Auto Industry Racing Ahead On Rising Sales

Rising auto sales in most regions are driving growth in the auto sector. U.S. and China sales are impressive, and the European market is also on the road to recovery. Low oil and gas prices and a string of vehicle launches have kept this space moving forward.

However, the growth rate in China is slowing, which is a major concern for automakers, and high amounts of safety recalls are adding to their woes.

Still, there are plenty of reasons to be optimistic about the broader auto industry for both the short and long term. Below, we discuss some of these key factors that should continue to the sector’s performance momentum in the near to medium term.

OPPORTUNITIES

Low Oil & Gas Prices

Although global oil and gas prices have started to climb, they are still significantly below last year’s levels. The low fuel price is a blessing for automakers. As fuel becomes more affordable, sales of gasoline-powered vehicles -- especially the larger ones that carry a wider profit margin -- get a boost. Although sales of hybrids and electronic vehicles are suffering from this trend, the sales volume of such vehicles is significantly lower than gasoline-powered vehicles. Hence, the positive impact of falling oil and gas prices outweighs the negatives for the auto sector.

Attractive Vehicle Launches

Rising sales and intense competition are driving automakers to come up with new and attractive, technologically advanced vehicles to gain market share. Most automakers are also revamping their popular vehicles by adding new technologies and increasing their visual appeal to refresh their sales.

These companies are also offering attractive optional features in vehicles to earn higher profits. These features provide scope for surplus revenue generation from small cars, which have lower profit margins than large trucks.

High U.S. Auto Sales

U.S. light-vehicle sales increased for the fifth consecutive year in 2014, improving on the 6-year high achieved in 2013. In fact, for the first time since the recession in 2008, U.S. auto sales surpassed 16 million units in 2014. Moreover, the popularity of the more-profitable vehicle segments such as pickup trucks, utility vehicles and luxury cars surged last year, thus benefiting automakers.

Sales remained on the upward trajectory this year too with a 5.4% year over year increase recorded in the first four months. The trend is expected to continue courtesy of low fuel prices and interest rates, enhanced job security, rising wages and household wealth, improving consumer confidence, residual pent-up demand, attractive deals and vehicle launches. Analysts expect U.S. light-vehicle sales to reach 7 million units this year.

Moreover, the high average age of light vehicles on U.S. roads is resulting in high replacement demand for cars as well as car parts. The average age is expected to rise to 11.5 years by 2017 and 11.7 years by 2019 from 11.4 years at the end of 2013, according to forecasts by IHS Automotive. This will benefit auto parts manufacturers and retailers.

Growth Prospects in Asia

Asian countries, especially China and India, are expected to account for a large portion of growth in the auto industry over the next 5 to 7 years. Ford Motor (NYSE:F) expects the Asia-Pacific region (mainly China and India) to account for 60–70% of its global growth this decade and generate 40% of vehicle sales in the coming 4 to 5 years.

China is the biggest and fastest growing auto market in the world in terms of unit sales. In 2013, it became the first country to surpass 20 million units of domestic auto sales. Moreover, it improved on the feat in 2014 with a 6.9% year-over-year increase to 23.5 million, per the China Association of Automobile Manufacturers (CAAM). In fact, General Motors Company (NYSE:GM) expects industry sales to grow to 33–35 million units annually in China by 2020.

China also offers attractive growth opportunities for electric carmakers such as Tesla Motors (NASDAQ:TSLA) since the country’s government aims to popularize electric cars to control pollution in its cities and increase energy independence. The country offers significant subsidies on the purchase of electric cars and has restricted the number of gasoline vehicles that can be sold in certain cities, in order to check pollution. It also announced a waiver of 10% purchase tax on domestic and imported electric, plug-in hybrid and fuel-cell vehicles in the nation from Sep 2014 to Dec 2017.

Recovery in Europe

The European automobile market has started showing recovery. After six years of decline, sales of passenger cars in the European Union improved 5.7% year over year in 2014, according to the European Automobile Manufacturer’s Association.

It increased 8.2% year over year in the first four months of this year too. The increase in sales is being attributed to wholesales; government incentives and tax breaks; and significant discounts by automakers, although sales to individuals is low.

Government Support in Green Car Development

Though the much-discussed auto industry bailout is behind us, the U.S. government is still involved in the auto industry on a smaller scale. The U.S. Department of Energy (DOE) lent over $8.5 billion to a few automakers under the Advanced Technology Vehicles Manufacturing (ATVM) Incentive Program to encourage greener or more fuel-efficient cars. The aim of the program is to reduce dependence on oil, curb greenhouse gas emissions and create new jobs.

Ford utilized the $5.9 billion DOE loan to retool two plants to produce small cars and develop fuel-efficient vehicles like Ford Focus EV and C-Max Energi plug-in hybrid. The automaker is repaying the loan in equal quarterly installments of $148 million and the full amount is expected to be written off by Jun 15, 2022.

In May 2013, Tesla became the first DOE loan recipient ($465 million) to repay the full amount. Although the loan was repayable in quarterly installments till Dec 2017, the electric vehicle maker cleared its debt with an advance repayment of the entire outstanding balance.

Nissan Motor Co Ltd (OTC:NSANY) was another carmaker to benefit from the program. The company obtained a $1.4 billion ATVM loan to retool a manufacturing facility, develop a cost-competitive electric vehicle and construct one of the largest advanced battery manufacturing plants in the U.S.

Apart from this, in late 2011, 13 major automakers -- Ford, General Motors Company (NYSE:GM), and Toyota Industries Corp (TOKYO:6201) to name a few -- signed letters of commitment with the U.S. government to upgrade fuel economy in cars and light-duty trucks to 54.5 miles per gallon (mpg) by 2025. This has significantly improved fuel efficiency and emission levels in the recently developed vehicles.

Bottom Line

As you can see, there are several reasons to remain optimistic about the auto sector’s performance in the near- to medium-term.

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