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 Europe is expected to begin bouncing back from its 20-year lows and
China, the world's largest auto market, will likely continue to post
double-digit gains, helped by an array of stimulus measures and
robust demand in smaller inland cities. But slowing demand in the
second-largest auto market, the United States, has some analysts
worried incentives could rise and bit into profit margins.
"You could see some pressure on the quality of profits," Hans-Werner
Kaas, senior partner at McKinsey's automotive practice, said of the
U.S. market. He is worried automakers will lose the pricing
discipline they have shown since the low-point of the recession in
2009, when General Motors Co <GM.N> and Chrysler Group <FIA.MI>
filed for bankruptcy protection.
Worldwide, auto sales in 2014 are seen rising 3.4 percent, according
to research firm IHS, while LMC Automotive sees an increase of 5
percent. Talk of sales and the challenges ahead will be a topic of
conversation among executives at the Detroit auto show this week.
In the U.S. market, analysts expect sales to land somewhere between
16 million and 16.5 million, near pre-recessionary levels, which
would mean an increase of as much as 5.8 percent. In the decade
before the recession began in 2008, the U.S. market averaged 16.7
million new-vehicle sales annually.
While sales could rise as much as 5.8 percent in the United States
this year, that would be down from 7.6 percent growth last year and
about half the double-digit gains in the three prior years as the
market rebounded from 2009's lows.
"We're out of the restructuring phase and out of the riding the
normal recovery growth and I think sometime at the end of 2014, or
somewhere in 2015 — the growth from the 10 plus million cars in the
U.S. to somewhere between 16 and 17 will be gone," said Xavier
Mosquet, senior partner and managing director at Boston Consulting
Group.
As growth slows, there will be more pressure on all players in the
U.S. market to lower prices and raise incentives to keep up sales,
which could hit company profits.
Kaas said that if the growth plans of all manufacturers in the U.S.
market came to pass, sales would top the forecasts of 16 million to
16.5 million, so some automakers will miss their targets. In an
effort to make those marks, they will be under increased pressure to
lure buyers with overly generous incentives.
Japanese automakers, who did not put much "cash on the hood" like
their U.S. rivals before the recession, may hike incentives in order
to compete, Kaas said. Thanks to the weaker yen, the Japanese
companies have room to do that without suffering too much, but that
could force others to respond.
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ELEPHANT IN THE ROOM
Last month's profit warning by No. 2 U.S. automaker Ford Motor Co <F.N>
was due to those pricing pressures, Morgan Stanley analyst Adam
Jonas said. Ford warned that its pre-tax profit for 2014 would be
between $7 billion and $8 billion, lower than the projected $8.5
billion expected in 2013.
"We think Ford's 2014 profit warning is a watershed event for the
industry in terms of increased competitive pressure," Jonas said in
a research note. "Ford is placing a very high portion of the blame
on obscure foreign currencies, engineering costs and launch timing,
but we don' buy it. The elephant in the room is pricing."
For 2013, Europe's beleaguered auto market is set to post a decline
close to its 2.8 percent contraction in the January-November period,
rounding off a six-year slump that has led to plant closures by PSA
Peugeot Citroen <PEUP.PA>, Ford of Europe and GM's Opel.
Most industry executives and analysts expect a return in Europe to
low single-digit growth in 2014, while cautioning that further
losses are likely as pricing remains under pressure due to the
region's glut of excess plant capacity.
"The European market remains dismal," Bernstein analyst Max
Warburton said in a recent note. "Perhaps the next move is up, but
we remain unenthusiastic. Most (manufacturers) will remain
loss-making in the region."
Southern European markets such as Spain also have potential to
bounce back more vigorously from their record lows, lifting
mass-market brands like Volkswagen<VOWG_p.DE>-owned SEAT and
Renault's <RENA.PA> no-frills Dacia — as well as relative newcomers
like Hyundai <005380.KS>.
In China, sales, including commercial vehicles, are forecast by LMC
to grow 11 percent, the same increase seen by Automotive Foresight,
based in Shanghai. IHS forecast a 9 percent increase.
That is welcome news as gains in emerging markets overall, like the
United States, could slow in 2014, Barclays analyst Brian Johnson
said.
"While we continue to see the emerging markets as driving global
growth in the years ahead, they don't have the same luster as in
years past," he said in a research note.
(Additional reporting by Samuel Shen and
Norihiko Shirouzu in Beijing and Deepa Seetharaman in Detroit;
editing by Dan Grebler)
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