Saturday, July 31, 2010

Delayed European auto market recovery may prolong SA's export pain

South African vehicle and component manufacturers exporting to Europe are likely to face tough conditions until 2012, as mounting government debt and budget deficits continue to dampen demand on the continent.

One such manufacturer is Toyota South Africa Motors (TSAM), which exports its Corolla to the continent, with current production at 150 vehicles a day, far short of the 440-units-a-day installed capacity at the Durban plant.

Local component manufacturers exporting to Europe are also feeling the pinch.

“Our biggest export market is Europe, and European markets are signalling distress in terms of car sales for 2010 and 2011. They paint a rather bleak picture –which isn’t good news for the component sector,” says National Association of Automotive Component and Allied Manufacturers (Naacam) executive director Roger Pitot.

More than 50% of South Africa’s component exports go towards vehicle assembly in Europe.
Based in the UK, PricewaterhouseCoopers (PWC) Autofacts senior analyst Michael Gartside tells Engineering News Online that “the first decent year of recovery [in Europe] will be 2012”.

He says PWC was forced to revise its original forecast that next year would be the year of recovery in terms of new passenger car sales in the European Union (EU).

Gartside says he expects sales in the 30 European countries researched to reach 13,4-million cars in 2010, down from 14,46-million in 2009, increasing marginally to 13,6-million units in 2011, and then finally improving to 14,4-million cars in 2012.

Did the government scrappage schemes – where some European government last year offered incentives to consumers to stimulate demand for new cars – assist in creating the current problem, as had been anticipated widely?

No, says Gartside.

“A lot of people believe it simply brought forward demand, but we think the incentives brought new buyers into the market.”

He notes that Germany, for example, heavily incentivised the sale of new vehicles, making it affordable for someone who could never before own a vehicle to go out and become a car owner.

In general, PWC’s research shows that the hangover from the various scrappage schemes has been less dramatic than many anticipated, with growing evidence of stronger underlying demand.

March and April sales in Germany were just 7,5% lower than the same period in 2008, before the crisis ensued.

Moreover, many markets not distorted by scrappage schemes have shown strong recovery. Belgium, Finland, the Netherlands, Norway and Sweden have seen demand grow by a collective 21% January through to May.

Instead of scrappage schemes, the new threat to vehicle sales rather comes from rising government debt and the measures taken to reduce this debt.

Measures in Greece, Ireland, Portugal, Romania and Spain may have implications for new car demand as most include a public sector wage freeze, while in Spain, they include a 5% pay cut in 2010, followed by a freeze in 2011, with VAT to also increase this year.

In Greece the impact is evidenced by vehicle registrations falling 54% in May.

Overall, EU risk factors are now weighted on the downside, says Gartside, and, hence, the expectation of a slowing recovery.

He adds that the recession, the oil price spike in 2008, combined with the number of first-time buyers entering the market on the back of the various scrappage schemes, have all served to change the structure of the European market.

Gartside says that sales of multipurpose and sports-utility vehicles have fallen significantly, with the sales of small cars rising sharply.

The small car sector grew from 37% of the car market in Europe in 2007, to 45% in 2009.

However, Gartside says that this trend may cool down in 2010 as scrappage schemes fall away.
Edited by: Creamer Media Reporter


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