Tumultuous Path Ahead for Auto Industry for 2009 says PricewaterhouseCoopers

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DETROIT, January 9, 2009 – Following a dispiriting end to 2008, many markets and car producers are expected to continue enduring a tough path in 2009.

Michael McKenzie, automotive analyst, PricewaterhouseCoopers, said:

“A new vehicle is the ultimate discretionary purchase and the second largest purchase a household makes following their home and consumers are deferring purchases until confidence is restored.”

“The absence of available credit is also severely hindering affordability and involuntarily forcing consumers out of the market globally.”

North America
Light vehicle sales in the US are at their lowest per capital in nearly 50 years. Diminished access to credit, combined with the stress caused by the current low sales volumes, are creating significant financial problems for the industry, particularly in the areas of inventory management, increasing supplier fragility, dealer floor plan financing, and higher defaults on consumer vehicle loans.

Industry sales volumes will likely fall to 11.6 million units in 2009, with the first quarter sales volumes reflective of the 10.3 million unit SAAR posted in the last quarter of 2008, with expected modest improvement as the year progresses.

The commencement of aggressive reductions in Q1 output in 2009, down -38% compared with an already depressed Q1 2008 contributes to the forecasted precipitous decline in assembly to 10.5 million units. Additionally, it is expected that sales will remain muted in the mid-term, peaking at between 15.5 million and 16.0 million units.

Michael McKenzie, automotive analyst, PricewaterhouseCoopers, said:

“With the release of TARP funds from the US Treasury to GM, GMAC, and Chrysler, the risk of widespread sector destabilisation stemming from a disorderly bankruptcy has likely been mitigated. However, conditions of the bridge loan are aggressive and may still result in actions ranging from work stoppages, to product rationalisation, to capitulating a change in ownership.

Europe
By November 2008, Western Europe’s annualised sales were down to 11.2 million –which, if sustained into this year, would make 2009 sales the lowest experienced since 1993. It is anticipated that sales will fall by around 12% in 2009, and do not expect a noticeable recovery until mid-2010. This pace is expected to translate into an 11.8% decline in assembly to 15.6 million units in 2009.

Michael McKenzie, automotive analyst, PricewaterhouseCoopers, said:

“Six months ago, the focus was firmly on CO2 issues, what the EC would agree upon, and what impact this would have on OEMs and the market. The EC has now agreed to a more gradual phase in of the 130g target, but this issue has now been somewhat overshadowed by recent market developments. “

Europe’s fastest growing market, Russia, is also expected to be pressured in 2009. Our baseline forecast for light vehicle market assumes a 16% decline in sales to 2.4 million units in 2009.

South America: Brazil
Brazil, which accounted for over 75% of South American light vehicle production in 2008, posted very healthy sales growth for the first 9 months of 2008, with passenger car sales 22.4% ahead of 2007 after 10 months.  However, sales slowed considerably in October and November, 13.2% and 25.7% respectively, as the impact of the global financial crisis spread to Brazil.

December sales rebounded relative to November 2008, though were still down 20% year-on-year following the government’s release of US$3.6 billion to state banks for auto loans, and a reduction of taxes on consumer loans. However, with the tax incentive scheduled to end in March 2009, Q1 sales may prove to be an aberration as sales are pulled ahead from the remainder of the year. There are doubts as to the short-term prospects for the market, given the strength of sales in the past few years and fears that these sales may have been promoted by relaxed credit.

These concerns suggest that Brazil’s market may experience a correction in 2009, with light vehicle output falling to 2.5 million – evaporating growth from 2007-08.

Asia-Pacific: Japan & South Korea
Japanese car manufacturers have been scaling back production and reducing temporary employee numbers. Toyota announced the closure of all plants in Japan for 11 days over February and March. Likewise, South Korea’s domestic market is confronting the same scenario of declining domestic demand coupled with falling exports indeed; Hyundai is relocating all small car assembly to India.

Asia-Pacific: China, India & ASEAN
China’s 2008 domestic sales slowed to 10% compared to 23% in 2007. In November 2008, total exports, a key indicator in the Chinese economy, declined for the first time in 7 years.

The Indian market is suffering primarily from a lack of automotive financing. With nearly 75% of vehicle purchases made on credit, the lack of finance has had a major negative impact on sales; November’s passenger vehicle sales declined by 27% compared with 2007, while sales of light commercial vehicles declined by 33%.

Michael McKenzie, automotive analyst, PricewaterhouseCoopers, said:

“In turbulent times, where survival of even the largest players is at stake, there is only one thing that is certain: all parties, from automakers to suppliers to dealers, will have to undertake aggressive restructuring to adapt to the new realities. The winners will be those who manage the downturn in an appropriate manner, controlling cash and eliminating unnecessary expenditures to weather the current economic down turn.

“At the same time, auto companies will be actively preparing for the upturn in the industry, which is expected in 2010. They will continue to invest in new product development and even new capacity where appropriate.”

Contact:

Kristin McCallum
PricewaterhouseCoopers
(313) 394-6349
kristin.l.mccallum@us.pwc.com

Laura Schooler
PricewaterhouseCoopers
(646) 471-3229
laura.schooler@us.pwc.com 

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