Saturday 21 April 2012

The European Clunker - European car sales, a clear indicator of deflation

Clunker definition: "A thing that is totally unsuccessful."

1. A decrepit machine, especially an old car; a rattletrap.
2. A failure; a flop.

While we recently we focused on Shipping as a leading deflationary indicator, we thought this time around we would focus our attention on European car sales. We will look at the impact various "cash for clunkers" plans in Europe have had on European car sales and their recent evolution, pointing towards more evidence of a serious bout of deflation in the European space. In addition to reviewing the evolution of car sales in various European countries, it is important, we think, to look at the age segmentation of the European car markets by countries and demographic trends as well.

We will start by the recent evolution of European Car Sales in various European countries.

PASSENGER CARS: registrations down 7.7% in first quarter 2012- source ACEA
Brussels, 17/04/2012 - "In March, demand for new cars in the EU* was negative for the sixth consecutive month, with a decline of 7.0% compared to March last year. While retaining their importance in terms of volumes (1,453,407 new cars), March registrations have not been at this level since 1998. Over the first quarter, the EU market shrank by 7.7%, compared to the same period a year ago, with a total of 3,312,657 new registrations.
Results in March were diverse across the EU* as Italy (-26.7%), France (-23.2%) and Spain (-4.5%) saw their markets contract whereas the UK (+1.8%) and Germany (+3.4%) performed better than they did in the same month a year earlier."

Whereas the drop in car sales were much more severe in Portugal and Greece, respectively by: -49.2%) and -42.6%.
Meanwhile, in Iceland, car sales were up by + 101.1 % March. Re-Iceland, we rest our case...(Iceland - The Great Debt Escape).
For the complete breakdown, by countries for March please check:
Car Sales Statistics.

Evolution of Car sales in Spain from 1995 onwards - source Bloomberg/OECD:
Falling of the proverbial cliff back to...1995 levels.

Evolution of Car sales in Italy from 1995 onwards - source Bloomberg/OECD:
Below 1995 levels...

Evolution of Car sales in Portugal from 1995 onwards - source Bloomberg/OECD:

Evolution of Car sales in Ireland from 1995 onwards - source Bloomberg/OECD:
Again back to 1995 levels...

Evolution of Car sales in Greece, we could only go back to 1999 onwards - source Bloomberg/OECD:
A bottomless pit?

We previously mentioned the uptick in car sales in Iceland for March (+101%).
Evolution of Car sales in Iceland from 1995 onwards - source Bloomberg/OECD:
Again back to 1995 levels but you can clearly notice the upward trend in car sales from the abysmal bottom reached early 2009 at 110K but, still a long way to go to move back to the average of 1136K from 1995 to 2012.

Evolution of Car sales in France from 1995 onwards - source Bloomberg/OECD:
The noticeable spike in car sales in the 2009 and 2010 period in France but as well noticeable in additional countries can be attributed to the various "cash for clunkers" programs implemented in various countries:
Austria, Cyprus, France, Germany, Italy, Luxembourg, Portugal, Romania, Slovakia, Spain.
The summary of the various "cash for clunkers" programs by countries can be found here:
Cash for Clunkers, Here and There - Bill Chameides, April 24th 2009.

In relation to France, the former French minister of Economic Affairs, Christine Lagarde, announced in September 2009 that the country's cash-for-clunkers scheme, called "prime à la casse", would be extended for two additional years at the time. The initial plan was to end the program by the end of 2009, but the government believed at the time that the car market would likely crash if the stimulus Euros were withdrawn. Of course it would have crashed; it was only delaying the inevitable. Particularly because of the "sensitivity" of French car manufacturers to European car sales in peripheral countries.
Renault and PSA Peugeot Citroën car sales have dropped by 20% in the first quarter, whereas GM, Ford and Toyota Europe dropped by respectively 10%, 7.6% and 2.1% on the same period.

Therefore it isn't really a surprise, looking at the performance of the Peugeot stock price, to see the share back to 1991 levels... - source Bloomberg:

On a Credit level, Moody's downgraded Peugeot's credit rating to junk status with a negative outlook, citing "severe deterioration" of its finances, General Motors recently bought more than 335 million dollars worth of shares of PSA Peugeot Citroen giving them a 7% stake in the French company. 10 years ago, GM did a similar deal with FIAT which eventually cost GM 2 billion dollars to get out of the tie up but that's another story...

Moving back to our "European clunker" story, it is important to look at the age segmentation of the European car markets by countries as a follow up on European car sales. Every year French consumer credit company CETELEM publishes a report relating to the trends in driving habits of youths. While the 2012 is not yet available, the 2011 makes some very interesting points:
"Beyond the economic context, the list of facts and societal trends limiting the potential growth of the automobile trade is long. A sluggish demography in conjunction with a saturation of car rates ownership condemn the expansion of the car market. Economic growth will limit the speed of the renewal of European car parks and therefore car sales. Also, in this already unfavourable context for the automotive industry, car usage continues to decline in European countries. The number of kilometers traveled each year has been steadily declining over the last ten years."

Evolution of average kilometers per year since 2000 in selected European countries, (index basis 100 in 2000) - source BIPE, Enerdata, Insee:

Clearly the high level of youth unemployment in Europe is a BIG negative for the European car industry given, on average, according to CETELEM, the average age of a buyer of a "new car" is...50 years old.
Average age of a buyer of a new car in Europe in 2009 by countries - source BIPE
51.5 years on average in France...
According to CETELEM, 29% of buyers of a new car in Europe had more than 60 years old in 2009 whereas 11% were below 30 years old. The secondary market is the main source for youths to access the car market in Europe.

Here is the structure of the European market in 2009 per age brackets - source BIPE:

More interestingly in the CETELEM market survey, in countries such as Spain and Italy, the proportion of buyers of new cars below 30 years of age has been higher than in France or Germany in percentage terms - source BIPE:

CETELEM indicating in their report that 63% of below 30 years old by second hand cars, 18% more than above 50 years old. It is in Spain that young Spanish have displayed the biggest attraction to "new cars". Two thirds of young Spanish have indicated in their 2009 survey they had purchased a new car, followed closely by young Italians and Belgians.

With unemployment in Spain closing on 25% and youth unemployment above 50% in 2012, new car sales will undoubtedly fall even more in the near future...
The car market in Europe is saturated. In the US you can find 800 light vehicles for 1000 inhabitants whereas in Europe it is below 700 in the eight countries studied by CETELEM according to their report. The European market will never reach the American level. The European car market is not only saturated but matured, hence the growing reliance of car manufacturers on emerging markets. In addition to this, the rising prices in gas prices, is weighting even more on the industry as a whole.

Add to the mix demographic trends in Europe, the future for the European car market is bleak to say the least:
Part of below 30 years old of age in the total population by European countries in percentage terms - source BIPE-Eurostat:
Youths in Europe are in the front line in relation to repaying the massive debt accumulated by the previous generation as well as maintaining the pension system. We have indeed an interesting toxic cocktail mix, which not only doesn't bode well for the car industry (with a saturated market), but doesn't bode well either for the "relations" between generations and trigger a "generational conflict" with the increasing worrying trend in youth unemployment. The evolution of the economic situation in Europe, could well lead to a European "Fall", in the footsteps of the Arab "Spring"...we might be rambling again...

"Events are called inevitable only after they have occurred."
Mason Cooley

Stay tuned!

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