SMMT WebinarVehicle production outlook and economic

forecast for 2010

September 2010

Paul Everitt

Chief executiveSMMT

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Matthew Croucher

Economics ManagerSMMT

UK outlook - the economy and UK Auto Sectorbeyond 2010

Where do we go from here?

• Recession and financial crisis was a profound shock

• UK economy stabilised – not a typical recession

• Needed exceptional UK policies and collective global rescue-aid

• Demand stabilised; world trade flows return; financial insecurity

remains

UK economy’s slow growth and high inflation recovery

Economic variables at Mar 09 at Dec 09 at Sept 10

real GDP growth 0.3 1.4 1.6

real household/consumer spending - 0.3 0.5 0.9

Claimant unemployed total (Q4) – mn

percent rate of workforce (32.6mn)

2.32

7.1%

1.88

5.8%

1.51

4.7%

RPI (Q4) 2.6 2.9 4.1

Bank (policy) rate 1.13 1.3 0.5

House price inflation (Q4) - 1.0 2.7 2.6

Manufacturing output 0.7 1.6 3.4

PSNBR – 2010/11 £142bn 173.2 146.1

Consensus forecasts on the UK macro-economy in 2010

Source: HM TreasuryConsensus of latest* economic forecasts for the UK for 2010 as at dates shown

Summary of new views on key items over the past month

Macroeconomic forecasts and the long term

• 2010 – firmer growth from 2012, but have to get there first!

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2006 2007 2008 2009 2010 2011 2012 2013 2014

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HM Treasury Poll of Medium Term UK Forecasts - at Aug 2010

real GDP real domestic demand claim. Unemploy rate

Macroeconomic forecasts and the long term

• Sustained support from Monetary Policy; inflation a passing phase

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2006 2007 2008 2009 2010 2011 2012 2013 2014

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HM Treasury Poll of Medium Term UK Forecasts - at Aug 2010

CPI RPI bank interest rate

A testing time for policy –will the UK economy take it and respond

• Addicted to support; timely exits and independent recovery possible

• Monetary policy a big indirect stimulus to output and demand

• GDP recovery perked-up in its third quarter; trend still weak; high

inflation

• Tight squeeze on household spending ahead; spending and

investment by firms hesitant too; stimulus aid fades; taxes up, public

spending cut

• Exports, manufacturing and business investment to lead, but financial

volatility must ease, credit and consumer spending follow; risk of

relapse

UK new vehicle sales – a major and volatile drop

• Link to investment, economic and credit cycles amplifies

knock-on impacts

• For UK cars, as across EC, falling demand rescued by scrap-aid

schemes

• For CVs, van and trucks no direct and immediate offset from

policy-aid

• Persistently cautious business demand for CVs

• Buses in recession, lagged the pack; coach demand low

in thousands Van truck

3.5t+

truck 6t+ Bus &

coach

Cars Vehicle

Output

1998-07 ave. 284.9 54.4 50.1 4.17 2,404 1,812

2008Actual 289.5 57.4 48.7 4.5 2,132 1,650

2009Actual 186.4 34.7 27.9 4.3 1,995 1,089

2010F/P 211.0 31.5 24.0 2.6 2,018 1,330

2011F/P 228.0 35.5 28.0 2.8 1,967 1,350

2012F/P 253.0 43.0 35.0 3.2 2,068 1,450

12 months: September 2009 to August 2010

@August 2010 205.6 32.2 25.1 3.3 2,146 1,328*

SMMT forecasts and projections on trends in UK new vehicle volumes* to July: F/P SMMT forecasts or projection

UK vehicle market and production outlook –demand weakening again

UK new car market outlook – restored or reshaped

• Near to medium term recovery route not a done deal

• Longer term restoration of noughties paradigms or market reshaping?

– push and pull of exceptional; cyclical, structural, transformational

and environmental issues affecting buyers and suppliers

15001550160016501700175018001850190019502000205021002150220022502300235024002450

regis

trations in t

housands

UK new car registrations 2008 to 2011 - actual & SMMT forecasts: rolling years, moving 12 monthly totals - the mean and range

Actual data

Month max. (Jul 10)

Month min. (Jul 10)

SMMT CF - ave (Jul 10)

Perspective on EU new light vehicle sales – a tough 2010 & 2011

EC(15) new vehicle registrations context and outlook – thousands

Economic fundamentals stable and improving or disturbed?

• Restocking, exit of policy stimulus, improved discretionary spending

growth

• Jobs, living costs and market growth – precautionary cash concerns

• QE, low rates and £ to support spend more now and switch to

exports

• Durable recovery needs confidence, commitment and credit to

spend

• Refocus - to manufacturing, exports, business investment, R&D, FDI

In conclusion

• UK economic recovery underway – weak, slow, tortuous

• Vehicle markets stable; more adjustment – restoration and/or

reshaping

• Past experience of similar shocks suggest long-haul back to „normality‟

• Back to noughties sales, output and trading in doubt?

2006 =100 2007 2008 2009 2010f 2011f 2014p

GDP 102.7 102.6 97.6 99.1 101.8 109.0

Manufacturing 100.5 97.6 87.1 90.3 93.2 101.0

Engineering 100.9 97.3 82.8 88.8 93.4 103.0

Motor vehicles 104.0 98.0 69.2 78.6 82.0 93.0

Forecasts of output volumes – indices 2006=100Sources: EEF Manufacturing Outlook(f) Sep 2010/ONS/SMMT(p)

Ian Henry

AutoAnalysis

Introduction

• Bi-monthly model and plant level production outlook provided to SMMT:

– Last detailed report published in July

– Next report to be published during the next week

• The broadly positive view presented in July has not changed dramatically:

– Uncertainty re short term still evident

– But financial and sales performance of major VMs is positive and improving

– Indications that investment rising again, eg EIB funding for engine programmes at Ford and PSA

– European production in 2009 was c16mn, down from over 20mn in 2007; 2010 on target to be close to 18mn

Crisis, what crisis?

• No doubt that the recession and financial crisis caused profound shock:

– No one saw it coming, esp. not as quickly as it arrived

– Worries about “PIGS” economies remain, esp. Spain

– Fear of double-dip recession remains

– SMMT‟s chief economist reported recently on “several weeks of mixed data” and a fall in investor confidence …

– But also spoke of “some resilience in real growth”, albeit with a higher than previously thought risk of inflation

• European work of EU finance ministers, the ECB and IMF stabilised the region’s economy:

– Europe has experienced an atypical recession, with exceptional measures to aid recovery, ie macro-level quantitative easing and sector-specific scrappage schemes

Is the auto recession over? The

industry’s response

• Combination of recession and the financial distress of many

VMs was expected to lead to major industry restructuring

– Several assembly plants were under threat of closure, but few have closed

– VMs very reluctant to close plants – preferring to cut shifts and line speeds

• Scale of change is smaller than expected ...

– GM is closing Antwerp plant

– Fiat will close Termini Imerese

• Elsewhere decisions are being delayed ...– JLR now reviewing whether to close a UK plant

– GM still looking for a “solution” to Luton van plant

– Renault‟s Spanish plants have new models

– PSA Madrid could be saved by EVs

• Or avoided…– Fiat moving models between plants, balancing output between plants

– Mitsubishi bringing new models to Netherlands to try to save plant …

– Toyota UK volumes below optimal levels … one line mothballed

And at the company level ...

• Fiat and Chrysler have “merged”, still pursuing globalisation and economies of scale

• Daimler and Renault have formed a JV in small cars, recently extended to cover EVs

• GM Europe “re-born”

• Sales boost from scrappage schemes have enabled PSA and Renault to re-pay loans early

• German VMs still investing and growing, esp. BMW and VW-Audi

• The Chinese threat is beginning to loom

• One other issue ... The increased political “direction” of the industry

Politics affecting industry structure

• Germany: gov’t refused to back Opel’s financial restructuring, leading GM Europe to go it alone financially; but still politically difficult for Opel to close a German plant

• France: political influence clear :– Renault bringing LCV production back from the UK and Spain to supplement

large car production – Political pressure stopped more production shifting to Turkey or Slovenia,

despite lower costs – Financial support for French VMs based on no French facilities closing – Key condition for €100mn support for Renault Flins is French content to be

70%, vs. originally plan of 40%.

• Italy: gov’t pressure helped pull Panda back from Poland

• UK: not much direct intervention, but scrappage schemes helped maintain production, and Automotive Council’s government support ends many years of limited involvement

Production Outlook Overview

• Recovery started in Q1 and should continue, despite dips in July/August sales in some markets

• Underpinned by improvements in VM finances and new models:

• Good financial results from BMW, VW and the French

• New models doing much better than expected:

• Capacity being increased at Audi and Opel

• Significant shift in production to smaller vehicles now clear:

• Plus series production of EVs and hybrids growing

• Market volumes: 2013 > 2007

• Despite uncertainties:

• 2010 will be UP on 2009 (close to 18mn vs. c16.1mn)

• Further modest recovery to c18.2-18.4mn in 2011

• Real climb back in production from 2012, when many new model programmes will be at full rates

• Key assumption that Europe does not suffer a double-dip recession and

problems of Spain and Greece

• This view is broadly consistent with other forecasting companies!

AutoAnalysis vs. IHS/CSM and JDP

European car and LCV production (mid

2010 views)

Year AA IHS/CSM JDP

2010 17.77mn 17.53mn 17.70mn

2011 18.24mn 17.95mn 17.72mn

2012 19.44mn 19.06mn 18.59mn

2013 20.85mn 20.57mn 20.86mn

We all get close to the same level in 2013AA thinks market will get closer to the 2013 “target” at a more even pace2010 ytd figures suggest may get to 18mn this year

AutoAnalysis production outlook – by VM

European Car and LCV Production by VM 2007-2014

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

2007 2008 2009 2010 2011 2012 2013 2014

Years

Un

its

Aston Martin

Saab

MG SAIC

LDV

Porsche

VW

Toyota

Tata

Suzuki

Renault Nissan

PSA

Mitsubishi

Hyundai-Kia

Honda

GM

Ford

Fiat

Daimler

BMW

So will the recovery really happen?

• A reasonable question, especially in view of mixed data signals

• The industry has given us broadly positive news …– European production in first 6 months of 2010 was 8.8mn

vs. 7.3mn in first 6 months of 2009– July ytd US sales (an important export market) were also

up at 6.7mn vs. 5.8mn in 2009– German vehicle exports up 12% in August, 36% in year to

August

The worrying signs …

• UK car sales down 17.5% in August, but still up 13.2% ytd; UK production down 7.5% in July, although still nearly 42% up ytd

• German sales down 27% in August, 29% in ytd, reflecting end of very attractive scrappage scheme in 2009

• French car sales down 7.1% in August, but LCVs up 8.5%• Italy car sales down 19% in August, albeit better than the

26% fall in July • September figures, post summer shutdown will be

revealing …• PSA still looking for more flexibility from its unions• And China has stated ambition to be a net exporter of

vehicles by 2015 as part of current 5-year plan

The positive picture, VM by VM

VM Review – BMW, Daimler

• BMW

– Aiming for 2mn upa by 2020 vs. 1.4mn in 2010

– Powerful new model programme

– Expansion in X1 production, more small cars and EVs

– 11 consecutive months of rising sales, Q2 t/o up 18%

– Will expand full manufacturing outside Germany, incl. Russia, India, US and China

• Daimler

– 4bn euro profit in 2010 vs. loss in 2009

– H1 Mercedes sales up 11.6% globally – China up 120%, Asia up 62%

– Reorientation to small cars and EVs under way; JV with Renault will be at heart of new Mercedes-Smart strategy

VM Review: Fiat, Ford, GM

• Fiat– Accelerating integration with Chrysler – Agreement with unions re: moving Panda from Poland to Italy– 1bn euro investment in Serbia to make new MPVs– But, targets for Alfa and Lancia seem very ambitious

• Ford– Valencia to become centre of European hybrid production– Strong sales of Fiesta boosting recovery– US press reports that Kuga production will not switch to US– Craiova production plans delayed, but will make 300k by 2013– Volvo sale to Geely complete

• GM– German gov‟t refused loan application – GM now self-funding – Commitment to Bochum reinforced; uncertainty remains re Luton– Antwerp plant will close by end of 2010– Expansion in Poland, plus export drive to China and Australia– Doubling Hungary engine capacity, increase also in Kaiserslautern– 2010 German production will be c100k above July projections

VM Review: Honda, PSA, Renault

• Honda

– Jazz production accelerating– Existing manufacturing line-up in UK and Turkey to remain for next 5 years– Potential to expand in Turkey remains

• PSA

– Repaying French government loans early– Co-operation with Mitsubishi will deepen, but no more co-operation with BMW– Madrid plant could make PSA EVs for Europe– Citroen‟s premium brand, DS, more successful than anticipated; DS3 production

now 420/day vs. 235/day – Chinese production growing – will export to Russia

• Renault-Nissan-Dacia

– Commitment to EVs becoming stronger– Like PSA, it will repay French government loans early planned– JV with Daimler extended to include EVs– New mid-term plan to be announced in Q3– Nissan Juke should boost Nissan UK plant to record production – Dacia Duster SUV production will be double initial plan

VM Review: Tata/JLR, Toyota, VW• Tata

– Plans to close a UK plant under review following recent upturn in LR sales

– New model programme at LR accelerating – more Range Rover branded products, more Jaguar variants expected

– Assembly in India starting late 2010; also in China within “a few” years; initially CKD, but could move to full manufacture

• Toyota

– Major recall problems still affecting company globally – UK plant under-utilised, mothballing one line

– Auris hybrid production launched; Yaris hybrid production seems likely

• VW

– Group sales rising and investment continue– Record sales in US and China; global sales up 11% in August, overall

group volumes up 15% in H1– Recruitment re-started in Germany and Slovakia – 1,000 more

workers being taken to help with large SUV production– In talks with GAZ to boost Russian capacity – 150k pa Kaluga plant

will not be enough– 500mn euro investment in Hungary engine plant, A1 capacity up 20%,

adding exports beyond Europe– Losses mount at Seat – VW has given Seat 5 years to sort itself out

In conclusion …

• Current Outlook much more positive than expected 1 year ago, even 6 months ago, despite mixed signals

• European economies appear to have been stabilised• VMs have revived investment and new models plans• Scrappage schemes helped ameliorated fall in sales;

their ending has not led to a sudden fall back in output• Economic analysts “believe” we will not have a double

dip recession – but many of these did not spot the recession!

• Overcapacity issue not being addressed – decisions delayed – some plants will be lost, but when?

• And don‟t forget – the Chinese are coming:– Chery may put a new plant in Spain or Turkey, or

buy FSO in Poland– Great Wall building plant in Bulgaria– And more will follow

Questions and Answers

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Email: memberservices@smmt.co.uk with your questions after this session.

Slides available after the event at www.smmt.co.uk/memberservices

SMMT WebinarVehicle production outlook and economic

forecast for 2010

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