason for this contraction is the removal of subsidies on electric cars.
Unlike the internal combustion engine segment, the electric car market does continue to grow. The segment accounts for a 5 per cent market share. The market does grow at a slower pace: from 62 per cent in 2018 to 50 per cent in the first half of 2019.
US benefits from improved trade relations with Mexico
The outlook for the US automotive sector remains 'reasonable', Atradius reports. This is partly due to the removal of import duties on steel and aluminium from Mexico and Canada. Much of the cars and parts for the US market are produced south of the border.
Nevertheless, Atradius is updating its expectations for the US market. The reason is impending import duties on vehicles and auto parts from the European Union and/or Japan. In addition, Atradius points to falling demand in the US market; for instance, rising prices for new vehicles are depressing demand in the consumer market. At the same time, future duties could have a major impact on the industry and lead to an increase in bankruptcies. Another challenge is the accelerated transition from traditional internal combustion engines to alternative fuels and electric driving, as well as the transition to self-driving cars.
'High investment needed'
"Although the future of mobility is not yet clearly defined, in terms of which technologies and innovations will eventually prevail, one thing is clear: high investments are needed to keep up with changing market conditions. It is estimated that planned global investment in the electric car segment will reach USD 300 billion over the next five to 10 years," Atradius writes in its report.
"The production ratio between internal combustion engine vehicles and electric vehicles/plug-in hybrids is currently 50:1. Yet electric cars are already expected to account for about 15% of global sales by 2025," Atradius said. Moreover, outsiders are entering the market, many with a technological lead and a lot of financial clout. And not only in new technologies such as self-driving transport, but also in e-mobility. The relatively low complexity of electric motors (which require fewer parts than internal combustion engines) also attracts outside companies. For example, British household goods manufacturer Dyson now builds electric cars."
The Market Monitor is available - after registration - free of charge on the Atradius website.
Author: Wouter Hoeffnagel
