Carmakers brace themselves for trouble

Carmakers brace themselves for trouble

Carmakers, after suffering two big shocks in less than three years, are bracing themselves for a new blow from diminished consumer confidence caused by the debt and markets crises in the US and Europe.

Sales of cars – as one of the most expensive and easily deferrable big consumer goods purchases – are seen as especially vulnerable if the market volatility of the past two weeks translates into a double-dip recession.

Industry participants are not yet warning of a repeat of the crisis of 2008-9 – sometimes nicknamed the “carpocalypse” or “carmageddon” – when governments around the world had to extend tens of billions of dollars of emergency aid to carmakers to prevent them from collapsing, in the biggest intervention in any industry outside banking.

Now, carmakers and industry analysts are beginning to revise downward their forecasts on earnings and sales, most of which had predicted a slow but steady recovery from the recession in the US and Europe and the recent earthquake in Japan.

Volvo, the Swedish carmaker owned by China’s Geely, this week warned that the “unstable economic climate” would be likely to cause greater volatility in consumer confidence, exchange rates and raw material prices, which could in turn have an impact on its profits.

“The recent developments in the global economy make it difficult for us to predict the car market and we need to be prepared for changes in consumer demand,” says Stefan Jacoby, the company’s chief executive.

Last week Fumihiko Ike, Honda’s chief financial officer, warned that the company might need to cut its full-year profit forecast again when it reports first-half financial year earnings in October.

Honda, like its competitors, was hit hard when the banking crisis in late 2008 caused consumers to postpone new vehicle purchases. But in March, Honda suffered another blow when Japan’s earthquake disrupted the supply of parts.

The company had on August 1 nudged its forecast for 2011 sales and profits forecast slightly upward, confident it had recovered from the earthquake. But now it worries that the drop in equities might hit car sales, and that the strengthening yen could hurt its export earnings
“There’s no question the automotive space is becoming a different place than it was even a few weeks ago,” says Jeff Schuster, executive director of forecasting at JD Power, which has cut its forecast of global vehicle sales this year from about 77m to 75m.

Goldman Sachs cut its forecast this week for global vehicle sales, due mainly to faltering demand in the US and Europe. It now expects sales of 80.4m units next year, down from its previous estimate of 82m.

Signs of a slowdown have emerged even from healthier car markets outside crisis-afflicted America and Europe. Car sales in India fell for the first time last month in nearly three years, down 16 per cent on a year ago. China’s car market, a cash cow for the industry for much of the financial crisis, grew an anaemic 3.6 per cent last month.

America’s two biggest carmakers are still sticking to their current forecasts, albeit at the lower end of their ranges, and with less conviction than before. “There’s a lot of turmoil in the business and turmoil means uncertainty, so we’re a little unsure of these numbers,” Dan Akerson, General Motors’ chief executive, said in Detroit last week of the company’s 13m US car market forecast.

Ford is for now sticking to its estimate that total US light-vehicle sales will reach 12.7m to 13.2m this year. “Clearly, there’s an elevated level of uncertainty as it relates to the economy compared with three weeks ago,” says George Pipas, the company’s sales analyst, “but that doesn’t necessarily cause you to change your forecast.”

Financial investors have been quicker to downgrade the industry’s near-term prospects, sending automotive stocks down more sharply even than bearish markets. The S-Network Global Auto Index has over the past three weeks dropped by about 19 per cent, compared to the 12 per cent drop in the FTSE All-World Index.

Ford, whose chief executive Alan Mulally has been lionised for restoring the company to profitability during the financial crisis, saw its share price tumble this week to barely half the peak price it reached in January. GM’s shares trade at about a quarter below their issue price in last year’s initial public offering. “Thirty years of equity history suggest that it’s difficult to make money in auto stocks in a fading macroeconomic backdrop,” says Peter Nesvold, analyst at Jefferies & Co.

The spectre of a renewed crisis for the industry is worrying not only for producers themselves, but for their suppliers and dealers, and for governments concerned about the health of some of their countries’ biggest employers and exporters.

Within a few weeks of the banking crisis in late 2008, carmakers were reporting sharply lower sales and cutting shifts and production days to avoid unsold inventory piling up. The closing of credit markets decimated lending both to consumers and producers.

Three years later, while most carmakers have returned to profitability with government help, the industry’s supply base is seen as more vulnerable. “There will be some fragility in the supply chain, and that could be quite quickly exposed if vehicle manufacturers need to either slow down or stop the wheels turning,” says Paul Everitt, chief executive of Britain’s Society of Motor Manufacturers and Traders.

Industry experts doubt that the current downturn will be as severe as last time, if only because car sales in Europe and the US are running at structural rates much lower than before the crisis. US car sales are still well below the 17m peak they reached in 2007, in the UK, car sales are forecast to come in below 2m this year, down from 3.4m four years ago.

Despite faltering demand, industry production in the second half of this year will in any case be buoyed by the need to rebuild inventories after the disruptions caused by the Japanese earthquake.

Amid a darkening outlook for the sector, analysts are also taking relative comfort from the fact that there is no sign yet of financing drying up. “Given the fact that liquidity is out there and carmakers can support sales with financial services products more easily, the downturn won’t be as big as it was,” says Arndt Ellinghorst, head of European automotive research with Credit Suisse.