European auto sales dire in May 2012 and year-to-date

by SR on June 25, 2012

Monthly passenger car sales in Greece compared to previous highest level

Conclusion: for European plays, the risk of being too clever remains

There are weak auto markets in Europe (see Greece, above) and not-so-weak markets, but the auto markets that are doing relatively well (such as Austria) are not large enough to make a difference to the performance of most global auto OEMs. Overall, European auto sales were unambiguously poor, with cumulative sales in the January to May 2012 period lower even than during the global financial crisis of 2008. One can argue about exactly how much of the bad news about Europe has been discounted in the share prices of auto, auto part and machinery stocks, but a lower-risk approach would be to avoid those stocks with significant exposure to Europe.

Back in mid-February 2012 I noted the recent strong performance of machinery stocks. By analysing the semantic content of news flow and comparing it to the price of the S&P500, I suggested that the ability of the Greek crisis to affect global share prices appeared to be weakening, but I also made the following comment. “My concern is that over the past two years we have seen that even robust growth stories for individual stocks can be completely overshadowed when the markets go into ‘risk-off’ mode. Effectively a bet on cyclicals is a bet that markets have got over the crisis in Europe and that we will not return to recent lows.” Given the performance of poor global markets since late March 2012 it is clear that the risk-on-risk-off pendulum is still swinging.

Rather than trying to be too brave/clever and catch falling knives, I would be looking for stocks like Toyota or Denso where there is a solid bull story with minimal European exposure. Another candidate would be Bridgestone, the share price of which has come off sharply on fears of softening tyre demand even as prices of key raw material (natural rubber) have plummeted.

[You may wish to read our caveat on the data and methodology used in this post.]

The gap to 2011 sales isn’t closing

Total European (EU27 + EFTA) cumulative passenger car sales, million units

The chart above shows clearly how European auto sales in January to May 2012 (the red line) are lagging behind not only 2011 auto sales for the same period (the blue line) but also sales for 2010. Auto sales for 2009 (the orange line) took off due to the widespread use of subsidies in European countries to stimulate demand for new cars, so unless we see a similar stimulus in 2012 auto sales are likely to be significantly lower than 2011, the next-worst year. Incidentally, the impact of subsidies can be seen in the chart below. The orange line (2009 sales) soared when 2,500 euro-per-vehicle subsidies were applied in Germany in 2009, a program that was expanded from 1.5 billion euros to 5 billion euros over the course of the year. When subsidies ended, sales fell once more.

German passenger car sales by year and month (thousand units)

As the following graphic shows, subsidies in 2009 were not a straightforward positive for German auto brands. Rather than the luxury cars for which German is known, consumers showed a preference for imported small cars, including those of Japan and Korea. The market share of domestic brands sagged from the average of 70% to the low-60% level until subsidies ended. While local brands probably did benefit in absolute terms it was not the unalloyed positive for which German companies and the German authorities had been hoping. Along with the short-lived nature of the impact of subsidies, the difficulty of targeting local brands without being accused of protectionism will probably make governments in Europe wary of initiating further stimulus programs.

German auto brands share of German passenger vehicle market

So if Europe is weak, where else should we look? Certainly the US continues to storm ahead, with cumulative light vehicle shipments (the red line in the chart below) having risen 13% year-on-year for the January to May 2012 period – and sales are almost back to 2008 levels (the green line). For Toyota of course, the US is arguably its strongest market outside Japan.

Total US cumulative light vehicle sales, million units

One might argue that China is doing well and thus that we should seek exposure to the stock of a company like Volkswagen that has significant exposure to China. As shown in the graphic below, China sales so far in 2012 (the red line) do appear to be ahead of 2011 sales (the blue line). The problem, as we detail in this post is that China’s sales figures are wholesale rather than retail. We know more or less what’s going into the distribution channel, but we have a less clear view of sales to the consumer.

Given this and the reports of inventory building up in the system causing price pressure, one would have to rank China as a less attractive market in the short term (and possibly the medium term) than the US. An analyst I know was in China very recently visiting auto companies and his takeaway is that sales are definitely slowing, although there is perhaps less of an inventory risk than the media suggests.

China cumulative passenger vehicle sales, million units

Finally, I will mention Bridgestone again. Natural rubber costs are volatile and have had a significant impact on the company’s profits for the past 6-7 years. As you can see from this chart, rubber prices are plummeting while tyre demand seems to be holding up well. (I explain why you can regard Bridgestone as a put option on the China auto market in this post, amongst others.)

Thailand natural rubber (RSS3) daily price in USD/kg

I attribute the fall in natural rubber prices to reduced buying from speculators worried about demand for tyres in China and Europe. But even more intriguing than this is the prospect of new rubber trees coming into production over the next 2-3 years. As the chart below shows, rubber prices really took off in 2003-2005 period.

I believe that those three years of sustained price rises will have induced farmers to plant rubber plants to take advantage of those higher prices. In the sense that prices today are still far higher than in 2003-2005, that was probably the right move. However, rubber trees take 6-7 years to mature to first harvest, so trees planted in 2005-2006 will be coming into maturity in 2012-2013, possibly adding a meaningful amount to supply and pushing down natural rubber prices still further. This would be an important positive for tyre manufacturers, as it would help reduce input costs irrespective of end demand for tyres.

Thailand natural rubber (RSS3) annual average price in USD/kg

Caveat and definitions

One of the reasons I have held off talking about European auto sales in the past is that the ACEA publicly available European auto sales data on which this analysis is based has ‘issues’. ACEA releases provisional sales figures for the Eurozone every month but it revises data for the previous few months and sometimes for the previous year, apparently at will. Unfortunately ACEA does not seem to maintain, at least publicly, a ‘definitive’ record of data that we can take as being “the truth”.

For example, in the May 2012 provisional release, cumulative sales for Denmark from January to May 2012 is stated as 69,517 units. On the other hand, the monthly figures released by ACEA for those five months in 2012 add up to about 64,500 units, depending on which ACEA spreadsheet you look at. In other words, in the case of Denmark the stated figure is more than 7% higher than it should be, as far as we can tell from the monthly data. Finland has a similar problem. Although anomalies of this magnitude seem to be rare, smaller ones abound, so you may notice small differences between my numbers and those of ACEA.

Now, I don’t want to be too hard on ACEA, which has a far more demanding task than an equivalent organisation in Japan or the US. ACEA deals with 30 independent countries, most of which speak their own language, countries that are spread over a significant geographical area and that have a combined population of 501 million people. Different countries have different levels of experience in the matter of collating and reporting sales data, different reporting structures and presumably different levels of competence. Germany? Reliable, timely data. Cyprus? Er, not so much.

With that apology out of the way, it is clear that ACEA needs to get off its backside and publish a “reference” database that is the ultimate authority on European auto sales. Sure, let the private sector offer more detailed information, but ACEA should get the country data right. Currently there are several different spreadsheets being used on ACEA’s site and the data is simply not consistent between different sheets. The reference database I propose should be updated fully every month so that changes – whether made to recent months the same year or to previous years – would immediately ripple through the system and become fully accessible. That would improve the transparency of the data and dramatically reduce or completely prevent embarassing situations like the one noted above with Denmark.

As usual, offers no warranty of any kind in relation to this data or the analysis based on this data…

EU15: Austria, Belgium, Denmark, Finland, France, Greece, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, the UK.
EU25: The EU15 + the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia, and Malta and Cyprus although data for these last two is frequently not available.
EU27: The EU 25 + Bulgaria, Romania.
EFTA: Iceland, Norway, Switzerland.

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