Global Car Sales Hit Speed Bump as Demand Slows and Trade Tensions Loom

Auto makers grapple with higher steel and aluminum prices and stiffer emissions regulations in Europe and China.

The trade dispute between the U.S. and China is pressuring the global auto industry. Above, Buick vehicles outside a car dealership in Shanghai. Photo: QILAI SHEN/BLOOMBERG NEWS

China’s once-booming car market is cooling, in part because of escalating trade tensions with the U.S. American demand for cars and trucks—long a bright spot for the global auto industry—has topped out, following a seven-year growth streak that helped lift earnings for many car makers and auto-parts suppliers world-wide.

In Europe, where new-vehicle sales have benefited from the continent’s economic recovery, the car market is also softening as demand returns to prerecession levels. That is making profits harder to come by in a region where many car companies have long struggled to make money.

To be sure, global demand remains robust, driven by continued economic strength, but headwinds are gathering.

President Trump’s trade policies are undermining consumer confidence in many markets outside the U.S. and are widely seen as the biggest threat to continued economic growth.

An easing of tensions between the U.S. and its major trading partners could prevent the slowdown in auto sales growth from becoming a more rapid decline, analysts say.

Evidence of that came Monday, when an agreement between the U.S. and Mexico to rewrite portions of the North American Free Trade Agreement buoyed investors, lifting U.S. stocks, global currencies and commodities.

Shares of General Motors Co. GM -0.12% and Ford Motor Co. F 1.19% surged. On Tuesday, German auto makers including Volkswagen AG VOW3 -0.49% , BMW AG BMW -0.59% and Daimler AG DMLRY 1.09% —which have big factories in the U.S. and Mexico—outperformed the country’s broader DAX stock index.

But the U.S. is still threatening Europe with new import duties and ratcheting up tariffs on China, the world’s biggest auto market by sales, which has responded with a 40% import tax on U.S.-built vehicles. An all-out trade war could push the auto industry off a cliff, analysts say. Oxford Economics, a global forecasting group, estimates that a “moderate trade war scenario” could result in a decline in global gross domestic product in real terms by about 0.5 percentage points to 2.4% in 2019, which could sap demand for new vehicles.

This worry has put several car makers, including Ford and Fiat Chrysler Automobiles NV, into caution mode as they temper their financial expectations. Daimler in June issued an unexpected profit warning, saying China’s retaliatory import duties on vehicles built in the U.S. would dent sales and profits for the sport-utility vehicles it makes at an Alabama plant.

Last week, Continental AG , the world’s second-largest auto-parts supplier, also warned investors its profits could take a hit this year, blaming softer demand for cars in Europe and China.

“The slowdown comes at a very difficult time as [the industry] transitions to more electrification and the robocar arms race sucks up research and development money,” said Dave Sullivan, an analyst with consulting firm AutoPacific Inc.

The weakening outlook comes as firms grapple with higher steel and aluminum prices stemming from new tariffs imposed by the Trump administration this year. Stiffening emissions regulations in Europe and China are also forcing auto manufacturers to spend billions of dollars on new technologies to curb tailpipe pollution.

Global auto sales have increased steadily since 2010, rising on average more than 5% annually. This year, sales are on track to hit 97 million vehicles world-wide, but the growth rate is expected to slow to 1.8% from 2017, according to forecasting firm LMC Automotive.

Mr. Trump has threatened to impose additional tariffs on the auto industry and has said he sees such threats as a way to extract concessions from trading partners. In May, the White House asked the Commerce Department to investigate whether it could use a national security law to impose tariffs of up to 25% on cars and auto parts imported into the U.S. Such actions could further crimp car sales, auto makers and analysts say.

“This would produce a near standstill in the vehicle markets,” said Justin Cox, a senior analyst with LMC Automotive. The firm forecasts that if the trade dispute escalates new-car sales in 2020 are likely to come in three million vehicles lower than current forecasts.

In China, the slowdown in the new-car market comes after years of rapid growth driven in part by the wealth amassed by an expanding middle class. Auto makers have spent billions building factories and diversifying their lineups in China, now the world’s largest auto market with 28.6 million new-vehicle sales last year, according to LMC. But the government recently ended a popular tax incentive on new-car purchases that had helped fuel demand.

China’s move to impose a retaliatory import duty of 40% on cars imported from the U.S. also has hurt business, especially for BMW and Mercedes-Benz maker Daimler—both of which sell American-built SUVs in the country that are subject to the tariff. BMW has raised prices on its U.S.-made vehicles sold in China.

July sales of new cars in China fell 5.3% from a year earlier to 1.59 million, surprising investors and causing auto makers to rethink forecasts. For the full year, sales are forecast to grow 1.2%, according to LMC Automotive, down from 13% growth in 2016 and 2.1% in 2017.

Ford in July cut its full-year profit guidance after reporting weaker-than-expected results in China and Europe, two key markets where it lost money in the second quarter. FCA also has reduced its profit forecast for 2018, blaming poor performance in China.

Both Ford and FCA had been counting on the Chinese market to reduce their dependence on North America. U.S. auto sales, which set a record of 17.5 million vehicles in 2016, are on track to decline in 2018 for a second year in a row.

In Europe, new-car demand has nearly returned to its pre-financial crisis peak. Sales of new cars in the European Union were up 2.9% in the first half, but that is down from the 4.7% growth posted in the first half of 2017.

Trade tensions with the U.S., the threat of a diesel-engine ban on the continent and weaker consumer confidence in the U.K.—Europe’s second-largest car market—in the wake of the vote to leave the EU have sapped sales growth within the past year.

Auto makers will need to look at Eastern Europe and emerging markets, such as India and Africa, for new pockets of growth, analysts say.

“More auto makers are going to explore how to grow further in inland China and what it will take to grow in Africa,” said Mr. Sullivan with AutoPacific.

Corrections & Amplifications

Oxford Economics estimates that a “moderate trade war scenario” could result in a decline in global gross domestic product in real terms by about 0.5 percentage points to 2.4% in 2019. An earlier version of this article didn’t clearly show that the forecast decline is the rate of growth (30 Aug. 2018).

Source: William Boston

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