The automotive industry left behind a year marked by hectic activity. While it kept up the pace of development in electric vehicles, autonomous vehicles and even flying vehicles, in this year’s assessment, I would like to focus more on key happenings in the mobility field as well as on the uncertainties brought about by new trade deals.
In 2018, mobility giants like Uber, Lyft and Didi Chuxing laid the groundwork to go public, with 2019 promising to be a banner year for ride hailing IPOs. In less upbeat news, automakers had to continuously reassess their strategies due to uncertainties caused by Brexit and the United States-Mexico-Canada Agreement (USMCA), even as vehicle sales in China finally slowed after a decade of growth.
Rapid transformation is set to characterize 2019 as well. The convergence of various technologies and industries within the automotive space will create numerous whitespace opportunities. Gen Z will occupy center stage, impacting the entire value chain starting from auto financing to aftermarket operations.
Mobility Providers Gear Up for High Profile IPOs
There were significant developments in the mobility space in 2018. The sharing ecosystem gathered momentum, resulting in the further progress of multimodal mobility offerings, and advancements in robo-taxis and autonomous shuttles. In addition, massive increases in the customer base of key shared mobility service providers including Uber, Lyft and Didi Chuxing boosted investor and corporate confidence, with all three poised to launch high value IPOs in 2019. Uber’s annual revenues are estimated to be around $12 billion, with the company filing for its IPO in December 2018. Following its acquisition of Uber China in a $35 billion deal in 2016, Didi Chuxing’s current revenue growth rate is much higher compared to Uber. In a bid to gain first-mover advantage, Lyft filed for its IPO just ahead Uber, hoping to leverage its 168% increase in revenues from FY 2016 to FY 2017.
While the mobility ecosystem kept busy with innovation and IPOs, OEMs started to focus on new auto finance models like vehicle subscription. Vehicle subscription services are expected to accelerate in developed markets, attract a flurry of new entrants, and provide an ever expanding portfolio of offerings. There are likely to be over 30 stakeholders in the vehicle subscription market ranging from mainstream, premium, and super premium OEMs and mobility providers to technology start-ups and software/platform providers. A majority of OEMs are expected to target 1-5 cities in the first three years of operations, before rolling out to at least 50 cities by 2025. Nearly 16.3 million new and used vehicles will be part of subscription programs by 2025.
Brexit and USMCA Generate Anxiety
The automotive industry is bracing for the impact of Brexit and the USMCA, a key trade agreement between the US, Mexico, and Canada. A ‘No Deal’ Brexit could substantially increase the cost of parts manufacturing in the UK or the price of imports. OEMs with significant manufacturing capacities in the UK—such as Jaguar and Land Rover, BMW, Honda, Nissan and Toyota—as well as OEMs exporting to the UK—such as Ford, Volkswagen, and Vauxhall—will be impacted by new taxes imposed on trade. Companies are already evaluating a host of post-Brexit strategies; JLR is planning to leverage its production facility in Slovakia to meet the demands of its European markets, while BMW is looking to source parts from the US. It will be interesting to observe how Brexit’s impact plays out this year.
While UK and Europe grappled with Brexit, the US government sought to address job losses, lower wages and increased manufacturing competition from Mexico by reworking the NAFTA deal to make it more beneficial for itself. NAFTA required automakers to produce 62.5% of a vehicle’s components in North America in order to qualify for zero customs tariffs. The new agreement will raise this threshold, over time, to 75%. This is meant to force automakers to source fewer parts for an “Assembled in Mexico” (or Canada) car from Germany, Japan, South Korea or China. Several models including the Honda HR-V, Ford Fusion, Nissan Sentra, Volkswagen Beetle and Golf, among others, will be unable to meet content stipulations. These models may face a 2.5% tariff increase when they are imported into the US.
Fall of a Dragon
After 10 years of sales growth, the Chinese passenger vehicle market declined in 2018 due to a variety of reasons including lower purchasing power, the rise of shared mobility and market saturation. China experienced weak gross domestic product (GDP) growth at 6.5% in Q3 2018, which was the slowest growth quarter in China since 2009. Chinese small and medium-sized enterprises (SMEs) face increasingly strict environmental restrictions. The closure of manufacturing factories has resulted in missed sales orders, the loss of business incomes and reduced consumption along the value chain. At the same time, the popularity of shared mobility concepts such as car sharing, ride sharing, ride hailing and bike sharing, is restraining demand for vehicle purchases.
Tough Year Ahead for the Turkish Automotive Industry
Against the backdrop of these developments in the global automotive ecosystem, the Turkish automotive industry was focused on surviving the economic crisis that hit it. The stagnant market in H1 due to presidential elections in June 2018, followed by the depreciation of Turkish lira against the Euro post the elections, resulted in dramatic increases in vehicle prices, noticeably affecting the automotive market. Light vehicles sales declined by 35% in 2018, compared to 2017. Lowered interest rates to promote new vehicle purchases, scrappage schemes and year end promotions were not enough for the industry to maintain volumes at the record breaking levels of 2017.
It was a difficult 2018 not only for OEMs but for operational leasing companies as well. Operational leasing companies were badly affected by the depreciation of the Turkish lira since they were financing their vehicles in Euros but were selling used cars in the local currency. With second hand sales one of their most important revenue channels, operational leasing companies lost sizeable amounts during the currency depreciation. As a result, companies that were not financially robust, such as Fleetcorp, went bankrupt, while others were left considerably weaker.
With economic stagnation and high inflation expected to persist, 2019 will not be an easy year for the Turkish automotive industry. OEMs manufacturing in Turkey are expected to increase their focus on export markets while waiting for the local demand to pick up.
The automotive industry is transforming rapidly and moving towards a completely new digital era, with investments and partnerships raising customer expectations. This will be a year when OEMs will need to rethink their strategies for the North American and European markets because of Brexit and the revised USMCA deal. While the automotive industry looks to turbo charge ahead on fully autonomous vehicles, flying cars, and electric vehicle technologies, the true measure of its success will lie in its being able to effectively respond to the challenges created by the trade deals.
Research and analysis on global automotive trends in 2019 is developed in greater detail in Frost & Sullivan’s “Global Automotive Market Outlook, 2019”.
Senior Consultant, Mobility Practice