We expect that global car sales will rise this year despite a downbeat outlook for the global economy. This may sound like a contradiction but a combination of the more consistent production volumes, delayed demand from the accumulated order books and some more positive economic momentum in certain regions, such as China, should result in an improvement in passenger car sales on the order of 4% in 2023. Looking beyond the current year, we also expect growth to be in the 4% to 5% range in 2024.

As we have documented in our previous market updates over the past two years, the initial recovery from a sharp drop caused by the emergence of Covid-19, was slowed down and then interrupted by various logistical headwinds, most prominently but not solely due to the shortage of specific semiconductors. While we are off the lows seen in 2020, last year’s global passenger car sales volumes measured in new registrations have likely ended up some 10-15% below the pre-pandemic peak of 2018-2019. Currently, as the numbers for the last year are being finalised and released, we expect that the FY22 passenger car sales ended up at approximately 80.5mn vehicles, down 1.1% year-on-year, broadly in line with our expectations updated mid-way through last year.

In 2022, car sales trends were uneven across the top markets and across the year. In terms of the key geographies, China ended the year in positive territory, helped by government tax incentives, despite the continued strict Covid-19 policies. Conversely, the US market fared the worst year-on-year, with the sales number likely ending up in the sub-14mn territory, implying a decline of 7-8% over 2022. In Europe, Germany was an outperformer among the largest markets, achieving small growth of approximately 1% year-on-year in FY22, according to VDA, the German Association of Automotive Industry. German sales were buoyed towards the end of the year by the upcoming expiry or reduction of some of the electrified vehicle tax incentives. Other large European markets ended the year in negative territory to varying degrees. Elsewhere, India was a strong performer for the second year in a row with improved vehicle availability and robust demand while in Japan, new car sales dropped by 5.6% year-on-year in 2022, according to the Japan Automobile Dealers Association and the Japan Light Motor Vehicle and Motorcycle Association.

We currently expect modest single-digit growth of 3-5% across the three largest passenger car markets, including China, the US and Europe. We expect China’s demand to be supported by the removal of zero-Covid policies while sales in the US and Europe should reflect the accumulated delayed demand and order books, as production volumes improve with the semiconductor supply bottlenecks finally clearing up and delivery times gradually improving. Having said that, with 2023 already underway, we recognise that the shortages have not completely disappeared yet and are more impactful for some car manufacturers than others.

After several years of production lagging behind sales volumes, last year was potentially the first one where the picture was more balanced. We expect this trend to continue in 2023, with similar volumes and rates of growth across both sales and production, hopefully with some positive balance in favour of the latter in order to rebuild some inventories.

As before, we believe that auto parts manufacturers continue to be exposed to the same problems experienced by car manufacturers in 2023. However, insofar as production volumes grow, this should provide some protection against potential risks with certain material prices expected to be lower year-on-year and others mitigated via the contractual or, at times, voluntary pass-through mechanisms.

There’s little doubt now that the future of cars is electric. In early 2022, the global EV fleet (battery electric: BEV + plug-in hybrid electric: PHEV) had an estimated size of 16 million cars (just over 1% of the total vehicle fleet). In FY 2022 only, over 10 million new EVs were registered. This strong inflow of new EVs will continue in 2023. Countries and almost all major car brands have made pledges to phase out ICE vehicles in new sales, generally targeting 2030 to 2035 in Europe. For car makers, the transition - and its pace - is a tremendous strategic challenge including the restructuring of organisations as well as the overhaul of product portfolios and production locations. Toyota is the only large brand left focusing on multiple solutions, but it is also seeking to catch up.

Europe adopted the most ambitious regulatory push for BEVs. The largest European car market, Germany, reached a full electric share of 18% in 2022 followed by the UK (17%) and France (14%) ( second and third largest markets). When including PHEVs, Germany exceeded the milestone of a 30% electric share in new car registrations in 2022. Among the large European car markets, Italy surprisingly lags in electrification with a market penetration of only 4%. In contrast to other countries, the BEV share even slipped in 2022.

Due to supply constraints caused by underinvestment and the war in Ukraine, estimated battery prices have increased for the first time to just over $150 per kWh (BNEF). This is comparable to 2020 levels. Given persistently higher battery metal prices as well as looming shortages, the downward trend is unlikely to pick up this year. This means price parity with conventional cars will be delayed and fiscal support is still needed for mainstream drivers, even though more affordable models are being introduced. This collides with the reduction of government support in the earlier-mentioned countries. In Europe especially, higher charging costs also add to costs as a growing number of potential EV drivers do not have the opportunity to charge at home.

From a corporate angle in Europe, though, we can expect an even stronger push for EVs in 2023 as businesses need to report emissions and seek to speed up the decarbonisation of their car fleets. Some countries are even considering mandatory electric cars for corporate car leasing after 2025. Production will continue to have an influence on EV sales as well. Semiconductor supply has improved, but EVs require more chips. And battery supply is tightening, which also explains why car makers including GM, Ford and Tesla are engaging with mining companies.

PHEV shares have already passed the peak in countries like Norway, Sweden, and Denmark, where electrification is making significant progress. In these front-running countries, the EV market has reached the point where buyers are opting for fully electric cars. The government push (Norway even aims to phase out new ICE sales in 2025), the ongoing introduction of new models, consumer affordability, as well as the future residual value are all likely to be factors here.

Chinese EV brands like Aiways, MG (SAIC), NIO, Xpeng and especially BYD are ready to advance in other parts of the world. Chinese brands have the advantage of a developed local supply chain network infrastructure for EVs, and BYD is an original battery manufacturer. Their activities outside of China are still small, but EVs have opened the global market and Chinese brands are expected to acquire more market share in Europe, as Korean Kia and Hyundai have done in the past. In the US, it will be harder to compete as only domestically-manufactured and sourced EVs are eligible for tax credits, although smaller Chinese EVs are significantly cheaper. Traditional car makers – particularly Volkswagen and GM and Ford - are making progress in global EV sales as well. All in all, the EV market is becoming more mature and naturally, the market composition is becoming more diverse. This also seems to be one of the reasons for the lower prices of Tesla in Europe and the US to keep ramping up production and meet its production objectives.