The European Auto Market under the Impact of the Financial Crisis: Lessons to be Learned

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1 The European Auto Market under the Impact of the Financial Crisis: Lessons to be Learned GHEORGHE CRUCERU Economic Science Faculty Transylvania University Braşov Street Fratii Golesti, bl T8A, sc ap 9, Mioveni, County Arges ROMANIA DAN MICUDA Finance and accounting Department Constantin Brancoveanu University Str. Libertatii, Bl.11, Sc. C, Ap.11, Pitesti, Arges ROMANIA Abstract: The automotive markets have an important status in the global economy; they present and entail significant human and financial resources and technology. Decline of the industry in various geographic areas must be taken under vigorous action and with lasting effect. The European car market is facing serious problems and therefore understanding them and the mechanisms that contribute to the consumer's behavior of European car buyers, could help to remodel an important industry that covers highly qualified individuals, where highly technologies from different fields have their leading role, where research and innovation is something normal that contributes eventually to the progress of other industrial domains. Identifying and analyzing the factors affecting sales it's vital and important to adopt effective measures. Some of the measures proposed by this study to increase sales can be applied by companies but others must be taken at government level by applying a policy to support the producers at a European level which can ensure long term sustainability of the industry. Key-Words: Economic Crisis, Automotive Industry, Consumer Behavior, Market Share, Trends 1 Introduction The world's economy is no longer just a sum of national economies; the interconnections are more intense and complex. It became a sole body reuniting national economies. As a consequence of this fact, an event occurred in a certain part of the world will impact sooner or later to the international community [2]. An example is the financial crisis happened in the U.S with serious effects felt worldwide, and a progressive influence in all economies including those from EU. As a result the consumer's behavior both individual and organizational changed. Consumers have become more careful in purchasing of goods, first because of the uncertainty of future income levels and second the decrease predictability of economic development. Following the decrease in consumption a resulting reduction of productive activity for many companies took place [3]. Various industries have been affected; particularly the automotive industry took a powerful blow. Automotive parties, directly and indirectly provides employment for more than 50 million people and has a major contribution to modern society, economic welfare, having a major impact on many other sectors. Great difficulties have been dealt by giants like American Ford, General Motors. In Europe sales of cars started to decrease causing concern. EU car industry employed nearly 2.3 million people, indirectly involves other 10 million people in various industries interconnected and impact widely on the economy as a whole, because the chain effect: from the provision of materials, tools, equipments and components to sales activities, repair and maintenance and other after sales services, such as finance and insurance, and transportation related business overall. It is estimated that one workplace in the auto industry generates 5 other jobs in related industries [8]. Automotive industry is also a driver of innovation and the largest private investor in research and development fields in Europe. Many technologies and inventions eventually have found use in other sectors. ISSN: ISBN:

2 2 Problem Formulation The effects of financial crisis were felt in most automotive markets in the world. Worldwide production of automobiles decreased overall in 2008 compared to previous year (Table 1) even though in some regions there were increases. Table 1 Cars production by regions (units) Regions World Europe America Asia-Oceania Africa Source of data: Profound decreases were registered to geographic areas in America (-1%) and higher in Europe (-5%). In 2009 there were greater reductions. According to the data, production in Asia-Oceania has increased in 2008 compared to previous year with over 400 thousand units (1.8%) much lesser compared with 2006 when the total growth was over 9%. In Table 2 are given total volumes produced by the car companies. Increased production is present to all these companies with some exceptions. Cars production by manufactures (units) Table 2 Group Toyota Honda Suzuki Nissan Mazda Hyundai NA Big car manufacturers concentrated in three main geographical regions (Asia-Oceania, America and Europe) registered permanent increase production during periods of economic calm. Evolution has changed after 2007 when some companies began to face difficulties. Production dynamics and automotive Table 3 (previous year =100) Group Toyota 10,4% 6,0% 7,7% Honda 6,8% 9,0% 0,3% Suzuki 16,3% 14,0% 1,0% Nissan -6,9% 5,5% 5,2% Mazda 7,1% -0,3% 6,5% Hyundai NA 14,4% 6,3% Kia NA 8,4% 1,9% General Motors 2,2% 8,3% -3,9% Ford 12,6% -9,9% -6,1% Daimler -35,1% 4,7% 3,4% Renault -2,6% 6,5% -10,0% PSA -0,7% 2,1% -6,1% Volkswagen 9,0% 9,8% 2,4% Fiat 14,0% 13,4% -7,1% B.M.W 3,3% 12,8% -6,6% Source of data: Evolution dynamics of automobile sales in the world largest producers shows overall positive trend of Asian firms, and declining, with some exceptions of firms from Americans and Europe. In the EU there are 237 factories that produce and assemble vehicles and vehicle parts. There have been periods of sales decrease that have bring into question the continuing work of many automotive companies. Fig.1 Kia NA General Motors Ford Daimler Renault PSA Volkswagen Fiat B.M.W Source: Source: ISSN: ISBN:

3 In the EU, there are automotive manufacturing plants in 17 countries [6]. 2.1 Seasonal sales Sales of cars have a high seasonality which involves scheduling production volumes adjusted to this factor. Analyzing data on periods, at EU level over the periods of winter have sold the fewest cars (22.1%). The most favorable sales periods are in spring (29.0%). The month with the lowest sales volumes was August (5.7% versus an average 8.3%); the best sales are recorded in June (9.8%) and March (11.2%). For an accurate analysis of the concentration we used the coefficient Gini- Struk. and index Herfindahl-Hirschman: (1) (2) From Information Processing values were obtained indicating a low concentration of sales as evidenced by the data presented in Table 4 Table 4 GS= Gini-Struck, coefficient % n H = Index Herfindahl- Hirschman n i= 1 g 2 i n 1 n 2 g i i= 1 1 Indicators of concentration ,180 5,026 5,887 5,125 0,0858 0,0856 0,0865 0,0857 The simplicity of the calculation is completed by the field of definition of the coefficient with the minimum equal to "zero" as an expression of equipartition the maximum concentration or diversification void and the maximum, equal to "1", the statement of the maximum concentration or diversification void. Evolution descent while the value of the Gini-Struck coefficient reveals a slight trend towards diversification (smoothing). Same thing can be said after the interpretation of the Herfindahl-Hirschman index. 2.2 Specificity European markets car. The automotive market is trading models with different features and performance, which means the most diverse prices from thousands of euro on luxury models reaching hundreds of thousands euros or just over one million, in rare cases. On a geographical area which exceeded 500 million people currently comprising a multitude of nations with different buying habits and economic development the uneven supply and demand expected to show differences. In the area of EU free movement of goods and people has implications in purchasing behavior. It can bring the example behavior of individual customers who prefer buying patterns run in other states. An example is the car market in Romania. This particularity derives from the fact that, in addition to new cars that are sold in this market, the second hand ones imported from other EU states have an important market share surpassing the new cars in the last years as shown in fig 2. Fig. 2 Evolution of sales of imported new cars and run units New Source of data: First time licensed Increasing the number of imported cars is quite problematic, reducing demand for new car and on the other introducing into service vehicles with high pollution level and lower technical characteristics. The fact that cars can be purchased by anyone in any EU country because of affordable prices and brands presents an attractive possibility. This phenomenon occurred at mass levels with the accession of Romania to the EU 2.3 Issues that affect sales Purchase decision is a result of behavior. Consumer behavior is determined by social factors like cultural, psychological, personal, economic and demographic influences [1]. People with high income have a strong preference for more expensive models. People with children prefer large cars like van type, in order to satisfy the whole family. There are people who consider that mini models are best suited to their status. Also lower-income buyers are shifting to low cost and to the models with low fuel consumption. One aspect that becomes more important lately is the cost of maintenance, the trend towards models that require fewer maintenance cost is increasing. In European countries we observe factors that changed radically the economy leading to major changes in the ISSN: ISBN:

4 purchasing decision. Some potential buyers have renounced their buying intention and others chosen similar but cheaper products, more affordable, fitted to their uncertain income. The effects of financial crisis have been felt differently across the EU in regard to new car registrations. Table 5 presents the progress of annual enrollment in the period using data from Eurostat and European Automobile Manufacturers' Association (ACEA). Car registrations from 10,000 Table 5 Country/year Austria Belgium Bulgaria Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Netherlands Poland Portugal Romania Slovak Republic Slovenia Spain Sweden United Kingdom Average UE Note: Malta and Cyprus are not available The data presented reveal generally unfavorable trends, sometimes collapses in the Baltic States (nearly 5 times in Latvia) but also in other former communist countries and others. Yet other countries, with strong economies were affected, although they have taken steps to protect car industry. There are countries showing a positive trend through the adoption of measures to boost the car sales (Germany, France and Slovakia). No doubt the number of registered vehicles has declined, but some models sales have substantially increased. The first model in terms of sales in Europe is the Volkswagen Golf, followed by the Ford Fiesta and Peugeot 207 at number three. All three models are in the trust-marks category having an affordable price. Preferences of buyers are moving more than in previous years to affordable prices; this is supported by programs to stimulate fleet renewal through a premium to dispose the old cars with use periods over 9 to 12 years. The effect was that cheap cars have become even more accessible to buyers, using the effect of price advantage. The most important winner of this phenomenon was Dacia s van model Logan MCV. Top 10 best selling cars in Europe Table 6 Place Marca Dynamics 1 Volkswagen Golf ,9% 2 Ford Fiesta ,0% 3 Peugeot ,7% 4 Opel Corsa ,5% 5 Fiat Punto ,9% 6 Renault Clio ,8% 7 Ford Focus ,1% 8 Fiat Panda ,8% 9 Volkswagen Polo ,5% 10 Opel Astra ,1% Source of data: The attractiveness of low cost cars during the economic crisis periods is obvious, determining clients to refocus their buying intentions. The numbers of cars sold in European markets are different because of the size of each individual market (population size). To determine how related are the two values (number of cars sold and population size) a correlation coefficient linking population to sales data s processed from Eurostat and the European Automobile Manufacturers Association (ACEA) was used: Table 7 Pearson Correlation Population New car registration Pearson Correlation 1 0,950(**) ** Correlation is significant at the 0.01 level (2tailed). The Pearson coefficient value is very close to one (maximum) indicating a strong connection between population and number of cars purchased. The fact that employment stability suffered from the economic crisis caused buyers to be more restrained in car purchase decisions. Table 8 shows the rate of employment detailed in the European Union by gender. ISSN: ISBN:

5 Employment rate by gender (%) Table 8 Year Total 63,5 64,5 65,4 65,9 Males 70,8 71,6 72,5 72,8 Females 56,3 57,3 58,3 59,1 Source of data: *Note: for this rate takes into account the population aged between 15 and 64 years old Employment rate is a factor that could influence the buying decision. To determine to what extent it affects sales volume a Person Association Coefficient was calculated for , the period for which data are available regarding the employment rates. The results presented in Table 9 reveals a weak link between employment rate and level of sales. Table 9 Pearson Correlation Year Pearson 0, , ,089966* Correlation *Correlation is significant at the 0.01 level (2tailed). An important factor which largely determines the behavior of car buyers is their disposable income. Since financial resources are those which provide the possibility of acquiring an asset, it would be expected that sales of cars are closely influenced by income per individual. A study in 2008 by GfK Geomarketing in 41 European countries [11] reveals that the average income per individual is nearly 12,500. Income per individual has different levels not only at state level but even at a regional level in the same state. Fig. 3 Purchasing Power Europe 2008/2009 Source: The differences are in the range of per individual. Using Pearson's Coefficient for Association for 2008 data s, according to the results presented in Table 10 the connection is relatively low. Table 10 Pearson correlation Year 2008 Pearson Correlation 0, * * Correlation is significant at the 0.01 level (2tailed). The explanation for this result is given by the fact that with increasing income, preferences of buyers are turning to more expensive models with higher performances. So high-income buyers are more demanding in terms of quality, comfort and performance, which aren t sensible to sales increase. For illustration, in Table 11 is presented the ranking of countries in terms of income per individual and the number of cars bought at 10,000 inhabitants. Table 11 Country Income per capita 2008 ( ) Rank income Cars register per 10,000 inhabitants Rank cars Luxembourg Ireland Denmark Austria France Germany United Kingdom Belgium Sweden Finland Italy Netherlands Spain Greece Portugal Slovenia Czech Republic Estonia Latvia Sources of data: An interesting example is Slovenia, which ranks 5th in the number of automobile acquired at 10,000 ISSN: ISBN:

6 inhabitants; although it has a conspicuous place in terms of income per individual (it occupies the 16th position). Global economic conditions raises many factors difficult to model or difficult to formalize mathematically as: saturation needs, remoteness of the source application physiologic need, potential interchangeability of goods and services, property belonging to a group, a group or division membership or influence, direct substitution or apparent substitution, the share of income allocated to consumption, the quality of goods or services, real income or the ratio between nominal income and price dynamics, providing of minimal real needs, the information asymmetry, the rule of honesty to the market during the analysis, etc. [4]. Fact is that consumer behavior is determined by subjective factors, economic factors having a lower influence in periods of economic calm. During economic crisis periods, the purchase decision becomes more rational, taking in consideration the economic developments. 3. Problem Solution To boost car sales EU states must take a series of legislative and economic measures. At the same time the increase in car sales need to take into consideration their influence on the environment. The continuous growth of car fleet has caused an increase in pollution in most EU states. 1. A remedy for pollution is to replace fossil fuel cars engines with electric ones. Stimulation of production of electrical cars and providing incentives for car buyers may lead to a significant reduction in pollution. 2. Other measures to help increase car sales refers to measures of fleet renewal. This can be achieved by: -implementation of schemes which allocates premium to dispose of each motor vehicle that is older than 8-10 years; - imposing larger taxes for vehicles emitting pollutants above certain limits, proportional the degree of pollution. 3. Adoption of a system to stimulate purchase of cars by encouraging people to buy a car for the first time. This can either be tax deductions, a premium in cash, or a combination of both. 4. Discounts granted to individual customers who are loyal to the company brand at least the second purchase. 5. Provision of loans with subsidized interest. 6. Restrictive measures to prevent illegal export from an EU state to another of cars proposed for dumping in fleet renewal programs. 7. Adopting laws to reduce the massive import of second-hand cars that sometimes affect drastically the sales of new ones. 4 Conclusions With the growing rates of change of the economic environment, the industry is experimenting faster and larger factor influences, having a complexity which is very difficult to assess. Moreover the current financial crisis is considered the result of such developments. A fairly large number of European customers have changes their buying patterns and turned versus low cost cars. Current and potential customers behavior is influenced by factors that until recently were not significant (the belief that having a car of a certain brand confers a certain social status, travel to work by car, etc..) which must be taken into account. Cars producing companies have to switch production to most versatile models with superior technical performance, with low fuel consumption and fewer noxious emissions. It is also imperative to penetrate other non-european markets in order to ensure keeping or even increasing production volumes (China and India are markets with huge potential). Also a real interest is for the African market although the scarcity of the financial resources can have a negative impact on the sales prospects in this region. References: [1] Brătucu G, Brătucu T, System analysis of the influences individual consumer behavior, Review Management and Marketing, no. 2, 2007, Ed Economic. [2] Dumitrescu S, Puiu O, Marin G, Economie mondială, Publisher Independenta Economică, Pitesti, [3] Irimia M, Luca F, The causes and effects of current economic, Journal of the Romanian Academy, Progress in Decision Theory economice in terms of risk and uncertainty, Publisher Tehnopress, Iasi, [4] Săvoiu GH, Grigorescu R, Asandei M, Manole S Cecetări şi modelări de marketing, University Publishing House, Bucharest, [5] [6] [7] [8] [9] [10] [11] / [12] ISSN: ISBN: