Recession will go further ahead for global car sales

Davos, Switzerland (CNN Business) The global auto industry plunged deeper into recession in 2019, with sales dropping more than 4% as carmakers struggled to find buyers in China and India. The pain is likely to continue this year.

The number of vehicles sold across major global markets dipped to 90.3 million last year, according to analysts at LMC Automotive. That’s down from 94.4 million in 2018, and well below the record 95.2 million cars sold in 2017.

The slump has upended an industry that is grappling with the huge challenge of ditching the internal combustion engine to tackle the climate crisis. Some experts have even begun to speculate that the world may have reached “peak car,” or the point at which global demand for vehicles begins an inexorable decline.

Recession comes with big ramifications for the global economy. According to the International Monetary Fund, the car industry accounts for 5.7% of economic output and 8% of goods exports. It is the second largest consumer of steel and aluminum.

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The biggest blow to carmakers last year came in China, the world’s largest market for vehicles, where a sharp slowdown in economic growth and the elimination of tax incentives for electric car purchases caused demand to plummet. The number of vehicles sold dropped 2.3 million from 2018, said LMC.

In India, another huge market where carmakers had invested heavily, consumers held off on big purchases because of a credit crunch and a weakening economy. Conditions were also tough in Europe, where Brexit and Volkswagen’s (VLKAF) diesel emissions crisis continued to scare off potential buyers and force executives to review investments.

The pressure has sparked a wave of partnerships across the industry. Fiat Chrysler (FCAU) is merging with Peugeot owner PSA Group (PUGOY) and Volkswagen (VLKAF) has teamed up with Ford to develop electric cars. German rivals Daimler (DDAIF) and BMW (BMWYY) have joined forces to develop ride sharing and driverless technology.

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Yet the outlook for 2020 isn’t much brighter. China’s industry minister Miao Wei said Monday that this year and next would be “critical” for the car market and that vehicle sales in the country could be flat “or slightly negative” in 2020.

LMC expects global sales to fall below 90 million, down 0.3% on the previous year.

“There is unlikely to be any real support to the global total from the mature markets like western Europe and the United States,” said Jonathon Poskitt, director of global sales forecasts at LMC.

The big question is when — or even whether — the auto industry will return to growth.

Poskitt said the vehicle sales record hit in 2017 is unlikely to be surpassed in the next few years, in part because of reduced demand in wealthy cities that are struggling with traffic congestion and increased pollution. In those urban areas, potential buyers might be more likely to use car sharing programs or public transportation. But LMC forecasts that demand in less developed areas will eventually result in new global sales records, starting in 2023.

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“Many markets in the world are not yet at what we would consider to be mature levels, and as income grows so does the affordability of vehicle ownership,” said Poskitt. “Considering the low levels of car density in China and India alone, there remains the potential for solid market expansion as some of the more immediate headwinds ease.”

Yet there is considerable uncertainty over how the transition from cars powered by diesel and gasoline to vehicles that run on electricity will affect sales, to say nothing of the possibility that individual car ownership will gradually be replaced by fleets of autonomous cars providing rides on demand.

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Among the immediate challenges facing global carmakers: Electric vehicles cost significantly more than conventional models, require fewer workers to assemble and rely on dramatically shorter supply chains. And in Europe at least, those supply chains face serious disruption from Brexit.

“Automakers are facing challenges that mean they will have to make changes to business models above and beyond those required by technological reconfiguration,” the IMF said in its October World Economic Outlook.

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