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PwC Automotive Institute Analyst Note on Automotive Industry

The note analyses impacts of the global financial crises on the forecasts for the industry.

Quarterly Forecast Update: No Sunshine When it Rains

The 14-month-old credit crunch has entered an alarming new stage that is quickly exposing vulnerabilities in adjacent sectors, such as automotive, where access to affordable credit is essential. The destabilization effects and collapse of consumer confidence caused by the crisis are spreading beyond the boundaries of the US and Europe and now threaten the emerging markets critical for OEM growth. It is unlikely that the auto sector will resume growth before 2010.

North America:

In recent months, the credit crisis, a weakened US economy, and equity market turbulence have coalesced to drive light-vehicle sales to their lowest levels in 15 years. Although fuel prices have recently receded from historic highs, the absence of available credit has challenged vehicle affordability; sales will likely remain strained well into 2009.The negative implications of credit tightening are compounded by the mass exodus of lenders from vehicle leasing, which represented approximately 20% of sales.

Because a new vehicle represents a highly deliberated purchase, second only to a home in expense, consumers are increasingly likely to wait until a period of greater confidence in the economy and home price stability emerges before reentering the vehicle market en masse.

PwC's 2009 baseline sales forecast for the US market has been revised down to 13.1 million units, with assembly expected to decline to a 16-year low of 12.3 million units, despite a reduced share of imports based on yen strength and additional New Domestic capacity localisation in 2008-09.

Unlike the product mix shift caused by rising fuel prices in the first half of 2008, which targeted OEMs with greater exposure to light trucks, our revised sales forecast suggests downward momentum is universal as consumer spending stagnates and reduced credit accessibility denies potential sub-prime buyers.

Additionally, the need to maintain cash reserves may pressure the acceleration of capacity rationalization by the Detroit 3, and the increased cost of carrying inventory will likely lead to reduced dealer stocks - both adversely affecting output.

European Union:

Initial expectations that the EU may be better insulated from US-derived financial turmoil have proved unfounded. Combined with the worsening economic situation, deterioration in housing markets already observed in several countries, and falling consumer confidence, tighter credit in the EU has deeply depressed new car demand in recent months.

As a result of the rapid sales decline and overcast economic outlook, PwC has significantly revised its EU forecast downward for 2008-2010. Our former perspective captured the downside risk potential that surfaced a month ago, but subsequent developments have highlighted the peril implied by growing financial concerns in the global economy.

While no manufacturer has proved immune, the pain of the current downturn is not being equally shared, and a host of external factors have converged to complicate the issue. Elevated fuel prices combined with increasing CO2-related taxes have caused larger vehicles, especially large MPVs and SUVs, to fare far worse than other market segments. Automotive demand has also been hindered by uncertainty surrounding certain national CO2-taxation schemes, likely deferring vehicle purchases by consumers waiting for new fuel-efficient technology to become more readily available in the European marketplace.

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PwC Automotive Institute, PricewaterhouseCoopers Plaza, 1900 St. Antoine Street, Detroit, MI 48226-2263

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