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Europe is Biggest Threat to Auto Industry's Revival

Aug. 8, 2012
Two of the top experts on automotive forecasting believe that the financial crisis in Europe is the biggest short-term headwind for the resurgent auto industry. Other threats include the 'fiscal cliff," sequestration and tensions in the Middle East.

Two of the top experts on automotive forecasting believe that the financial crisis in Europe is the biggest short-term headwind for the resurgent auto industry.

"We've seen it played out in the financial results of the OEMs as well as the suppliers that have high exposure to Europe," said Anthony Pratt, R.L. Polk & Co.'s director of forecasting for the Americas, at the Center for Automotive Research's Management Briefing Seminars in Traverse City, Mich.

R.L. Polk forecasts that automotive production in the European Union will shrink by 6% this year, Pratt noted.

"While the volumes, at least in the short term, have been isolated to Europe, the implications are having a ripple effect globally, and that's because many of the manufacturers and suppliers have business in Europe," and Europe is "an important component of their total global strategy," Pratt said.

Jeff Schuster, senior vice president of forecasting for LMC Automotive, agreed, noting that light-vehicle sales in Western Europe fell by 8% in the first half of 2012.

"As the level of uncertainty rises as the result of the European crisis and its impact on other markets, so does the amount of pressure on auto sales around the world," Schuster said. "All eyes are on Europe for a signal of the direction, as [overall] volume growth holds in 2012 but remains at risk next year."

Downward Revision

During a presentation Tuesday at the Management Briefing Seminars, Schuster explained that LMC Automotive -- formerly J.D. Power Automotive Forecasting -- has lowered its 2012 light-vehicle-sales forecast for the United States from 14.5 million to 14.3 million units.

For 2013, LMC has lowered its forecast from 15.2 million to 15 million units.

Schuster, however, told IndustryWeek that the downward revision isn't due to one specific factor.

"The story is not that the second half [of the year] is going to be a negative, but that the growth rate is not expected to be as strong as we previously thought," Schuster said. "That has a lot do with the economy and the growth rate of the economy, as well as how consumers are responding, and consumer confidence."

Still, LMC predicts that global light-vehicle sales in 2013 will increase by 6% to nearly 85 million units, and the firm is "still very positive" on the long-term growth prospects of the industry, Schuster said.

"We still have to address some short-term issues, which has been a process from 2009 that we haven't worked through yet as an industry," he added. "But long-term replacement demand we believe will come back."

Likewise, Polk is fairly bullish about long-term global demand.

The firm expects global light-vehicle sales to grow by 34% between 2012 and 2017, approaching 100 million units by 2020, Pratt noted. Not surprisingly, emerging markets -- led by China -- are projected to make up the bulk of the organic growth.

For the United States, Polk forecasts light-vehicle sales of 14.3 million units in 2012.

"I'm happy to say that we stuck a stake in the ground at 14.3 [million] early in the year and stuck with it, and we're staying with 14.3 based on what we're seeing for the balance of the year," Pratt said.

The forecasting firm sees U.S. sales growing by 12% between 2012 and 2014, driven by pent-up demand, attractive leases, low interest rates and high used-vehicle prices, Pratt noted.

Polk sees U.S. sales peaking in 2014 at 16 million units and plateauing for three years.

More Downside than Upside Risk

Polk also has "upside" and "downside" forecasts based on the anticipated impact of various positive and negative scenarios, Pratt explained. He referenced a long list of potential headwinds at home and abroad -- led by Europe -- driving the firm's downside forecast.

At home, the threats include the so-called "fiscal cliff," the expiration of the Bush-era tax cuts, and mandatory cuts in federal spending, or sequestration.

"That's being magnified by gridlock in Washington and the fact that this is an election year and, quite frankly, nothing will probably happen between now and at least November," Pratt added.

Beyond Europe, the threats abroad include mounting tensions in the Middle East.

"We may almost be desensitized to the fact, but there's a lot of tension taking place between Iran and Israel, as well as in Syria," Pratt said. "And that poses a significant threat to the economy as well as to the cost of gasoline and the overall health of the auto industry."

Due to the level of uncertainty in the world, Polk believes that "the risk of downside is much greater than the opportunity for upside from our baseline forecast," Pratt added.

Polk's downside-scenario forecast puts U.S. light-vehicle sales at 14.1 million units in 2012 and light-vehicle sales at 15 million units in 2014.

On the bright side, Polk still sees robust growth taking place in China over the next decade, to the tune of a 59% jump in sales between 2011 and 2017.

"China most certainly will continue to be an important component of global automotive growth, and it continues to be a bright spot for many manufacturers, both OEMs and suppliers," Pratt said. "There's been some worry about China recently and [people saying], 'Oh my gosh, the volumes are slowing. Is the sky falling?' I would say 'not likely.'"

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