According to Independent Commodity Intelligence Services article published on December 28, 2022, conditions have been challenging for the automotive industry in recent years, and no immediate reprieve is expected in the near term against a backdrop of geopolitical volatility.
Growth expectations for 2022 were not fulfilled and the Russian invasion of Ukraine at the end of February stifled any post-pandemic macroeconomic recovery. This trend looks set to continue in the industry in 2023.
BROAD PERSPECTIVE
A quick de-escalation of the conflict in Ukraine appears unlikely, and restricted energy supply and consequentially higher prices will continue to impact both producers and consumers in the automotive sector.
This pressure has rippled downstream, as buyers will put off larger purchases, such as new cars, to cope with the cost-of-living crisis and rising inflation.
Higher fuel costs may deter drivers from undertaking as many journeys, meaning vehicles need less repairs and replacements.
Auto components derived from the chemicals sector have also recorded an increase in pricing over the past year, with these commodities not tipped to fall suddenly due to persistent inflationary pressures.
These factors, coupled with the societal shift brought about by lockdowns to contain COVID-19 infections, may result in fewer active road users, resulting in a structural shift in demand.
As environmental concerns remain a pivotal factor for the market, stilted trade relations with Russia will also impact electric vehicle (EV) production, as Russia is the largest producer of palladium, necessary for computer chip production.
REGIONAL BREAKDOWN
While automotive sales for the US and Europe rose on the previous year, this does not paint the full picture, as markets had not recovered from the pandemic and were low base year for comparison.
The US is in a unique position, according to ICIS senior economist Kevin Swift, as although economic headwinds have proved resilient and fundamentals are not favourable, the automotive sector could benefit from the backlog built up from the pandemic.
“There is still pent-up demand from year-and-a-half almost two years to where people were paying a premium just to purchase a vehicle that may not have been the model and colour with the features that they wanted,” said Swift.
“That will provide somewhat of a support, a floor to any decline in late vehicle sales, we expect light vehicle sales to next year compared to this year, despite a mild recession.”
Proximity to the energy crisis and the ensuing economic disruption will play a larger impact for producers in Europe, with commercial vehicle production facing particular challenges.
New legislation in the form of the Alternative Fuels Infrastructure Regulation (AFIR) are ambitious in tackling emissions, but the European Automobile Manufacturers Association (ACEA) is calling for support to match new regulations.
“Policy makers should focus on measures that accelerate fleet renewal, prioritising investments in zero-emission vehicles, which will have a far bigger impact on both air quality and reduced CO2 emissions,” said Martin Lundstedt, CEO of Volvo Group and Chairperson of ACEA’s Commercial Vehicle Board.
As the largest driver of automotive demand, much will depend on growth in China, but this will be challenged by the government’s COVID-19 policy and how regulators handle rising infection rates, according to ICIS demand analyst Jincy Varghese.
Analysts at Oxford Economics anticipate a subdued recovery in consumer spending in early 2023 but highlight risks in both directions to this near-term outlook.
“High numbers of new COVID cases could hamper growth via reimposed restrictions. However, near-term growth could improve substantially if the Chinese government scales back its dynamic zero-Covid policy,” said Oxford Economics.
“The outlook for China’s automotive industry remains puzzling, as it heavily dependent on consumer mobility. China has also experimented with the ‘closed-loop system’ of production where workers live in on-site dormitories at the plant. However, it was suspended due to a lack of spare parts,” added Varghese.
In turn this could cap activity in the Indian market, as a large portion of its spare auto parts are imported from China.
Against evaporating demand, the bright spot for the industry is that this will take some of the pressure off strained supply chains and could allow producers to catch up with backlogs.
Balance is not guaranteed for the automotive sector, however, as for semiconductor components there is still competition from electrics and electronics producers and sustained high prices could lead to a slowdown in distribution.
Ultimately producers will have to remain amenable to any volatile macroeconomic or geopolitical changes on the horizon in 2023.
If China’s zero-COVID policy is lifted completely and Europe can mitigate the impact on energy and raw materials supply ensuing from the war in Ukraine, then automotive producers could see steady growth for the coming year.
