1 CHAPTER 2 THE AUTOMOBILE INDUSTRY IN AND BEYOND THE CRISIS Introduction and summary The automobile industry has been severely hit by the crisis The automobile industry is among the sectors that have been hit most by the recession. Demand for cars fell sharply, accentuating the difficulties of excess production capacity already faced before the crisis and deepening the economic downturn in major car-producing countries. Relative to the general downturn, the decline in car sales was nonetheless not deeper than what was observed in the past. The automobile industry This chapter considers the role of the automobile industry in the current cycle. It first examines the role of the industry in the economy, before analysing the relation between the automobile and business cycles. After casting some light on the sources of the collapse in car sales at the start of the crisis, the chapter discusses the policy measures, in particular car scrapping programmes, put in place to support the automobile industry. Finally it investigates the short and medium-term prospects for the automobile industry. The main results are the following: is economically important The size of the automobile industry relative to overall activity is small, but because of its strong linkages with other parts of the economy, the final impact of a shock in the industry on the broader economy is sizable. and intertwined with business cycles The automobile and business cycles usually move in line with each other but the amplitude of the cycle is higher in the automobile industry. The volatility of the automobile industry is also higher than that of the manufacturing industries as a whole. It has suffered from constrained credit in the crisis Evidence for the United States and Canada suggests that the reduction in car sales since mid-2008 has been magnified by the lack of access to credit, leading many households to postpone their car purchases. This implies that continued improvement in financial market conditions could provide an impetus to car sales. 2 but benefited from government support Government support to the automobile industry has been provided in a variety of forms, including subsidies to firms and direct involvement in industry restructuring plans. These measures are likely to impede the structural changes the industry will need to go through in the years to come. including car scrapping schemes Many countries have introduced car scrapping schemes to cushion the overall downturn in economic activity, boosting sales in the short term. However, crowding-out effects whereby the demand for new cars dampens the demand for other products are likely to have lowered their final impact on economic activity. As these programmes are temporary and consist mostly in a shift of purchases from the future to the present, the surge in sales is likely to be reversed after the schemes end. Evidence on the timing and the magnitude of this “payback effect” varies but suggests that over the short term, car sales may be temporarily depressed by the termination of scrapping programmes in many countries. At the same time, these schemes do not appear to be cost-effective instruments to reduce greenhouse gas emissions. and is set to rebound in many countries As actual sales are well below trend, a rebound in car sales is likely in North America, Japan and the United Kingdom. In contrast, car sales in Germany have been pushed significantly above trend and may weaken going forward. though medium-term sales trends are likely to be divergent across regions Over the medium term, regions within and outside the OECD are likely to experience diverse trends in car sales. In mature markets, such as Europe and North America, trend sales are likely to remain stagnant. By contrast, rapid increases are foreseen in China, which is already now the second largest market for cars. A rapid increase is also projected in India. Medium-term projections suggest that capacity exceeds trend sales by around 20% in the five largest Western European markets considered as a whole. Without an adjustment in capacity, these countries would need to ensure an ongoing strong export performance. By contrast, in North America, capacity is projected to be around 65% of trend sales. Automakers in the NAFTA area would thus need to halt their decline in domestic market share or to rely increasingly on exports in order to avoid excess capacity. The fortunes of Korean and Japanese auto firms are heavily tied to world markets as they export a large part of their production. Maintaining their high levels of capacity utilisation will require them to keep up their strong export performance. 3 The importance of the automobile industry in the economy The industry is more important than its size implies The automobile industry1 represents a relatively small share of the overall size of OECD economies in terms of value added and employment (Figure 2.1). But this hides large va