Higher Taxes Mean The Swedish Car Market Crashed 35% In Q3

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Includes: BMWYY, DDAIF, DMLRY, F, FCAU, GELYF, GELYY, GM, HMC, HNDAF, HYMLF, HYMTF, MZDAF, MZDAY, NSANY, TM, TSLA, TTM, VLKAF
by: Anton Wahlman

Summary

The monumental disaster that is the Swedish car market continues with another disaster month reported for September: Down 40%.

That puts the Q3 as a whole at a 35% decline. Translated to U.S. market terms, a 35% decline in a 17 million market means a 6 million unit decline.

In other words, what Sweden saw in its Q3 car market is similar in magnitude to the U.S. car sales depression of 2008-2009.

Left unchecked, this radical high-tax anti-car policy will cripple the U.S. car industry in the coming years, culminating in 2022-2025.

After the tariff-trade concerns are presumably overcome in the next few months, this is the biggest issue threatening global auto industry profitability going forward.

It’s elementary, Dr Watson: Economics 101 dictates that if you increase the price, demand falls. The latest such lesson in Q3 2018 comes from the Swedish car market, which fell 35% from the previous year.

The reason? Massive new annual car registration taxes for most regular gasoline and diesel cars, implemented on new car purchases starting July 1, 2018. You pay these higher taxes for the first three years of ownership.

It’s as if the Swedish government wanted to punish new car ownership. And it did.

The immediate impact in July was a drop of 49%. At the time, I was told that it was a temporary phenomenon, and that sales would return. Just wait a month or two.

Well, what happened? In August, sales were down “only” 18%. OK, so far, a clear reduction in the decline. Perhaps give it just one more month, and we would be back to zero?

Nope.

As it turns out, we just got the September numbers. Sweden is good that way, in that we get the numbers as fast as anywhere - immediately after the month is over.

And those numbers were not good. The market was down 40%.

That puts the full third quarter at this horrible outcome:

Sweden

2017

2918

change

July

24722

12504

-49%

August

29915

24670

-18%

September

31672

19111

-40%

TOTAL

86309

56285

-35%

As you can see in the table above, for the quarter as a whole, the market was down 35%. Can you imagine that happening in the U.S.?

The U.S. light vehicle market is approximately 17 million units per year. A 35% decline would mean a 6 million fall to 11 million units. That’s the level we hit around 2008-2009 in the severe recession, in which General Motors (GM) went bankrupt and Chrysler had to be sold to Fiat, forming FCA (FCAU).

This is a variant of the kind of policy that is being implemented in California and the other so-called ZEV (zero emissions vehicle) states that follow California’s lead that policy. It’s using a different policy tool than Sweden does, but the objective and basic outcome will be the same.

This objective is:

  1. Subsidize electric and most plug-in hybrid cars.

  2. Make regular gasoline and diesel cars more expensive, to pay for it.

Of course, subsidies can be explicit via government checks, and it can be implicit by forcing automakers to subsidize the approved cars internally. In addition to that, you can adjust new cars taxes, annual registration taxes, and you can manipulate relative fuel prices with taxes and subsidies too.

The bottom line is that it’s important to understand that the market outcomes will, over time, be about the same between Sweden and the California-led dozen or so U.S. states that seek to make regular cars more expensive to own and drive. It ought to be the subject of a lot more public debate, because I don’t think most people are even remotely aware of these policies.

So what about the other side of the coin? How have electric car sales developed after the subsidies were raised 50% at the expense of regular gasoline and diesel car buyers?

Sweden

total

EVs

BEV %

July

12504

521

4%

August

24670

559

2%

September

19111

658

3%

TOTAL

56285

1738

3%

As you can see in the table above, so far essentially not at all. Of course, this is blamed on supply shortages, and there is likely some truth to that. We shall see in the coming months. However, so far there is no trace of the new tax scheme boosting BEV (battery electric vehicle) sales in Sweden. It’s been around 3% for this quarter.

But Sweden was not a big BEV country to begin with. People prefer plug-in hybrids (PHEVs) in Sweden. How have their sales gone after implementing the new policy?

Sweden

total

PVEVs

PHEV %

July

12504

1905

15%

August

24670

1977

8%

September

19111

1724

9%

TOTAL

56285

5606

10%

As you can see in the table above, especially adjusting for the total collapse in the car market in July when PHEVs basically held up flat, there has not been a lot of movement in the right direction even for plug-in hybrids. Sales as basically flat, at just under 2,000 units per month.

Among the BEVs, however, it should be noted that the best-seller each month of the quarter was the Renault (OTCPK:NSANY) Zoe. In the premium segment, the newcomer is the Jaguar i-Pace, which started deliveries in Sweden in just the last 10 or so days of the quarter. Twelve Jaguar i-Pace units were registered by month-end. Even though most units are allocated to The Netherlands, where there is a major tax incentive that's expiring on December 31, we should still see a major Jaguar i-Pace sales increase in October compared to September.

Tesla (TSLA) also is creeping up in the sales chart - from a tiny level to begin with. 215 Teslas sold in Sweden in September, which was a large increase from the most recent months.

On the other side of the equation we have diesel. It used to be well over 50% of sales only a few short years ago. Here is the recent diesel trend in Swedish car sales:

Sweden

cars sold

diesel

D %

2017 all

379393

186329

49%

2018 Jan

22980

9453

41%

2018 Feb

27211

11916

44%

2018 Mar

37206

15285

41%

2018 Apr

34215

13434

39%

2018 May

37687

14533

39%

2018 Jun

66244

28994

44%

2018 Jul

12504

2832

23%

2018 Aug

24670

7387

30%

2018 Sep

19111

5854

31%

As you can see in the table above, diesel’s market share has fallen from 49% in 2017 to around 30% in the last couple of months. With BEV and PHEV share adding to a total of 13%, that means that even if it started at zero in 2017 (it didn’t), not all lost diesel sales went to the BEV and PHEV categories. A large chunk went to regular gasoline cars.

Unless the U.S. federal government manages to reign in California’s separatist car industry policies, the U.S. car market will see a similar fate as Sweden, starting in the next couple of years and accelerating into a major decline from 2022 to 2025. You can time-stamp this!

The winners of this kind of policy will be the electric car makers, ranging from Tesla to a long list of - primarily Chinese-influenced or even based - BEV startups. Of course, they in turn have a hard time getting off the ground given that the large automakers can subsidize their electric cars, at least in the short term. In addition, the car industry has very low economics to begin with, so even if you make it big after you have obtained volume scale, there is not a pot of gold at the end of the rainbow anyway.

The losers, if (parts of) the U.S. continues on a path to imitate Sweden’s automotive industry policy objectives, will be all the other “regular” automakers: Ford (F), Volkswagen (OTCPK:VLKAF), BMW, Daimler, Geely, General Motors, FCA, Tata TTM), Hyundai, Mazda, Toyota (TM), Honda, Nissan and Subaru, to mention the most obvious ones.

The market is mostly focused on trade policy now. It looks like the new North American trade agreement has been decided, but deals with Europe and China remain. But let’s say those are resolved in the next few months. Then what?

Well, then this! Investors were - and still are - rightly concerned about the horrible negative impact that tariffs would have on car prices and therefore car sales. However, there's almost zero attention being put to the debilitating impact that higher taxes on cars would have, other than just the tariff kind.

That should change in the coming year. As the tariff-trade issues are resolved and therefore subside, these other car taxes will come into focus as the new threat to the automotive industry.

Disclosure: I am/we are short TSLA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: At the time of submitting this article for publication, the author was short TSLA. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.

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