Record levels of safety withdrawals are a major concern for the automotive industry today. The slowdown in growth of car sales in China and an expected slowdown in Europe add to their woes. Even in the red-hot market of the United States, many suspect that the best may already be behind us. Since automakers were betting on growth prospects in Asia, a slowdown in China will have a major impact on overall sales.
However, there are several positive aspects such as the low price of oil and gas, the impressive US sales and a sustained recovery in Europe. On the other hand, focus on vehicle safety is benefiting parts manufacturers, especially those related to automotive safety products.
Still, there are plenty of reasons to be wary automotive space stock both short and long term. Here are some of the key challenges that investors in the automotive sector should be considered in the coming months and years are discussed:
Remember cost of security
Withdrawals and related security costs have become a major for most automakers in recent years problem. By the National Highway Traffic Safety Administration (NHTSA), auto recalls in the US We hit 51.26 million units in 2015, setting a new record. Overall, automakers announced nearly 900 recalls last year, which was also a new record.
The previous record, both for the number of withdrawals and the number of vehicles recalled was established in 2014 when s and w automakers announced 803 recalls covering 50.99 million vehicles. Also, these figures refer only to withdrawals in the US and global memory numbers are much higher.
Takata defective airbags, which resulted in significant retirements in 2014 can be blamed for the maximum remember last year too. The top 12 automakers – including Honda Motor Co., Ltd. (HMC – Analyst Report), BMW, Toyota Motor Corporation (TM – Analyst Report), General Motors Co. (GM – Analyst Report), Nissan Motor Co. Ltd. (NSANY – Snapshot Report), Ford Motor Co. (F – Analyst Report), Fiat Chrysler Automobiles NV and Mitsubishi Motors Corp. – are believed to have been affected by the air bag inflators malfunctioning. But recently, the NHTSA expanded the recall for about 5 million vehicles and added Volkswagen AG (VLKAY – Snapshot Report), Audi, Mercedes-Benz unit and Saab to the list of affected car manufacturers.
Apart from this, the stricter enforcement by the government contributed to the large number of retirements. High fines imposed on many automakers in case of delays in reporting safety issues also led many companies to advertise proactive safety recalls.
The scandal emissions Volkswagen also resulted in a large number of recalls last year. However, these are not included in the figure proposed by the NHTSA as this is a violation of rules and not a safety issue.
Repair costs related recall-increase the financial burden on the automakers. A massive withdrawal may also hurt sales as consumers begin to question the safety of the brand.
Slower sales growth in China and Europe
Although China reported exceptionally strong automobile sales in 2015, the growth rate has slowed. In late 2015, the growth rate decreased 2.2 percentage points from 2014 end.
In fact, sales of commercial vehicles fell by 9% over the previous year in 2015. While sales of passenger cars increased during the year, the growth rate slowed.
Slowing economic growth in China is leading to the slow vehicle sales. As China is the largest car market and fastest growing in the world, a decline in vehicle sales or even a slowdown in the growth rate significantly hurt the earnings of automakers.
The European car market is expected to witness even slower growth this year. By the Association of European Automobile Manufacturer, Builders is expected that sales of passenger cars to increase only 2% in 2016 compared with growth of 9.3% in 2015.
Market Share Concentration
Since most of the market share by a few leading car manufacturers remains only in the automotive industry it is highly competitive. The top 10 global automakers account for nearly 81% of all vehicles sold, according marketrealist.com.
Moreover, the high dependence of these automakers makes auto parts suppliers vulnerable to price pressures and production cuts. Price pressure from automakers constricts margins parts suppliers. At the same time, production cuts frequent automobile manufacturers to meet market adjustments affecting the operations of suppliers.
Some suppliers of the automotive industry that are highly dependent on a few major car manufacturers are Meritor Inc. (mTOR – Analyst Report), Tenneco Inc. (TEN – Analyst Report) and Magna International Inc. (MGA – Analyst Report) . The full list can be seen on this page auto supplier. http://www.zacks.com/stocks/industry-rank/auto-truck-orig-10
While the automotive industry has several reasons to be optimistic in the near term and a half, a number of long-term challenges remain.
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