Major regional markets maintained growth in the first half of 2024
The pace of car sales growth slowed down in the first half of 2024 after a strong rebound of light vehicle sales last year, in line with our expectations. We note that all the three major regional car markets – China, the US and the EU – saw some growth during this period. European car sales (including the EU, the UK and the European Free Trade Assocation) increased by 4.4% year-on-year, according to the European Automobile Manufacturers’ Association. In the United States, light vehicle sales increased by 2.1%, while Chinese car sales grew by 6.1%. Among other prominent national markets, Japan experienced a sharp double-digit decline, while sales in India, Brazil and Mexico remained resilient.
Sales growth set to slow
We envisage a further deceleration in car sales growth during the second half of this year. This is in part due to consumer demand becoming more muted after a post-Covid catch-up phase, but also the mixed economic environment and continuously elevated interest rates alongside uncertainty surrounding both policy and political developments across the globe.What’s more is that used cars have become increasingly attractive again after prices started to drop following better stock positions. We note that 2024’s second quarter automotive sector earnings season has had a soft tone, with a number of prominent car and auto part manufacturers revising their full-year outlooks lower.Taking the industry backdrop into account, we also are trimming our full-year 2024 car sales growth expectation to +1.8% from +2.6% previously. Our update assumes that the bulk of the YoY growth was already realised in the first half of the year. In the second half, we believe car sales growth will be largely flat YoY, remaining only slightly positive. To recap, we now have a more neutral outlook for car sales in the second half relative to the first one, with balance of risks shifting to the downside during the last couple of months. Our second half forecast also implies a slowdown in car sales growth in the three largest markets to the 0-1% range YoY. Given this backdrop, car makers are now facing increased competition, a softer pricing environment and pressure on margins.
Slower second half weighs on FY24 growth
Source: Moody’s, ING research
Production volumes to trail the auto sales dynamic
We expect production volumes to trail behind those of car sales and anticipate that production volumes will actually drop by low single digits in the second half of the year relative to the same period last year. Vehicle inventory levels have increased in the important US market and due to a stalling of electric vehicle (EV) uptake in the Western world this year. As a result, we anticipate that the full-year 2024 car manufacturing volumes will decline by 1% to 2% compared to the flat or slightly positive growth we anticipated earlier this year. We believe that this expected contraction in the production programmes should have a greater immediate impact on revenues of auto parts manufacturers.
Auto sector peers feeling the heat
With the majority of 2024’s second quarter auto sector player results already out, we will aim to draw initial conclusions about the auto sector peers’ peformance during the first half of this year and the remainder of the year. We have already indicated that the second quarter season was mixed, with multiple revisions of at least some aspects of the initial full-year guidance. In our assessment, car manufacturers were more affected by the changes in the car market environment – including less buoyant EV sales – relative to the car parts manufactuers in the first half of 2024. We believe that one of the reasons was a strong prior-year comparative base for the major car manufacturers which enjoyed a particularly favourable commercial environment, buoyed by the still significant demand backlog from previous years. Now that this overhang has been cleared, original equipment manufacturers may not be enjoying the same pricing power and will have to rely on operational efficiencies to sustain their current relatively high margins.We also believe that auto parts manufacturers have not enjoyed the same favourable pricing environment in the recent past, and by initiating cost-cutting initiatives earlier have a chance of sustaining their current profit margins more successfully. Furthermore, with supply chain issues largely disappearing into the rear view mirror, major auto parts manufacturers are currently enjoying more orderly production schedules. While auto parts manufacturers are more sensitive to softer production volumes, we have not seen particularly dramatic FY24 guidance revisions from auto parts manufacturers at the mid-point of the year. This could be the result of more conservative production volume assumptions at the beginning of the year, as with ZF Friedrichshafen, which kept its market-wide production volume forecasts of -3% for FY24 intact during the first half earnings release.
Electrification slows in Western world while China pushes forward
The electrification trend faces headwinds in the US and Europe this year after the first wave of the shift to EVs has come to an end. The uptake is decelerating, and we expect EV penetration rates – for plug-in hybrid EVs (PHEVs) and battery electric EVs, or BEVs – to grow just slightly to 24% in Europe and 10% in the US (from 23% and 9% respectively). This can be illustrated, for example, with Tesla’s first half 2024 delivery figures that stood behind last year’s numbers and earlier price reduction actions to ramp up orders, showing eroded enthusiasm among Western EV-driving prospects. This stands in contrast with China’s continued efforts to ramp things up, with an expected share of no less than 40% of total new car sales in 2024. As such, Chinese EV sales are approaching 10 million on an annual basis, making up almost 60% of global sales and leaving a gap with the rest of the world. There’s a combination of reasons behind this year’s slowdown of EV uptake in the Western world:
At the same time, in China, manufacturers already upscaled their supply chains (including battery production) for EVs and even created excess capacity, which is also a reason to keep the growth figures running and push forward with exports. All in all, China still pushes the global EV share to an expected 20% in 2024. 
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