Friday, September 20, 2019
Passing the End of the Tunnel
A recovery in consumer sentiment and new models are expected to offset the aftermath of ceased tax benefits
Passing the End of the Tunnel
  • By matthew
  • January 15, 2010, 11:44
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The auto industry, a highly concentrated field featuring less than a dozen major manufacturers who account for over 75% of the entire market, anticipates escaping from their record breaking slump, reflecting the forecast that auto sales will rebound gradually as the credit crunch in 2009 is resolved.

The economic recession, which was especially relentless for manufacturing companies including auto makers, has become an opportunity to reconstruct the stratum of the industry globally, developing new momentum for a rally. It is predicted that the global auto industry is likely to be mainly led by traditional players from the US, Europe, Japan, and Korea, as well as the emerging market of BRIC nations.

Although the European market is predicted to suffer from negative growth in 2010 as a consequence of the “cash for clunkers” program in 2009, the emerging market, mainly based on low-cost BRIC countries, is expected to lead the rejuvenation of automobile demand. Automakers are expected to continue transferring their production facilities from high-cost regions such as the US and EU to lower-cost countries such as BRIC nations and parts of Latin America.

Meanwhile, the US market will display double digit growth by virtue of the technical rebound following the deep and drastic pullback of 2009, and the obvious end of the economic recession.

Korean automakers are expected to bear the cost of the end of tax credit on decrepit vehicles, as well as the payment stress from importing countries due to the depreciating value of the won against major currencies such as the dollar. However, the decrease in demand will be able to be offset some by a rebounding consumption sentiment and positive effects following the release of new models.

In addition, considering the technical rebound from the first quarter of last year, the domestic market in 2010 appears to be similar with that of 2009 in terms of the scope of growth. The appreciation of the Won could put tough pressure on the profitability of Korean automakers whose attractive balance sheets absolutely hinge on exports. However, any negative effects from the volatile exchange rate are unlikely to be acute thanks to the restoration of demand in the US market, the remarkable growth of emerging markets and an increase in the brand awareness of domestic automakers in the overseas market.

Competitiveness in the overseas market for domestic automakers is expected to heighten because they already have started to take advantages from the collapse of America’s three most prominent makers and the unexpected slump of the steadfast market leader, Toyota Motors with 13.3% of market share all over the world.

Having experienced a sluggish 2009, some global automakers are expanding production after restructuring their inventory glut, with Ford Motors and the Japanese BIG 3 facing establishment of better marketing strategies after successfully reducing costs by shifting production facilities from mature markets to emerging markets, and lowering transportation costs through localization of the manufacturing process.

Additionally, the compact car market, in which domestic automakers have been comparatively advantageous, is likely to heat up following the challenge of overseas automakers, mainly from the US and Japan where the necessary restructuring has been already completed.

In general, even though the global automobile market is expected to have a rebound from the worst market condition in 2009 with increasing demand, the magnitude of the recovery will be fairly restrictive due to expired effect of various support programs from different governments such as Cash for Clunker in the US and the tax credit of the EU. Moreover, the industry will be more competitive in 2010 amid the robust circumstance that most market participants consider the crisis closely affiliated with the collapse of the major automakers in the US, as an opportunity to write a new history of the industry.

The sure thing is that everybody in the industry is on the way to rebound, but no one is there yet.