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US, Japan, and China recovery to lift global car output
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The global manufacturing cycle is slowly turning upwards, led by an improvement in the auto sector. Demand for autos in the world’s three largest economies — the US, China and Japan —has improved since the start of the year.
US vehicle sales reached a post-recession high in June as rising consumer confidence and construction lifted demand. Second quarter earnings from major US producers Ford, General Motors and Chrysler were all better than expected.
In Japan, the weaker yen and rising household confidence linked to Abenomics supported first half production via the export and domestic sales channels. Chinese auto demand is trending higher, in line with solid consumption.
Across the rest of Asia, demand for autos has slowed.
The end of the household subsidy program in Thailand is weighing on sales, while demand has softened in India and Indonesia, mirroring the slowdown in their respective economies.
The auto sector is a good barometer of global manufacturing, as it drives demand in a range of supporting industries — electronic parts, chemicals, metals and so on — and also because it illustrates the trend towards long supply chains, often across several countries.
Stronger US demand is supporting vehicle exports from other major car producers. Aside from Mexico and Canada, which act as assembly points for auto shipments into the US, car imports from Japan and Germany — 43 percent of the total — have picked up over the last couple of months.
The weaker yen has made Japanese exports more globally competitive, with auto producers reaping significant gains.
The upturn in Japanese auto production is having positive feedback effects on the US auto industry, lifting auto parts shipments. German producers, meanwhile, are among the biggest winners, as car sales to the US and parts sales to Japan have both risen strongly in recent months.
Korean auto shipments to the US are trending down, though this has been partly offset by stronger Japanese production and demand for parts. The Japanese upturn should soon lift auto producers across Asia. Firms in Thailand, Indonesia and Vietnam are tightly woven into Japanese supply chains.
Production in the world’s largest car manufacturer, China, has slowed as weaker demand from emerging markets, particularly Turkey and Brazil, crimping sales.
Moreover, Chinese preferences are shifting towards foreign cars at the expense of cheaper domestic options, hurting local producers, a trend that we expect to continue as the middle class grows wealthier. Offsetting this, Japan buys 30 percent of auto parts imports from China, which should lift Chinese production.
It is difficult to isolate the outlook for a country's production, given the long and cross-country supply chains within global auto production. To get a better sense of where the industry is headed for the next 12 months, we built a vector autoregression model using monthly trend-adjusted auto output from China, the US, Germany, Japan and Korea — the world’s largest auto players — to help capture hidden supply-side linkages.
We find that auto producers in Japan and Germany benefit from the steady US outlook, with Japanese producers also benefiting from stronger domestic demand.
Japanese auto production will trend higher through 2013 and should lift production among key suppliers in Thailand, Vietnam and Indonesia.
Auto producers in Korea and China have a large footprint in emerging markets because of their competitive price points. Persistent weakness in emerging economies will weigh on production and helps to explain the recent softening in these sectors.
However, both countries are also heavily involved in the production processes in both Japan and the US, which should cushion the slowdown.
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