Under the hood

Trade finance

Under the hood

June 2019

Worldwide car sales have stood still for the past two years, and electric vehicle technology continues to disrupt. Is the car industry at a fork in the road? Rebecca Harding investigates what is going on in the individualised transport industry

What does the automotive sector mean to you? Power? Freedom? Affluence? Drive? Prowess? Or just getting from A to B?

To an economist – and we’re not called the dismal scientists for nothing – the car sector is the bellwether for the global economy. It is the fourth-largest sector in the world in trade terms; by the end of 2018 it is estimated to have accounted for roughly 10% of world trade in goods, or approximately US$2.2trn. Nothing represents strong growth better than strong automotive sales. How do we know that the Chinese economy is booming? Because German exports of cars to China are growing. How do we know that the UK car sector is strong? Because UK exports of cars to China are growing more quickly than German exports of cars to China.

Dr Rebecca Harding

Dr Rebecca Harding

Independent economist | CEO of Coriolis Technologies

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Bottom gear

Yet for all its iconic status, the sector seems to be in crisis. Vehicle trade values are estimated to have fallen by nearly 2% between 2017 and 2018 and, according to the International Organization of Motor Vehicle Manufacturers (OICA), the number of cars sold worldwide has plateaued at just under 75 million since 2017.1 Growth in global trade has been modest over the past five years at an annualised rate of just under 1%. The automotive industry’s reputation is in tatters because of the emissions scandal which has dented demand for diesel engines. Technology is gathering pace and threatening to disrupt the big global incumbents. The threat of a trade war is already slowing down global growth,2 with the recent downward revision of China’s growth targets to 6.0%–6.5% a measure of more modest expectations. If a trade war becomes real, then automotive manufacturers are the centrepiece because of their supply chain links with key sectors like iron and steel. More than this, the US has been on the edge of declaring the EU car sector a “national security” threat. If it does, then the sector has also become a tool of politics.3

"The automotive sector is unlikely to be disintermediated by emerging technologies"

Does any of this sound familiar? The problems that car bosses now face have a certain resonance. Greater regulation and compliance criteria, economic turbulence as a result of the politicisation of the sector, volatile share prices alongside systemically important but tarnished national champions that are potentially too big to fail, and the disruptive impacts of new technology all combine to make 2019 a challenging year for the sector.

There is no hiding the facts (see Figure 1). Only three of the top 10 largest automotive sector exporters (which includes car components) are estimated to have expanded their exports between 2017 and 2018. The rest, including the top exporting nations (Germany, the US, China and Japan) all declined year-on-year.

 

Supply chain relocation

The only exceptions are Canada, Spain and Mexico, which saw growth in their exports. As the world’s fifth-largest exporter, Mexico is something of the new kid on the block and has grown very rapidly over the past five years. Its trade has grown by over 50% since 2013 and, alongside Canada’s growth, there is more than a touch of irony in this. The USA’s exports have fallen back, both year-on-year and over the period as a whole. A significant factor in this was the relocation of supply chains within the North American Free Trade Agreement (NAFTA) to take advantage of Mexico’s lower costs comparative to China’s. Mexico and Canada were the main beneficiaries of this process. The increased labour costs that will be incurred in Mexico as a result of the new NAFTA will, if agreed by Congress, undermine the advantages that Mexico in particular has enjoyed.

Spain is also an interesting example. It has benefitted from the redistribution of German and French supply chains and its production has increased by 45% since 2013, resulting in a near 27% growth in exports.4 However, these exports are predominantly in Europe and Asia rather than the US, so the effects of any trade war will be less severe than, say, the effects would be for Germany.

"Germany exports higher-end cars such as BMWs and Mercedes, which have become emblematic of the rising middle classes in China"

No panic in Detroit

In the last quarter of 2018 and the first of 2019 we have seen how the uncertainty about the prospect of a global trade war has started to affect the global economy. China is central to this, and its car sector is another key indicator for what is going on (see Figure 2).

 

The US is by far and away the biggest exporter to China, with the Middle Kingdom importing US$13.5bn worth of cars into the country in 2018. Germany is the next biggest, at US$11.5bn. In 2017, imports of cars from the US and Germany were roughly the same at US$12.7bn. In other words, the fact that the US ranked so much higher in 2018 is explained by a drop in Germany’s exports alongside an increase in US exports.

This can be interpreted in one of two ways. The first interpretation is that Germany exports higher-end cars such as BMWs and Mercedes which, since the global financial crisis, have become emblematic of the rising middle classes in China.

73.5

million cars produced in 2017

Source: OICA

The second interpretation is that China imported more cars from the US ahead of its announcement at the end of December that it would remove tariffs, perhaps as a sweetener to the ongoing conversations.

What is more interesting about the chart is that Thailand’s exports have grown so quickly, albeit from almost a standing start. This reflects the redistribution of South Korean and Japanese supply chains within Asia. Similarly, Hungary has fared well over the period, again reflecting supply chain redistributions within Europe (since Audi is one of the largest car producers in Hungary), but also reflecting the increase in production of electric buses, which China has begun to import in large numbers.

In 1984, MIT published a book entitled The Future of the Automobile.5 Faced with rapidly changing technology, a shift in global production and a change in societal views of the car itself, the book sought to explain where the future of the car would lie. It predicted the global supply chains, integrated technologies, lean production and increased environmental awareness that have defined the sector over the past 35 years.

 

Cruise control

The challenges are no less significant now. Yet given the size and the structure of the sector, its globally distributed supply chains and the dependency of the world on individualised transport as well as road freight, the automotive sector is unlikely to be disintermediated by emerging technologies. Elon Musk’s statement that Tesla would produce 400,000 cars by the end of 20196 is impressive, but the main disruption that the company poses to the sector is strategic. Dubbed ‘the Apple of the automotive industry’, its innovations in batteries, motor technology, and vehicle software have been significant differentiators.

In other words, changing regulations, the public outcry against bad environmental practice and rapidly changing technologies are, in the end, likely to make the biggest players more rather than less nimble. Being first usually isn’t enough – it remains to be seen whose models will enjoy widespread adoption.

Dr Rebecca Harding is an independent trade economist and CEO of Coriolis Technologies

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Sources

1 See https://bit.ly/2vvrWoB at oica.net
2 As explained on Trade Finance TV at vimeo.com/312973338
3 See https://bloom.bg/2X3NMcx at bloomberg.com
4 See https://bit.ly/2Ovaczf at atradius.co.uk
5 Alan Altshuler, Martin Anderson, Daniel Jones, Daniel Roos and James P. Womack (1984): The Future of the Automobile: The Report of MIT’s International Automobile Program. See mitpress.mit.edu/books/future-automobile
6 See https://bloom.bg/2IopLcM at bloomberg.com

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