Dr. Rebecca Harding

CEO Coriolis Technologies

What does the automotive sector mean to you? Power? Freedom? Affluence? Drive? Prowess?

To an economist, and we’re not called the dismal scientists for nothing, the car sector is none of these. It is the bellwether for the global economy. It is the fourth largest sector in the world in trade terms: by the end of 2019 Coriolis estimates that it will account for roughly 10% of world trade in goods, or approximately US$2.3tn.

Nothing represents strong growth better than strong automotive sales. How do we know that the Chinese economy is booming? Because German exports of cars to China are growing. How do we know that the UK car sector is strong? Because UK exports of cars to China are growing more quickly than German exports of cars to China.

Yet for all its iconic status, the sector seems to be in crisis, reflected perhaps in the prospective US$50bn merger between the PSA Group and Fiat Chrysler announced last week. In a sector where size matters, this appears a sensible move. It also highlights the risks the sector faces, and, of course, its systemic importance within the global economy.

For example, automotive trade values have grown only modestly since the financial crisis, at around 2% annually; between 2018 and 2019, with China’s growth has stalling, Coriolis estimates suggest that there will be only a marginal growth of 0.4% year on year. The sector’s reputation has been dented by the emissions scandal which has damaged demand for diesel engines. Technology is gathering pace and threatening to disrupt the big global incumbents. The threat of a trade war is already slowing down global growth with the recent downward revision of China’s growth targets to 6.0%-6.5% a measure of more modest expectations. If a trade war becomes real, then automotives are the centrepiece because of their supply chain links with key sectors like iron and steel. More than this, the US has flirted with declaring the EU car sector a “national security” threat[1] – if it does, then the sector will also have become a tool of politics.

This feels redolent of other systemic crises: anyone who has been involved with the banking sector for the last few years will sympathise with the problems that car bosses now face. Greater regulation and compliance criteria, economic turbulence as a result of the politicisation of the sector, volatile share prices alongside systemically important but tarnished national champions that are potentially too big to fail, and the disruptive impacts of new technology all combine to make 2019 a challenging year for the sector.

There is little way of hiding the facts. Only three of the top ten largest automotive sector exporters (which includes car components), are estimated to have expanded their exports between 2018 and 2019. The rest, including the top exporting nations of Germany, the USA, China and Japan are currently on a downward trajectory year-on-year.

The only exceptions are Canada, Spain and Mexico, which have seen growth in their exporters. As the world’s fifth largest exporter, Mexico is something of the new kid on the block and has grown very rapidly over the last five years. Its trade has grown by over 50% since 2013 and, alongside Canada’s growth, there is more than a touch of irony in this. The USA’s exports have fallen back, both year-on-year and over the period as a whole. More than a part of this was the relocation of supply chains within the North America Free Trade Area (NAFTA) to take advantage of Mexico’s lower costs comparative to China’s. Mexico and Canada were the main beneficiaries of this process. The increased labour costs that will be incurred in Mexico as a result of the new NAFTA agreement will, if agreed by Congress, undermine the advantages that Mexico in particular has enjoyed.

Spain is also an interesting example. It has benefitted from the redistribution of German and French supply chains and its production has increased by 45% over the period, resulting in a near 27% growth in exports.[2] However, these exports are predominantly in Europe and Asia rather than the US so the effects of any trade war will be less severe than, say, the effects would be for Germany.

In the last quarter of 2018 and the first quarter of 2019 we have seen just how the uncertainty about the prospect of a global trade war has started to affect the global economy. China is central to this, and its car sector is another key indicator for what is going on.

The USA is by far and away the biggest importer to China, importing US$13.5bn worth of cars into the country in 2018. Germany is next, at US$11.5bn. In 2017, imports of cars from the USA and Germany was roughly the same at US$12.7bn. In other words, the fact that the USA is estimated to have ranked so much higher in 2018 is because of a drop in Germany’s exports alongside an increase in the USA’s exports.

This can be interpreted in one of two ways. The first interpretation is that Germany exports higher end cars, such as BMWs and Mercedes, which since the global financial crisis have become emblematic of the rising middle classes in China. The second interpretation is that China imported more cars from the USA ahead of its announcement at the end of December that it would remove tariffs, perhaps as a sweetener to the ongoing conversations.

In 1984, the MIT published a book called “The Future of the Automobile”.[3] Faced with rapidly changing technology, a shift in global production and a change in societal views of the car itself, the book sought to explain where the future for the car would lie. It predicted the global supply chains, integrated technologies, lean production and increased environmental awareness that have defined the sector over the past 35 years.

Thirty-five years later, the challenges facing the sector are no less significant. Yet given its size and structure, its globally distributed supply chains and the dependency of the world on individualised transport as well as road freight, the sector is unlikely to be disintermediated by emerging technologies in the immediate future. Elon Musk’s statement that Tesla would produce 400,000 cars by the end of 2019 is impressive, but the main disruptor that the company poses to the sector is strategic. Notably, James Dyson pulled his ambitions to build an electric car earlier this year.

In other words, as happened to banks in the wake of the financial crisis, changing regulations, the public outcry against bad environmental practice and rapidly changing technology are, in the end, likely to make the biggest players more rather than less nimble. To achieve this, however, they should perhaps look at how the financial sector has learned to adapt.



[3] Alan Altschuler, Martin Anderson, Daniel Jones, Daniel Roos and Hames P. Womack (1984): “The Future of the Automobile: the Report of MIT’s International Automobile Program