Insights & White Papers

Part 2: A New Decade For The Automotive Industry

By Alex Jay, Ed McCarter

The US and China comprised nearly half of global car sales in 2019 but economic conditions may stall future growth. Understanding the regional factors affecting these auto-markets and how they may impact OEMs is the focus for Part 2 of Alex Jay and Ed McCarter’s automotive industry analysis.

Executive Summary

Recapping Part 1 of the white paper, Liberty Advisor Group’s Alex Jay and Ed McCarter studied the evolving preferences of US consumers in terms of vehicle class and powertrains. They also investigated factors encumbering the adoption of electric vehicles (EVs) and what can be done to transcend commercial and technical impediments.

Economic conditions and their impact on auto markets are the focus for Part 2. Alex and Ed’s article begins with the world’s largest automotive market – China – and examines why sales have contracted since 2017, which is in contrast to strong numbers seen in the US and Europe. From there, the effect of increasing car prices on American household debt is analyzed and what the near to mid-term implications may be for original equipment manufacturers (OEMs).

Tail End or a New Tale? Chinese Auto Sales in the Year of the Rat

The Chinese auto market has an outsized impact on global sales, where it represents nearly 30% of commerce. This impact is illustrated in Figure 1, where six years of global sales along with the three largest markets are depicted.1 Before analyzing sales in China, the US and EU 28 + EFTA (Europe) will be examined first to establish a basis of comparison. Beginning with the US, sales have been strong and stable over the last six years as evidenced by a near-neutral compound annual growth rate (CAGR) of 0.3% and average annual sales of 17.5M vehicles. Europe’s CAGR is an impressive 3.3% with a yearly average of 17.2M sales, which aligns well with the region’s YOY positive trajectory.

China’s CAGR over the same horizon was 1.5%, but this number is misleading as the market experienced strong growth and then a sudden drop. This is a significant deviation from the US and Europe and necessitates a closer examination of the opposing cycles. Focusing on the growth portion, the CAGR from 2014 to 2017 was 5.3%; an enviable number that any marketplace would like to emulate. From 2017 to 2019, however, the CAGR shifted to (3.7)%.  So, what led to this oscillating trend that is in stark contrast to the US and Europe?

Figure 1:  Annual Sales of Passenger and Commercial Vehicles

Total Sales of Commercial Vehicles

Analyzing economic conditions and government programs provides insights into China’s sales pattern, and the following three factors help to clarify what transpired in the Chinese automotive market.

  • According to The World Bank, China’s gross national income (GNI) per capita has steadily increased, from $13,460 in 2014 to $18,170 in 2018.2 (This trend is expected to be near similar for 2019.) While this is not an exact measure of average and disposable incomes, it does suggest that Chinese consumers had greater means to purchase a vehicle during the positive growth phase. Beyond that segment, however, additional insights are needed as the increasing GNI does not support the auto market contraction from 2017 to 2019.
  • In 2009, the Chinese authorities implemented a tax incentive for vehicles with 1.6L engines (and those with smaller displacements as well) where the rate was cut in half from 10% to 5%.3 This move had a remarkable effect on the auto market as sales more than doubled over the next 8 years – from 13.6M vehicles in 2009 to 28.0M in 2016 – and was a contributing factor to the growth phase shown in Figure 1.4 This rapid rise in car ownership, coupled with concerns about the environment and excess capacity, led the government to reduce the incentive to 7.5% in 2017 and discontinue it in 2018.5 As expected, this had a cooling effect and helps to explain the negative segment of the cycle.
  • Although NEV sales comprise a smaller portion of total vehicle purchases in China – for example, 4.7% in 2019 – their impact is not negligible.6 As noted in Part 1, the Chinese government’s sizeable incentives propelled the NEV market through 2018. Once reduced, however, NEV sales dropped 4% in 2019. The establishment and subsequent diminution of NEV subsidies provides an additional insight into the oscillating sales trend.

Taking the above three factors in aggregate, along with decelerating GDP growth and the US-China trade war, which started in mid-2018, help to complete the picture of the growth phase and explain why 2017 became an inflection point for the Chinese auto market.7,8

What does this mean for 2020? For one, China will still have a pronounced effect on the global automotive industry and when 2020 sales figures are finalized, it is predicted that the global sales (Figure 1) will continue to run parallel to China’s trajectory. In terms of actual sales, it is estimated that Chinese vehicle purchases will contract between 1.5% and 2.5%, which aligns with the 2% decrease forecast by the Chinese Association of Automotive Manufacturers.9

At the time of publishing this article, the novel coronavirus had affected all regions in China and, consequently, the World Health Organization had declared a global emergency. Though it is too early to measure the impact to China’s auto market, it is not unreasonable to assume that sales may contract more than 2.5% due to business closures, travel bans and other measures to help control the outbreak.

Consumers Cannot Afford a Ford (or Other Brands)

The average price for a new vehicle in 2019 was $37,183.10  (As a point of comparison, the average price in 2014 was $32,386, which is slightly more than $35,400 when adjusted for inflation.11) This is a substantial outlay for the typical American family where the median household income was $63,197 in 2018.12 What makes this price tag even more concerning are the increasing monthly payments and longer duration of car loans. According to Lending Tree’s recent 2019 analysis, the average monthly payment in 2019 for a new vehicle was $550 and had grown by over $70 since 2014.13,14 This has resulted in more buyers undertaking 7-year car loans, and is reflected in the following trend – in 2009 approximately 9% of loans were seven years in duration, a proportion that increased to nearly 25% in 2014 and 31.5% in 2019.15 By contrast, 4 and 5-year loans dropped from 14% and 36%, respectively, in 2009, to slightly more than 7% and 20% in 2019.

These increasing auto prices and corresponding loans have had a broader effect on the economy: American auto debt grew faster than other type of consumer debt from Q3 2014 to Q3 2019. At the end of Q3 2014, auto debt was $0.93T and represented 8% of total debt. In Q3 2019, this grew to $1.32T and 9.4%. It should come as little surprise that this growing liability has had a negative impact; namely, the serious delinquency rate for auto loans is now the highest it has been since the great recession and sits at 2.34%.16,17

These micro and macro effects raise two key questions: (1) what is driving higher prices, and (2) what does it mean to the American automotive industry? As discussed in Part 1 of the report, consumers are buying more pickups and crossovers which are, generally, more expensive than sedans. Moreover, they are buying vehicles with premium packages such as advanced driver assistance system (ADAS) technology and enhanced entertainment features. Together, pricier vehicle classes and upscale content explain the increased transaction prices and subsequent outcomes in terms of higher monthly payments, longer repayment periods and the increasing load of household automotive debt.

On the surface, higher transaction prices for products with wider margins appear to be a boon for OEMs. The troubling aspect, however, is what the current level of auto debt means to future vehicle purchases. For instance, buyers with 7-year loans are effectively removed from the market over the same period. This does not prevent them from using their current vehicle to buy a new one, but 33% of trade-ins carried over an average debt of $5,000 in Q2 2019.18 This purchasing pattern should worry automakers because consumers are carrying debt forward to purchase another product that will likely place them in greater debt. Another concern for OEMs is interest rates. At the time of writing this paper, the commercial bank rate for a 48-month loan on a new car was 5.45% and the corresponding historical rate was 6.43%.19 This indicates that rates are relatively low, which favors consumers. But what happens if rates increase? Will consumers delay future purchases, transition to the used-car market or assume more debt? These options, along with the growing level of national auto debt, do not benefit vehicle manufacturers. And it is for these reasons that the outlook for the automotive industry over the next two to five years should be viewed with caution.

About the Authors

Alex Jay is a Principal at Liberty Advisor Group.  Alex spent 14 years in the automotive industry, nearly 13 of which were with the Ford Motor Company. His automotive roles include Dimensional (GD&T) Engineer, Product Development Engineer, Six Sigma Black Belt, Business Analyst, and Engineering Change Management Lead. As a consultant, he focuses on product lifecycle strategies with an emphasis on how to design and execute commercialization strategies. Alex earned his B.A.Sc. (Chemical Engineering) from the University of Waterloo and his MBA from the Ross School of Business at the University of Michigan.

Ed McCarter is a Principal Consultant at Liberty Advisor Group. He graduated from Washington University in St. Louis with a BS in Systems Engineering and Economics & Strategy. Ed’s focus at Liberty has been on complex enterprise technology systems and highly engineered products, specifically in the automotive space.

About Liberty Advisor Group

Liberty Advisor Group is a goal-oriented, client-focused and results-driven consulting firm. We are a lean, handpicked team of strategists, technologists and entrepreneurs – battle-tested experts with a steadfast, start-up attitude. Our team, with an average of 15+ years of experience, has delivered over $1 billion in operating income improvement and over 300 M&A deals for our clients. We collaborate, integrate and ideate in real-time with our clients to deliver situation-specific solutions that work. Liberty Advisor Group has the experience to realize our clients’ highest ambitions. Liberty has been named to the 2019 Best Places to Work in Chicago and to FORTUNE’s list of Best Workplaces in Consulting and Professional Services.

Liberty’s hands-on automotive experience is why we are able to understand and appreciate the challenges that our clients face. The advisors in our Automotive & Mobility Practice do not have generalist backgrounds – they are Engineers and Computer Scientists who are passionate about the auto industry and how it continually evolves. Further, they have worked across the entire vehicle development lifecycle along with the critical organizations that are responsible for bringing sedans, trucks, crossovers and SUVs to market.

Footnotes

1 Sales data for years 2014 to 2018 were captured from OICA’s sales statistics (refer to www.oica.net), 2019 US data were captured from www.nada.org, and 2019 Europe and Chinese data were captured from www.marklines.com

2 To learn more about The World Bank’s Gross National Income (GNI) Per Capita (PPP, international dollars) calculation, please visit their World Development Indicator site at https://databank.worldbank.org/

3 Liu Zongwei, Wang Yue, Hao Han and Zhao Fuquan, “Overview of China’s Automotive Tax Scheme: Current Situation, Potential Problems and Future Direction”, Journal of Southeast Asian Research, Vol. 2017 (2017), Article ID 790677, DOI: 10.5171/2017.790677

4 Sales data for years 2009 to 2016 were captured from OICA’s sales statistics; please visit www.oica.net to learn more

5 Sherry Fei Ju and Charles Clover, Financial Times, www.ft.com/content/73ceffb4-d8ac-11e6-944b-e7eb37a6aa8e, accessed 24 Jan. 2020

6 2019 NEV and total vehicles sales in China were captured from MarkLines’s 2019 China Flash Report; please visit www.marklines.com for more information

7 James T. Areddy, Chao Deng, The Wall Street Journal, www.wsj.com/articles/chinas-economic-growth-slows-to-6-1-as-trade-and-business-confidence-suffer-11579236022, accessed 24 Jan. 2020

8 Heather Timmons, Reuters, www.reuters.com/article/us-usa-trade-china-timeline/timeline-key-dates-in-the-u-s-china-trade-war-idUSKBN1ZE1AA, accessed 24 Jan. 2020

9 Automotive News, www.autonews.com/china/china-light-vehicle-demand-fall-third-year-2020-forecast-says, accessed 24 Jan. 2020

10 Neal E. Boudette, New York Times, www.nytimes.com/2020/01/04/business/auto-sales-price.html, accessed 27 Jan. 2020

11 Anita Lienert, Edmunds.com, www.edmunds.com/car-news/average-transaction-prices-hit-record-32386-in-2014-edmunds-report-says.html, accessed 27 Jan. 2020

12 Jonathan Rothbaum, Ashley Edwards, U.S. Census Bureau, www.census.gov/library/stories/2019/09/us-median-household-income-not-significantly-different-from-2017.html, accessed 27 Jan. 2020

13 Jenn Jones, Lending Tree, www.lendingtree.com/auto/debt-statistics/, accessed 27 Jan. 2020

14 Nathan Bomey, USA Today, www.usatoday.com/story/money/cars/2019/03/01/care-payments/3001818002/, accessed 27 Jan. 2020

15 Chris Arnold, NPR, www.npr.org/2019/10/31/773409100/the-7-year-car-loan-watch-your-wallet, accessed 27 Jan. 2020

16 The serious delinquency rate for loans are loans that are 90 days or more past due

17 Household debt information captured from the Federal Reserve Bank of New York’s Household Debt and Credit Report (Q3 2019); please visit www.newyorkfed.org/microeconomics/hhdc.html to learn more

18 Chris Arnold, NPR, www.npr.org/2019/10/31/773409100/the-7-year-car-loan-watch-your-wallet, accessed 27 Jan. 2020

19 The Federal Reserve, Terms of Credit at Commercial Banks and Finance Companies, www.federalreserve.gov/releases/g19/HIST/cc_hist_tc_levels.html, accessed 27 Jan. 2020

Alex Jay By Alex Jay
Ed McCarter By Ed McCarter