Auto parts manufacturers depend heavily on car manufacturing production and sales volumes, as only a small portion of auto part volumes are sold into the aftermarket segment. Therefore, a recovery in new vehicle production and sales is the key driver for the performance of auto parts in 2021-22.

Auto parts manufacturers depend heavily on car manufacturing production and sales volumes, as only a small portion of auto part volumes are sold into the aftermarket segment. Therefore, a recovery in new vehicle production and sales is the key driver for the performance of auto parts in 2021-22.

We believe that the auto industry is in the midst of one of the most dramatic transformations in decades. Specifically, current industry themes include electrification, the shift towards more intelligent and autonomous driving, greater digitalisation, connectivity and infotainment requirements, among other sub-trends. These themes pose challenges for and shape the strategies of the leading car and auto parts manufacturers at the present moment. In fact, we believe that we are approaching a much greater fusion between tech companies and the auto sector.

After a dramatic reduction in passenger car sales and production volumes last year, based on our base-case global economic recovery scenario across key regions, we believe that global light vehicle sales will rebound in 2021, potentially by 7% to 9%, depending on various industry forecasts. Specifically, Moody’s expects that under its base-case economic scenario (including 5.3% real GDP growth in the G20 economies), global light vehicle unit sales will grow by 7.0% YoY in 2021 to 83.0m. Valeo, in its recent outlook for 2021, indicated that its base case scenario for the industry assumes 10% growth in global automotive production this year. Faurecia expects a recovery in worldwide automotive production by more than 15% (to 82.3m units) over the two-year period of 2020-22. Schaeffler, more conservatively, is basing its current guidance on global light vehicle production growth of 7.2% in 2021.

While sales are expected to rebound from the lows in 2021 and continue to grow in 2022, Moody’s doesn’t expect sales to return to the pre-Covid peak of approximately 95m units seen in 2017-18 until much later, potentially around 2025. Faurecia forecasts returns to the above-90m production volume level by 2025. Overall, Faurecia projects an automotive production cumulative annual growth rate (CAGR) of 5.2% over 2020-25.

While electrification has been an ongoing theme for the auto sector for some time already, we are witnessing a notable acceleration in the pace of sales of electrified vehicles and in the auto manufacturer’s own production targets. Recently, Jaguar Land Rover announced plans to “reimagine” Jaguar as an all-electric brand by 2025 and Ford to move its passenger-vehicle range in Europe to an all-electric basis by 2030 (from effectively zero last year). Schaeffler during its recent presentation said it expected the pace of electrification to increase sharply, with the battery and fuel cell-powered vehicles expected to reach 50% of the fleet by 2035, with the share of the hybrid electric vehicles (HEV) and internal combustion engines (ICE) to decline to 35% and 15%, respectively.

At the national level, individual European countries have their own targets of increasing the electric vehicle (EV) share in new car sales, reaching 100% within 5 to 15 years. Outside of Europe, China, the largest passenger vehicle market, aims for a 25% share for EVs in new passenger car sales by 2025.

Other supportive factors for the further proliferation of EVs include increasingly competitive price points and various government incentives for purchasing such new vehicles. According to the ACEA, HEVs represented 11.9% of total passenger car sales in the EU in FY20 (up from 5.7% in FY19) and electrically chargeable vehicles (ECV) represented 10.5% of new car registrations in the region (up from 3.0% the year before). BNEF predicts that global EV sales may jump to as high as 50% of new car sales in 2021. However, we also note that infrastructure bottlenecks, such as the availability of charging points, may need to be addressed in order to keep pace with the proliferation of EVs.