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Back to Normal Over 2024-2025

Weaker demand is likely in North America and Europe, while Chinese demand shows signs of strengthening.  S&P Global Ratings revised our global forecast for light vehicle (LV) sales over 2024-2026 to incorporate a stronger than expected 2023 baseline (LV sales and production increased 9.5% globally) due to the end of the supply-side bottlenecks that plagued the industry over 2021-2022. We maintain our expectation of modest LV demand growth, in the 1% to 3% range, over 2024-2026. That reflects a return to more traditional demand/supply patterns in the industry, escalating geopolitical tensions, and the impact of elections in major regions this year. Following consistent inventory rebuilding over 2023, we expect global production to be strictly demand driven, which leads us to anticipate very modest growth of 0% to 1%.

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LV demand momentum remains surprisingly solid in the first quarter 2024, with 5% global growth year on year, amid expectations of a soft economic landing, higher for longer interest rates, and improving purchasing power due to falling inflation (see "Global Economic Outlook Q2 2024: Still Resilient, With Gradual Rate Cuts Ahead," published March 28, 2024). Europe was a key driver of that growth, with healthy order books supporting sales over the first months of 2024, while China's growth strongly exceeded expectation due to a low-base effect and more aggressive promotions from automakers.

China

We believe China is unlikely to maintain the high-single-digit growth of the first quarter as consumer sentiment remains soft due to the negative wealth effect of the prolonged property-market stress. This prompted us to revise our 2024 LV sales growth forecast for China to 2% to 4%, up from 0% to 2%, followed by more moderate growth in 2025 and 2026. Slightly stronger momentum in production growth reflects China's increasing LV exports. Chinese original equipment makers (OEMs), including BYD Auto Co., Ltd. and SAIC Motor Corp., Ltd. are heavily investing in vehicle carrier vessels and renting logistic space in destination harbors to support their accelerated overseas expansion.

Europe

Europe's 7% growth over the first quarter of 2024 was driven by strong passenger car sales in Russia, Turkey, and Western Europe-- where the five largest markets (Germany, France, Italy, Spain, and UK) posted an average increase of 6.8%. We believe Western Europe's result is the tail of order books cumulated during 2023. So, despite the solid start to 2024 we expect annual sales will moderate, notably as high labor costs limit disinflation and likely temper the pace of much awaited interest rate cuts by the European Central Bank (ECB). European Commission elections, the risk of escalating conflicts in Eastern Europe and the Middle East, and legitimate expectation of lower interest rates and prices (especially in the volume segment) could delay big ticket purchases. This leads us to maintain moderate expectations of LV sales growth, at 0% to 2% over 2024-2026, following the 19% increase of 2023. European production could suffer from increasing imports and automakers efforts to reduce fixed costs by cutting their production footprint.

U.S.

Despite a recent upward revision of U.S. GDP to 2.5%, from 1.8%, we maintain our view of that sales in the U.S. will be roughly in line with the 15.6 million achieved in 2023 (+12% year on year, Source: S&P Mobility) and rebound slightly in 2025 and 2026 but remain below pre-pandemic levels of 16.9 million.

Like Europe, U.S. auto sales growth in the first quarter was driven by inventory building and higher incentives in some segments. Softer sales growth in March (which equated to an annual sales rate of 15.5 million units) is consistent with our forecasts, which incorporate a delayed impact on consumer purchasing power from the contiguous macroeconomic shocks of high vehicle prices, ongoing inflation, and higher interest rates for longer (see "Tougher Pricing Conditions In 2024 Could Cramp U.S. Auto Sector Ratings Headroom," published on Feb. 12, 2024).

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Pricing Pressure Is Intensifying

Pricing patterns differ substantially among regions, due to the structure of local markets and the strategies of disruptors and new entrants. Overall, we expect a weaker pricing environment in 2024 and 2025, compared to 2023.

In February 2024 the average price of a new vehicle in the U.S. was about $47,200, down 5.4% from the market peak in December 2022. In March, incentives as a percentage of average transaction price increased to 6.6%, up from 3.2% a year earlier, and were even richer in the luxury segment. The situation varies significantly among OEMs, but it is our understanding that rebates of up to 10% of average selling prices are already in the market.

Car prices in the eurozone, as measured by the Eurozone Car Price Index For New Cars, are still increasing (Source: Eurostat) despite a clear inflexion of the trend, with year-on-year growth of 1.8%, in March, down from a peak of +8% in December 2022 (and below March's annual inflation estimate of 2.4%). We don't have reliable information on the evolution of transaction prices in the region, but we assume that pricing pressure is increasing, obliging OEMs to adjust their cost bases to absorb high labor, logistics, and energy costs. OEMs have until the end of 2024 to boost higher margin ICE combustion vehicles in their EU fleets before regulations severely tighten allowable average CO2/km towards 95, in 2025.

Pricing in China continues to be challenging and will remain so until the market ends its current consolidation. China's EV market is becoming more crowded, with increasing supply from new-model rollouts and existing-model upgrades at short intervals, both by existing players and new entrants. Large-scale price competition started last year and has become more aggressive and frequent this year as producers are eager to expand volume amid falling battery prices. For loss-making EV makers, scale and economies of scale are key to profits. With fast electrification and EVs reaching price parity with gasoline vehicles, the market size for ICE vehicles is gradually shrinking while production capacity remains sizeable. This led to ICE vehicle price cuts by traditional OEMs that are struggling to protect market share and survive. This also explains why exports have become increasingly important for Chinese OEMs.

In the U.S. market, incentive spending continues to rise towards historical levels, increasing 11% over March 2024, with average transaction prices (net of incentives) at $44,186 (compared to the December 2022 peak of $47,362, (source: J.D. Power)). We expect average new vehicle prices will fall about 10% from 2023 levels over the next 18-24 months as demand shifts to used vehicles from new vehicles. We expect used-vehicle prices to fall another 5% to 7% in 2024 (after falling about 7% in 2023) as increasingly difficult financing conditions weigh on demand while supply increases. The industry should exercise discipline while rebuilding capacity toward inventory levels of 50-60 days, which remains about 30% below pre-pandemic levels. This should reduce pressure on automakers to increase incentives and lower prices, helping to protect margins, even if consumer demand weakens over the next 18 months.

Electrification: Regional Divergences Increase 

With more than 14 million vehicles sold in 2023 EV's global market share increased to 16.5%, up from 13% in 2022 and 2.5% in 2019. EV's market penetration increased in China and the U.S. but remained flat at 22% across the EU15 countries. We attribute that to a still material EV/ICE premium and a relative scarcity of lower-priced models. EV sales growth rates remain solid across Europe, China, and the U.S. in early 2024, though slower compared to the spike over 2020-2021.

EV pricing dynamics, the margin dilutive effect of electric powertrains for most of legacy OEMs, and the market distortive profile of subsidies could weigh on motivation to push EV sales. That will likely lead to stable (at best) or declining EV market share in the U.S. and Europe. Conversely, in China, we believe that pricing parity and the large range of models at every price segment will continue to pressure sales of traditional powertrains and support increasing EV adoption.

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Germany's EV adoption rate reflects Europe's short-term EV fatigue.  We have slightly widened the range of our EV 2025 penetration scenario in Europe to factor in slower battery-only-EV (BEV) adoption. That is particularly noteworthy in Germany, the region's largest market, where budget cuts ended, in December 2023, an electrical vehicle subsidy program that had paid out about €10 billion since 2016. Yet, EV sales momentum had been slowing in Germany since September 2023, when they declined 15% year on year. That fall continued in early 2024, with BEV penetration falling six percentage points from year end 2023, demonstrating how important incentives had been in offsetting EV's substantial premium, especially given purchasing power pressures and higher-for-longer interest rates. The penetration rate of plug-in-hybrid-EV (PHEV) has barely since the end of 2023, both in Germany and other major EU markets.

We remain confident that EVs will continue to gain market share in Europe due to:

• Compliance with EU regulatory emission targets for 2025. While we cannot exclude the possibility that the EU will soften its planned ban on ICE sales by 2035, we consider any relaxation of 2025 emissions goals to be unlikely.
• Expansion of the range of small and medium models (segments B and C) which account for most European new car sales. Additions in 2024 will include the Ford Puma (SUV-B), Citroen C3 Aircross (SUV-B), Cupra Tavascan (SUV-C), Peugeot e-408 (car-D), and Renault 5 (car-B).

Competition for European sales from Chinese EVs is set increase as China is massively investing in vessels earmarked for vehicle maritime transportation. There has been no update on the European Commission's initiative to investigate Chinese EV subsidies, which could lead to trade restrictions. The wisdom of that potential course remains questionable, not least because Chinese OEMS have made it clear they eventually aim to produce vehicles for the European market in Europe.

For now, Chinese carmakers generally have advantages in terms of planning, manufacturing processes, and supply chain management, which enables them to undercut European carmakers' pricing. S&P Mobility forecasts that Tesla and Chinese OEMs will each have 7% of the European (including Russia and Turkey) market by 2030.

EV sales momentum in China remains solid, but the competitive environment is fierce.   EV penetration in China increased to 30% in 2023, well above the government's original target of 20% by 2025. Domestic electric vehicle sales are likely to grow 15% to 20% per annum over 2024 and 2025, down from over 36% in 2023, meaning EV penetration will rise toward 40% by 2025. With local EV producers upgrading product offerings and foreign manufacturers (other than Tesla) trying to catch up, competition will remain strong and weigh on producers' pricing power.

Weaker U.S. emission reduction targets have prompted a downward revision of our EV market share forecasts.  The Biden administration's emission revised standards for new light- and medium-duty vehicles dictate a reduction in greenhouse gas emission of almost 50% from light-duty vehicles and 44% for medium-duty vehicles by 2032, compared to the 2026 model year. These targets are less aggressive than prior greenhouse gas emissions reduction goals in the first few model years but come with more stringent reductions after 2030. The impact of the new targets over the next 12-18 months should be consistent with our expectation that automakers in the U.S. will take a more measured approach on EV volume build-out to adjust to slower demand and avoid price wars for upcoming launches. We view this as slightly positive for OEMs' credit quality over the next 12-18 months as it appears to be an industrywide adjustment that is supportive of a more profitable product mix. It has also led us to revise down our 2025 forecast for EV's U.S. market share to about 15%, from 18%.

We still expect significant launches at more affordable price points over the next few years, supported by manufacturer subsidies from the Inflation Reduction Act, investment in local supply chains, and tax credit. Together, we believe these factors will help reduce the U.S.'s EV market share gap with Europe and China beyond 2025.

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Related Research

• Global Economic Outlook Q2 2024: Still Resilient, With Gradual Rate Cuts Ahead, March 28, 2024
• Tougher Pricing Conditions In 2024 Could Cramp U.S. Auto Sector Ratings Headroom, Feb. 12, 2024
• Industry Credit Outlook 2024: Autos, Jan. 9, 2024