Autos

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

The world's auto industry just hit a pothole.

Car sales in Western Europe fell 6.8 percent in April, their biggest drop since 2013, as a late Easter and the effects of tax changes sapped demand in the U.K., the region's second-biggest market.

Such local difficulties haven't overly troubled car manufacturers since 1911, when Ford Motor Co. opened its first factory outside North America in Manchester, England. If one market is looking weak, there's generally always been another one that's growing strongly. 

Triple Threat
April is the first occasion since January 2009 when the world's three big car markets have all been contracting
Sources: European Automobile Manufacturers' Association, China Automotive Information Net, WARD's Automotive, Bloomberg, Gadfly calculations

April was different. New car sales in China fell 1.8 percent from a year earlier, while annualized sales in the U.S. declined for a third consecutive month, coming in 3.7 percent below April 2016. Those three markets account for about 70 percent of auto sales globally, and the last time they contracted simultaneously was in January 2009.

Is this a blip, or the start of a longer-term trend? There's a worrying amount of evidence pointing toward the latter. The looming dislocations of the U.K.'s departure from the European Union and a car market that's been amply refreshed in three strong years of sales since 2013 mean that growth in Western Europe will be far more modest this year than in previous ones, according to IHS Markit. Analysts expect sales growth of 4 percent to 5 percent in China this year, from 13 percent last year, and an outright fall of 1 percent to 2 percent in the U.S.

Carmakers are already starting to feel the pinch. Ford is planning to cut about 10 percent of its global workforce, while Nissan Motor Co. is forecasting a surprise drop in profit this year and Toyota Motor Corp. expects an 18 percent decline.

Wrecker's Yard
In enterprise value-to-Ebitda terms, automakers are the least-loved sector of the S&P 500
Source: Bloomberg

That a reckoning is coming shouldn't be astonishing after several banner years for the global industry. Sales of automobiles, like those of other high-cost, one-time-purchase durable goods, tend to slowly rise and fall in line with the business cycle. When incomes are rising and interest rates are low, drivers are more likely to trade their old banger in for a newer model. When the reverse situation prevails, they tend to sit tight for longer before making a big purchase.

The implications of a slowdown, however, could be widespread. As Gadfly's Brooke Sutherland argued Tuesday, Ford's U.S. job cuts are particularly savage because it's facing weaker revenue just as the shift to autonomous and electric cars puts more upward pressure on R&D budgets. Most automakers still lose money on every electric car they sell, and are hoping for scale and technological improvements to make the business profitable. It's hard enough making that sort of high-stakes bet, without throwing stagnating sales into the mix.

That's just the start of it. Ford and General Motors Co. have been warning about a glut of used cars in the U.S. dragging down the value of their leasing portfolios. The availability of cheap second-hand vehicles is likely to amplify the weakness in new-car sales and accelerate depreciation of the existing fleet. That will make auto finance less attractive: If resale values are declining faster and the cost of finance is stable or increasing, the odds of ending up with a loan that exceeds the value of your car increase dramatically. After progressively loosening auto loans for five years, U.S. lenders are tightening up, fast.

Goodbye Easy Street
Auto lenders are on balance tightening loan standards for the first time in six years
Source: U.S. Federal Reserve, Bloomberg
Note: Shows net percentage of respondents reporting tightening standards on consumer loans for new and used autos. Negative numbers indicate loosening standards.

The auto industry will survive this gathering storm. Back in 2008 and 2009, there were widespread predictions that millennials' shift from sprawling suburbs to dense inner cities was leading to an outright decline in car travel, and would spell doom for the sector. In fact, the effect was temporary: About as many cars were sold worldwide over the seven years since 2010 as in the decade preceding, and in the U.S. people traveled about 231 billion miles farther over the past 12 months than in the same period three years earlier.

Hit the Road, Jack
The miles traveled on U.S. roads spent six years in the doldrums, but have since roared back
Source: U.S. Federal Highway Administration, Gadfly calculations
Note: Shows trailing 12-month figures.

Still, in the near term, carmakers face a challenging future. The sector is already the least-loved among sub-indexes of the S&P 500, based on enterprise value-to-Ebitda multiples. The coming 12 months will test the affections of long-term investors to the limits.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net