Automotive market in Poland and the global crisis: is the worst still ahead of us?
series: Article of the week on PICC site
source: polishmarket.com.pl
Paweł Sionko
Economist, PMR Publications
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The global economic crisis that started in the autumn of 2008 hit the automotive industry particularly hard, causing a sudden slump of demand for new vehicles across the world. Although the Polish automotive sector, like the country’s economy as a whole, seems to be doing rather well in these difficult times, it is in a significantly worse condition when compared with the previous year.
Foreign scrappage bonuses and weak zloty support sales
According to the data of the Automotive Market Research Institute Samar (IBRM Samar), 214,626 new passenger cars were sold in Poland in the first eight months of 2009. This is a minimal increase (by 1%) from a year ago[1]. In ordinary conditions, such a rate of sales volume growth would not impress. However, in light of the crisis, which significantly affected sales of new cars across Europe, the fact that last year’s sales levels were maintained commands respect.
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Although compared with other countries this data seems quite good, a more in-depth market analysis demonstrates that the situation does not look so optimistic. Even though domestic demand in Poland has in general turned out to be relatively invulnerable to the crisis so far, in the case of new passenger cars a considerable part of this year’s sales (approximately 15-20% according to various estimates) was a consequence of purchases made by foreign customers, in particular Germans and Slovaks. The significant weakening of the zloty[2], accompanying the crisis on financial markets, made vehicles offered in Polish car showrooms much cheaper than in the majority of EU member states. This was rapidly reflected in higher foreign demand, in particular in borderline regions. The Germans demonstrated particularly high activity following the introduction by the German government in January 2009 of a program supporting new car purchases, offering a bonus of €2,500 to each citizen who scraps a car older than nine years in exchange for a new one. Although initially €1.5bn was allocated for this purpose, in the face of the enormous popularity of the program, the total value of the scheme was increased to €5bn in April. According to its authors, the program was intended to support the domestic automotive industry, sustain employment in the sector, and favour economic growth in Germany. However, in the absence of restrictions on the place of purchase, the Polish automotive industry also benefitted. The weak zloty also lured Slovaks, who adopted the common European currency in January 2009, to shop in Poland.
However, recent months saw a systematic appreciation of the zloty[3], which partly impaired the price competitiveness of vehicles sold in Poland. Also the car-scrappage program introduced in Germany, although supposed to last until the end of the year, will not drive sales of cars in Poland in the nearest future due to the exhaustion of dedicated funds. With a steady deterioration of the situation on the Polish labour market, a further weakening of Poles’ propensity to spend should be expected. All the more so as in the autumn, when demand for seasonal work decreases, the number of unemployed may grow significantly. For this reason, the only drivers of market growth in Poland in the coming months could be sales of cars with a cargo partition, whose buyers are allowed to deduct VAT (although the Ministry of Finance announced an intention to limit this privilege from the beginning of next year), and fleet replacement by companies after a period of drastically restricted investments in H1 (however, this will depend to a large extent on the financial standing of enterprises and overall economic situation).
A broader picture of the market can be gleaned from Central Statistical Office (GUS) data on retail sales of cars, motorcycles and parts, where after almost two years of high increases, the annual sales dynamic has been negative since July 2008 (with the exception of December when symbolic growth of 0.8% y-o-y was noted). Although the drop in sales decreased considerably in the last months, this was to a significant extent a statistical effect resulting from a lower reference base. This factor should also ensure that sales declines in this segment remain moderate in the rest of the year, even despite the expiry of the German support program.
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Significant decrease in imports of used cars
The crisis not only weakened demand for new cars, but also caused a slump in imports of used cars. In the first eight months of 2009, just over 454,420 used cars were imported into Poland, which represents a decline of 41.4% compared with the corresponding period of the previous year[4]. Apart from great uncertainty regarding the future economic situation in Poland, which resulted in a sudden decline in customer propensity to make serious purchases, the main reason for the decrease in imports of used cars to Poland was the significant weakening of the zloty observed since autumn, which has considerably increased the price of cars imported to Poland. The very high number of such vehicles imported to Poland in previous years was also of importance, as it may have resulted in a partly saturated market.
Even though the largest drop in imports was observed at the beginning of the year, the scale of the decline has eased only slightly since, despite some stabilisation of the economic situation and a gradual appreciation of the zloty. We believe that until the Polish economy returns to the rapid growth path, and until the level of incomes in Poland improves considerably, Poles will continue to buy used cars more frequently than new ones. However, a return of used car imports to their 2008 levels should not be expected this or next year.
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Although in the previous years the age structure of imported vehicles has been systematically improving, cars with an exploitation period exceeding 10 years still represented almost 45% of imports in H1 of 2009. The share of vehicles aged 4-10 was approximately 44%, and that of relatively new cars (exploitation period below 4 years) – only 11%.
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Moreover, in recent months the age structure of imported vehicles deteriorated still further: in August, the share of oldest cars was almost 49%. Paradoxically, similarly to sales of new cars in Poland, imports of these oldest vehicles were to a large extent driven by the German government’s support program. According to estimates of the German police, as much as 10% of the approximately 500,000 cars scrapped in Germany in H1 were illegally exported abroad, primarily to Poland.
Weaker external demand the reason for limited production
Although in January-August sales of new passenger cars in Poland were sustained at their 2008 levels, in the majority of EU member states sales slumped (growth was noted only in Germany, Slovakia, Czech Republic and Austria). Generally, demand for new cars in Europe in this period turned out to be almost 10% lower than a year ago.
As more than 97% of vehicles produced in Poland are exported, this forced factories to reduce production. According to the IBRM Samar data, in the first eight months of this year 555,014 cars left production lines of factories in Poland, which is 20.9% lower than a year ago[5]. However, in other EU member states declines in car production were even deeper.
Fiat gains during the crisis
Compared with the slump in car production across the world, the domestic segment of passenger cars noted relatively good results. In January-August, Poland produced 516,564 of this type vehicles, a decrease of slightly more than 15% y-o-y.
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To a large extent, this was a consequence of the good results of Fiat, whose Polish factories put out approximately 250,000 passenger cars in the first seven months of 2009, an increase of approximately 25% compared with the same period of 2008 and representing almost 75% of the entire domestic production in this segment. The company increased its share in the production of passenger cars in Poland by more than 31 percentage points. This was possible thanks to high demand for its compact cars, in particular Fiat Panda, Fiat 500 and Ford Ka. Obviously, apart from its very attractive offer in this segment, which enjoys the greatest popularity amongst customers during the current crisis, Fiat’s success was also supported by car scrappage schemes implemented by several European governments (in particular Germany, Italy and France).
Opel maintained the second position amongst producers of passenger cars in Poland with more than 56,000 produced vehicles and a 12% market share (compared with 130,806 and 23.1% in the same period of 2008). Volkswagen came third with a 10% market share and almost 48,000 produced passenger cars. The next position was occupied by FSO, owned by UkrAVTO of Ukraine, which commended a 4.6% share after putting out slightly more than 22,000 Chevrolet Aveo cars.
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Slump in investments affects commercial vehicles segment
Considerably larger drops in production were noted this year by the segment of commercial vehicles, which suffered immensely due to the global crisis. Lower economic activity and worsening financial situation forced enterprises in Poland to cut costs and limit investment expenditures. The impact on demand for vehicles used by companies is demonstrated by the fact that amongst all main groups of fixed assets, investments outlays in H1 of 2009 declined the most (by more than 42% y-o-y) in transportation equipment[6]. Obviously, it should be remembered that the vast majority of commercial vehicles produced in Poland are exported, but the scale of investment cuts by companies in other countries was even higher.
The sales results in the commercial vehicles segment were equally significantly affected by a sharp slump in business conditions in the transportation segment, which is a consequence of the crisis. Faced with considerably reduced demand for their services, transportation companies were forced to sell part of their fleet to car commission shops, at the same time reducing purchases of new vehicles to the minimum. As a consequence of the slump in demand, only 38,450 commercial vehicles were produced in Poland in the first eight months of 2009, a 57.8% decline year-on-year.
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It should be emphasised that steep drops affected both of the two producers operating on the Polish market. In January-July, Volkswagen cut production of commercial vehicles in Poland by more than 53% y-o-y, and Fiat by almost 73% y-o-y. Consequently, Volkswagen’s market share grew in this period from 74% to almost 83%, with a decrease in Fiat’s shares from 26% to 17%.
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Uncertain prospects for 2010
The data presented above show that in the first eight months of this year the Polish automotive sector performed relatively well compared with other countries. Furthermore, in the fourth quarter production declines should gradually decrease thanks to a lower reference base. As a result, in 2009 as a whole car production in Poland can be expected to contract by about 15%. By contrast, considerable uncertainty exists regarding the sector’s performance in 2010, when the car-scrappage schemes introduced by European governments – which helped sustain demand for new cars in recent months – will expire. If the preferential tax treatment of cars with a cargo partition is also eliminated, it is hard to expect any major stimulus from the domestic market as well. According to Adam Kolodziejczyk, CEO of Ford Polska, a decline of less than 10% in new car sales in Poland in 2010 would be seen as a very good result. Therefore, unless the global economy quickly returns to the growth path, or if no further support schemes for the car industry are put in place, we may expect the contraction in car production in Poland to continue and indeed deepen considerably next year.
We as PGD Group expect vehicle sales at our showrooms to maintain their 2008 levels this year. However, the situation is likely to worsen in 2010, for which we are forecasting a 16% drop in sales. This will be driven by several factors. First, purchases by customers from neighbouring countries are set to weaken considerably, due to an anticipated strengthening of the zloty and the resulting narrowing of price differentials. Second, with the situation on the Polish labour market deteriorating, we also expect a slight decline in sales to private buyers. Virtually the only factor likely to support car sales in 2010 are higher orders from companies, which this year all but suspended car purchases while extending the life of their current fleets, an approach that cannot be maintained indefinitely.
Even despite the likely deterioration in its performance, the Polish auto market will still stand out positively from other countries in 2010. That is because the European market remains shaky. The scale of the government support programs which helped prop up sales this year will probably be significantly reduced next year.
Our response to the crisis centres around a multibrand strategy, which enables dynamic growth in sales and profits during boom times and substantial cost reductions in a downturn, thanks to synergy effects.
Adam Pietkiewicz, President of PGD Group (the largest car dealer group in Poland)
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[1] In the whole of 2008 sales of new passenger cars in Poland grew by more than 9%, and exceeded 320,000.
[2] From the end of July 2008 until the end of March 2009 the value of the zloty dropped by approximately 32% compared to the euro and by more than 42% compared to the US dollar.
[3] At the end of August 2009 the EUR/PLN exchange rate was less than 4.1, approximately 13% lower than at the end of March.
[4] Throughout 2008 more than 1.1m used cars were imported to Poland, the highest figure since the country’s EU accession.
[5] In 2008 production of cars in Poland was 990,982, i.e. 14% higher than in 2007.
[6] The data refers to large and medium enterprises with 50 or more employees.
