We expect global light vehicles sales will fall 20% this year compared with 2019 following sales and production disruption due to the COVID-19 pandemic. This forecast is at the more pessimistic end of the 15%-20% projection for global sales falls we made in March this year. Sales in the first half of 2020 were down by one-quarter (24.6%), an unprecedented shock for the global industry.

Across the regions, signs of improvement started to show in China during the second quarter, and we saw some stabilization in Europe and North America in July and August. South America, meanwhile, continues to experience steep light vehicle sales declines.

In this depressed environment, the Korean market has surprised us with 8% growth in the first half of 2020. However, this is credit positive only for Hyundai-Kia, which dominates the domestic market with a 70% share. Its impact on other automakers is negligible.

While we try to predict the magnitude of any recovery in the second part of 2020 in the world's largest auto markets, we expect that sales volumes in 2021 and 2022 will be more critical for our base-case scenario for the industry and our ratings on global automakers and suppliers.

We are only slightly upwardly revising our projections for global vehicle sales to 7%-9% growth both in 2021 and 2022. Under this scenario, light vehicle sales two years from now will still be 6% below 2019 volumes. Our forecast is more conservative than general market standards. However, we deem this scenario consistent with the pandemic-related dramatic squeeze on potential car buyers' finances across the globe, combined with pressure on affordability stemming from higher prices of new hybrid and electric vehicles that carmakers are trying to promote in regions like Europe and China.

Many automakers' and suppliers' plants are likely to operate at suboptimal capacity and at less efficient levels for the remainder of 2020. What's more, a large proportion of rated issuers will end 2020 with a higher debt load than at the start of the year. We therefore expect companies' profitability and cash flow adequacy metrics to be weaker in 2021 than in 2019. This, combined with the enduring profitability pressure generated by the transition to electric mobility (unimpeded by COVID-19), and the sizable investments needed to upgrade existing and develop future technology, leads us to maintain a negative outlook for the auto industry despite some evidence of recovery.

In an effort to rationalize costs and defend market shares, many auto players are increasingly looking at consolidation opportunities and partnerships to share the burden of investments in new technologies and product development. The consolidation that is taking place, to the detriment of debtholders, poses additional risk, although this risk is company-specific rather than industry-wide.

We believe any upside to our sales scenario will stem mainly from the Chinese market, the most dynamic but least predictable among the main global auto markets. We think China may be the only market to catch up with 2019 volumes by the end of 2022. However, it remains to be seen whether the recovery in China observed in the second quarter, with sales up 3% year on year, is sustainable through the second half of this year given the decelerating growth of disposable income in the country year on year.

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China Sales Could Recover To 2019 Levels By The End Of 2022

Growth in auto sales in China turned positive from April and remained surprisingly strong through August, mainly due to booming light commercial vehicle sales. We expect slower growth momentum for the rest of the year, considering still soft consumer confidence. On balance, we have revised slightly upward our full-year forecast for 2020, now expecting sales declines in the 6%—9% range compared with 8%-10% previously. This is consistent with our macroeconomic forecasts for the country (see "China’s Rate Rise Puts Recovery At Risk," published Aug. 18, 2020, on RatingsDirect).

Noteworthy is that China lost its supremacy in global new energy vehicle (NEV) sales during the first half of 2020. China accounted for just 39% of global sales, according to the auto data provider EV-Volumes, compared with 57% in the first half of 2019. NEV sales volumes severely underperformed internal combustion engine (ICE) vehicles, posting a decline of 42% versus a total auto sales decline of 20%, a reflection of subsidy reduction. We believe NEV sales will pick up momentum in the second half, benefiting from a lower base in the same period last year, as demonstrated by year-on-year growth of over 20% in July-August.

We continue to believe that the Chinese market has the potential to resume moderate long-term growth. Our forecasts for Chinese GDP growth in 2020, 2021, and 2022 remain at 1.2%, 7.4%, and 4.7%, respectively. This leads us to believe that light vehicle sales will expand in by 4%-6% in 2021 and by 2%-4% the year after. In our scenario, light vehicle sales in China will have recovered to 2019 volumes by the end of 2022, which we don't expect to happen in Europe and the U.S.

European Sales Will Fall 20%-25% This Year And Only Slowly Recover

In Europe we anticipate a gradual stabilization of light vehicle sales in the second half of 2020. We project sales declines will slow down to 10% in the third quarter and to 5% in the fourth quarter year on year, after declines of 18% and 53% in the first and second quarters. We think a combination of pent-up demand after the lockdown and the positive impact of government-sponsored incentives will help ease the sales declines. While year-to-date registrations remain depressed compared with the same period of 2019, we are starting to see good monthly progression in France, Spain, and the U.K., while Germany and Italy are still lagging behind. A second pandemic wave is a risk, but we think it would be less likely to result in lockdowns comparable to those in March, April, and May, owing to their tremendous social and economic costs. We therefore forecast a light vehicle sales decline in Europe in the range of 20%-25% this year, followed by single-digit growth in both in 2021 and 2022. This expected uplift is mainly due to replacements of a fairly old car population supported by the likely continued stimulus to support the transition to environmentally sustainable vehicles. Nevertheless, European sales for 2022 under this scenario would still fall 8% short of 2019 sales volumes.

Despite the dramatic decline in sales volumes in the region, there is evidence of a quickly rising share of electrically chargeable vehicles (including battery and plug-in hybrids) in the sales mix. Their share increased to 7.8% of total passenger vehicle registrations in the EU-EFTA-U.K. region in the first six months of 2020 versus 2.9% in the same period of last year. This supports our view that electrification is well entrenched in Europe, where we expect the share of electrified cars to move towards 20% by 2025.

In a challenging European market, some car manufacturers have struggled to maintain their market shares in passenger vehicles, in particular PSA, FCA, and Ford--in the latter's case reflecting a strategic repositioning. Given that automakers in 2020 are heavily affected by increasingly tight CO2 emissions standards, we do not have a clear picture on market share changes, but we expect 2021 to deliver a more insightful picture.

Despite the pandemic, residual values in the main European markets--Germany, France, Italy, Spain, and the U.K.--have held up relatively well, in particular in the small car segment. Further ahead, governments' incentives could introduce some distortions and weigh on pricing in used car markets. We think this risk is higher for electrified vehicles exposed to quick technology upgrades in countries where incentives are particularly rich.

U.S. Sales Likely Are To Stay Below The 20-Year Median

Our current forecast for light vehicle sales in 2020 is 13.3 million units, or a 21% decline year over year. Recent sales trends indicate modest upside to our base-case for 2020, as August sales (annual run rate of over 15 million) recorded the fourth consecutive sequential growth from the April low point of 8.6 million units. We believe that tight inventories resulting from the approximately two-month production shutdown and some pent-up demand during the pandemic amid an aging car parc and low gas prices, is likely to result in future vehicle production in excess of sales trends. We expect high volatility in the weekly U.S. production schedules for automakers in this environment and modest strain on the supply chain, which could lead to some production delays, but no material bottlenecks. We expect a 10%-15% sales recovery in 2021, but sales will likely remain below the last 20-year median of 16 million even in 2022 as the sustainability of recent demand trends is somewhat questionable. Furthermore, the pace of the sales recovery in our base-case scenario for 2021 and 2022 is higher than the annual growth rates reported between 2010 and 2012. Ford and GM were somewhat profitable even at 12.5-13.0 million auto sales in 2011 and 2012, even though their discipline regarding the use of incentives to boost demand was tested.

Related Research

• Industry Top Trends Mid-Year 2020 Update: EMEA Autos, July 16, 2020
• Industry Top Trends Mid-Year 2020 Update: North American Autos, July 16, 2020
• Carmakers Are A Step Behind In Industrial China's COVID Comeback, July 17, 2020