Automotive Industry Crisis: Car Sales Crash across Global Markets in November

Initial estimates for the high-growth markets of China and India also point to double-digit declines. Numbers will be confirmed next week, but they paint a startling picture for the auto industry to face up to. The highly synchronised nature of the collapse in a single month is completely without precedent and suggests that the global tipping point was the financial crisis that emerged in September and October, followed by the global stock market meltdown and a withdrawal of credit finance on a global scale.

IHS Global Insight Automotive forecasts for the fourth quarter of 2008 have now been released, showing that global light-vehicle production is likely to fall 6% in 2009, coming in at just 64 million units, compared to the 70 million units reached in 2007. Furthermore, this drop will add an extra 11 million units to global unused auto assembly capacity.

Outlook and Implications

As individual markets around the world confirm auto sales figures this week and next, the reality of the precipitous drop will send a shockwave through an already reeling industry; fighting for its very survival in the United States. The knock-on effect of the financial crisis in September and October, the meltdown of stock markets around the world, and the subsequent freeze in credit and lending has meant the removal of many of the financial instruments used by the auto industry to propel sales.

The motor car is often the second largest and sometimes the largest household purchase and is therefore largely financed in some way, shape, or form. The wholesale freeze in the financial sector has rippled out to the car industry with devastating effect. As governments and industry bodies plead with the banking sector to free up lending, following the very high-profile public bail-out of the financial system, there is much anecdotal evidence to say that this is simply not happening, as banks retrench and restore their own balance sheets before moving back into any kind of wholesale lending. The effect is devastating on the auto industry and the subsequent wide-ranging job losses and impact on the "real" economy will spiral downwards, leading to a deep and painful recession.

The severity of November's sales figures is now likely to spur various governments around the world into supporting the industry in some shape or form. The U.S. Congressional committee will deliver its verdict on the restructuring plans for the Detroit-based domestic industry, with the probable result that GM and Chrysler will receive state-backed loans to help restructure and survive the crisis in the coming year. In Europe, France is already discussing the possibility of a new scrapping incentive, paying consumers to scrap their old cars, deliberately designed to stimulate new car demand.

It is on the demand side that the answer to the crisis lies; stimulating demand through targeted incentives aimed at consumers and businesses, rather than trying to persuade lenders to free up credit, or bailing out the entire industry—as in the case of the United States—is a far more efficient way to ignite demand and lessen the impact of the downturn. IHS Global Insight estimates that a targeted scrapping scheme in the United States could cost the tax payer far less than rescuing and propping up the industry in its current form. Targeted consumer incentives, aimed at updating aging vehicles and focusing on smaller, more fuel-efficient segments would have the knock-on effect of improving vehicle carbon footprint and reducing emissions and fuel consumption; the very thing most governments around the world are trying to achieve through punitive measures aimed at the industry directly and hitting at a time when they can least afford it.