The global economy remained robust overall in 2018, despite increasing international trade conflicts. Initial estimates indicate that global gross domestic product increased by 3.7% compared to the prior year (Oxford Economics; February 2019). However, toward the end of the year, economic momentum declined significantly across the board, with consequences including noticeably slower world trade.
In the euro region, economic growth weakened perceptibly; economic output fell significantly short of expectations, especially in the second half of the year. The economic slow-down was primarily attributable to weak foreign demand. Growth was also affected by a number of temporary factors, including disruptions in production as a result of the introduction of the new emissions testing methodology WLTP. The European Central Bank kept its benchmark interest rate at 0%, but terminated its bond-buying program in December. The German economy lost momentum over the course of the year, growing perceptibly more slowly overall than in the prior year. Along with the WLTP-related loss of production in the automotive sector, slower growth in exports also hampered economic expansion. The Brexit process held back economic growth in the United Kingdom, which once again fell short of growth in the euro region. The economic upturn in the U.S. continued, mainly driven by the country’s tax reform and other fiscal stimuli. The Fed raised its benchmark interest rate an additional four times in light of the buoyant economic trend. GDP growth in Japan did not maintain its 2017 level since a number of heavy rainstorms and natural disasters affected the country’s economic activity.
Following stronger-than-expected growth in the first quarter, economic momentum in China slowed increasingly over the course of the remainder of the year. However, the increase in GDP for the year still met the Chinese government’s growth target, mainly buoyed by a number of measures the government took to support the economy that counteracted the adverse consequences of the trade conflict with the U.S. In India, economic growth accelerated as a result of increased private consumption and investment. The Russian economy continued to recover overall, bolstered by both domestic demand and exports. In Brazil, on the other hand, economic growth remained restrained in 2018, as political uncertainty and a temporary trucker strike held back economic activity there. The economies of certain other emerging countries clearly deteriorated, especially those of Argentina and Turkey.
In this context, the situation of the Schaeffler Group’s regions during the year was as follows: Gross domestic product in the Europe region rose by 3.3%, largely driven by the 7.4% growth rate in India, which is also part of the Europe region. Economic output in the Americas region increased by 2.3%, while the Greater China region reported growth of 6.3%. Gross domestic product in the Asia/Pacific region rose by 3.3%.
Following significant increases in 2017, the global capital markets declined during the year, with the Dow Jones Industrial Average (DJIA), the Deutsche Aktienindex (DAX), and the Mid-Cap-Dax (MDAX), among others, dropping in value.
In the currency markets, the euro declined against the U.S. dollar over the course of the year. Having initially fallen against the Chinese Renminbi as well, it then rose again over time, closing higher at year-end than at the beginning of the year. Comparing annual averages to the prior year, the euro rose against all of the foreign currencies most significant to the Schaeffler Group.
See Notes to the Consolidated Financial Statements for more on foreign currency translation.
Trends in automobile production and vehicle population significantly affect the results of operations of the Schaeffler Group's Automotive OEM and Automotive Aftermarket business. The global trend in industrial production provides an indication of the development of the Industrial division’s business.
Preliminary estimates put global automobile production, measured as the number of passenger cars and light commercial vehicles produced, at just under 94.1 million, 1.1% less than in the prior year (IHS Markit, February2019). While automobile production grew noticeably in the second quarter, it declined in each of the remaining periods, especially so in the fourth quarter.
Automobile production in the Europe region was 0.5% below the prior year level, with growth in the first half of the year more than offset by a decrease in the second half of the year. The weak trend in this region was largely driven by the considerable contraction in Germany, which, in turn, was primarily attributable to production delays in the third quarter as a result of the introduction of the new emissions testing methodology WLTP. The United Kingdom, Turkey, and Italy – all countries with significant production in the region as well – reported declines as well. Production in India and Russia, on the other hand, grew significantly. Automobile production in the Americas region was 0.1% below the prior year level since growth in the second half of the year followed a contraction during the first half of the year. Brazil reported the region’s highest growth rate although that rate fell noticeably short of the prior year level. The U.S. and Mexico, on the other hand, experienced little growth, while production in Canada even declined considerably. Automobile production in the Greater China region fell 3.8% short of the level seen in the prior year. While automobile production grew noticeably in the second quarter – mainly due to the low prior level – it declined in each of the other quarters, especially in the second half of the year. The decline for the year is mostly due to two factors hampering domestic demand: deteriorating consumer sentiment given the trade conflict with the U.S. and stricter lending practices. Automobile production in the Asia/Pacific region rose by 1.0%, with the decline in the first three quarters more than offset by strong growth in the fourth quarter. Temporary impacts contributed to a lower growth in both Japan (production stoppages due to natural disasters) as well as South Korea (strikes). In Thailand, on the other hand, production increased considerably.
Vehicle population and average vehicle age
Based on preliminary estimates, the global vehicle population, measured as the number of passenger cars and light commercial vehicles up to 3.5 tons in weight, rose by 3.6% to just under 1.4 billion in 2018 (IHS Markit, February 2019), and the average vehicle age remained unchanged at 9.7 years.
In the Schaeffler Group’s Europe region, the vehicle population expanded by 3.0% to just under 547 million; the mean vehicle age rose slightly to 11.6 years. India once more experienced an above-average increase in vehicle population levels. The vehicle population in the Americas region increased by 1.5% to just over 426 million, with the average age unchanged at 10.2 years. In the U.S., the population growth rate amounted to 1.5% as well, above the prior year level. Growth in the Greater China region fell short of the prior year level but remained high. The vehicle population grew by 10.8% to just under 222 million, while the average age rose to 5.4 years. The vehicle population in the Asia/Pacific region was up 2.2% at just under 180 million, once more mainly driven by growth in Southeast Asia. In Japan, on the other hand, the population grew by less than 1.0% once again. The region's mean vehicle age increased slightly to 8.6 years.
Based on preliminary estimates, global industrial production, measured as gross value added based on constant prices and exchange rates, expanded by 3.4% in 2018 (Oxford Economics, December 2018). Except for Americas, all of the Schaeffler Group’s regions reported slower growth in the second half of the year.
The Europe region saw a 2.3% increase in industrial production, with India reporting a very encouraging trend. In contrast, the trend in the euro region fell short of expectations; increased momentum in 2017 was followed by noticeable declining activity in 2018. Reasons for the decline in industrial production in the euro region include subdued foreign demand, especially from Asia. Growth was also affected by a number of economic one-time impacts, particularly the production delays in the German automotive sector which also affected other industrial sectors via the supply chain. In the Americas region, industrial production rose by 2.9%. This growth was primarily driven by the trend in the U.S., which reported the highest growth rate in industrial production since 2006. This was mainly attributable to significant growth in production in the oil sector, which also had positive knock-on effects on the related supplier sectors. In addition, the newly introduced tax reform helped increase investments in the manufacturing sector across all industries. In both Canada and Brazil, industrial production grew less than in the prior year, while Mexico reported a slight recovery following its previous stagnation. In the Greater China region, industrial production once again expanded considerably, growing by 6.0%. Activity was stronger than expected in the first six months of the year, primarily as a result of massive government investment in infrastructure projects, which also benefited the related supplier sectors. However, the economy lost momentum in the second half of the year, especially in the fourth quarter. In the Asia/Pacific region, growth in industrial production amounted to 2.5%. While some countries in Southeast Asia reported higher growth rates for their industrial production than in the prior year, South Korea and especially Japan reported declines. The slower momentum in Japan, compared to the prior year, was mainly due to reduced demand for imports from China; adverse weather conditions also factored in holding back growth in industrial production.
The Schaeffler Group uses various materials, especially different types of steel, aluminum, copper, as well as plastics and lubricants. Commodity market price trends affect the Schaeffler Group’s cost to varying degrees and in some instances with some delay, depending on the terms of the relevant supplier contracts.
Comparing annual averages to the prior year shows rising prices for all of the Schaeffler Group's main input materials. At the same time, most prices declined over the course of the year – price reductions especially during the second half of the year resulted in the prices of some input materials closing lower at year-end than at the beginning of the year.
Steel is used to manufacture rolling bearings and automotive components. Depending on the source region, annual averages of prices for cold- and hot-rolled steel increased by between just under 1 to just over 34% compared to the prior year, with the highest price increase occurring in the U.S. as a result of the newly-introduced punitive tariffs on steel imports.
Aluminum is primarily used for pressure die castings, while copper is mainly required for use in electric motors and mechatronic components. Prices for aluminum and copper reached their highest level in several years during the initial months of the year, but dropped again during the remainder of the year. Annual price averages were above the prior year level throughout the year: The price of aluminum rose by just over 7%, copper by just under 6%.
The Schaeffler Group uses plastics, for instance to produce cages for rolling bearings, and lubricants serve to reduce friction in components and as preservatives. Plastics and lubricants are often made based on crude oil. The price of Brent crude oil rose to more than USD 86 in October 2018, its highest level in four years, but dropped again considerably by year-end, partly because a number of oil-producing countries significantly increased production. The annual price average was more than 30% higher than the prior year level. Based on the ICIS Global Petrochemical Index (IPEX), annual price averages of processed petrochemical products, including the plastics used by the Schaeffler Group, rose by over 6% compared to the prior year level.