Positive Sales Outlook Tempered With Caution
BMI View : We are positive on the near-term outlook for South Korean auto sales as a pick-up in economic activity, and pent-up demand for passenger cars, act as supportive demand factors. However, we remain cautious on the latter part of 2014 due to our expectation of a slowdown in Chinese economic growth, which will weigh on the Korean economy. We see a more positive export story for 2014 as the rise in global vehicle demand, as well as further tariff cuts under the Korea-EU FTA, will see stronger external demand for Korean cars.
According to the Korea Automobile Manufacturers Association (KAMA), vehicle sales in 2013 contracted 1.9%, to 1,383,358 units. This was in line with our bearish outlook on the market, given that we too were forecasting sales to contract 1.2%, to 1.39mn units.
However, sales in January 2014 are enjoying an uptick, rising 2.1% year-on-year (y-o-y), to 107,510 units. As the accompanying chart shows, this was the first positive growth in four months. South Korean automakers have launched new models in the domestic market over the past few months, which helped to bolster January sales. A case in point is Hyundai Motor, the country's largest carmaker. Hyundai's domestic sales grew 2.6% y-o-y in January on the back of strong demand for its new Genesis premium sedan as well as its new Azera hybrid car. In fact, the Azera was the best-seller in Hyundai's line-up, selling some 8,134 units in January.
|Cautious On Latter Part Of 2014|
|South Korea - Domestic Auto Sales, Units (LHS); % chg y-o-y (RHS)|
After contracting for the past two years, we forecast auto sales to grow 1.9% in 2014, to 1.41mn units. We expect the positive start to 2014 to continue in the near term as economic activity begins to show incipient signs of a pick-up.
We forecast domestic passenger car sales to grow 2.0% in 2014, to 1.16mn units. The fall in auto sales in 2013 was due to a contraction in the passenger car segment and we expect some of this pent-up demand to come back into the market in 2014. Furthermore, an additional cut to the individual consumption tax for cars over 2000cc will help to boost demand for cars.
On the other hand, domestic commercial vehicle (CV) sales grew 4.8% in 2013, to 246,331 units, and we expect sales in this segment to grow 1.3% in 2014, to 250,000 units.
Despite our more positive near-term demand outlook, we remain cautious on the latter part of the year. Our expectation of a slowdown in Chinese economic growth will be a drag on the South Korean economy, resulting in corporates adopting a more defensive stance, which will then take its toll on CV demand ( see 'Maintaining Our Below-Consensus 2014 Growth Forecasts', January 23). Also, the high indebtedness of Korean households will crimp private consumption and put a lid on passenger car demand for 2014. As a result, our vehicle sales growth forecast for the year is just for a mild recovery in the market.
Stronger Exports Will Support Production
Auto production declined slightly in 2013, to 4,521,429 units, a decrease of 1.2%. This came in slightly above our forecast for 4.43mn units, due to the resilience in CV production, which enjoyed a gain of 2.1%, to 398,825 units. However, vehicle production suffered a sharp collapse in January, tumbling 10.3% y-o-y, to 368,243 units. We are not reading too much into January's print as this year's Lunar New Year holiday affected the total number of production days.
We forecast auto production to grow 1.9% in 2014, to 4.6mn units. Besides the small growth in domestic sales, the major factor supporting the growth in output is a more positive export story for 2014. In our opinion, the rise in vehicle demand globally, as well as further tariff cuts under the Korea-EU FTA, will see stronger external demand for Korean cars.