The Future of World Car Fleet: the Road Ahead (A BBVA Research Model for Long-Term Automobile Projections)

The Future of World Car Fleet: The Road Ahead (A BBVA Research model for long-term automobile projections)

November, 2012

Cross-Country Emerging Markets Unit A BBVA Research model for long-term automobile projections

Key Messages

• Developing Models for tracking long term changes (“pionering model”) Motivation: Analysis of long • Analisys of long term trends which are shaping the new economic order . run determinants • Wealth not population is driving the economic transformation of car industry • Population+Wealth (“Middle Classes”) will be key for business opportunities

• Population, Wealth, Middle Classes and Urbanization will bias the future of Car Fleet Results: to Emerging Markets Car industry will • East Asia will experience the highest increase followed by Latam experience an • Development Economies will experience moderate increases except in the US important economy transformation • BBVA Markets will improve depending on where we focus

Annex • Motivation and alternative models The BBVA • The BBVA CAR Model: Especification, estimation and comparative results Research Car Model • Comparative analysis

2 A BBVA Research model for long-term automobile projections

Contents

Analysis of long run determinants of Car Industry

Global results

Annex: The BBVA Research CAR Model

3 A BBVA Research model for long-term automobile projections

Car Fleet Determinants

BBVA Model: Car Fleet Determinants Source: BBVA Research World Car Fleet Determinants Population Car Ownership Long Run Saturation levels Cyclical Determinants Real GDP GDP Growth per Capita Acceleration

Population Economic Recessions Density (dummy) Urbanization Rates Infrastructure (Roads Quality) Financial Depth

(Private Credit/ GDP) 4 A BBVA Research model for long-term automobile projections

Different Population Dynamics

Population pyramids for selected economies (2010) Source: BBVA Research and UN G7 Countries Eagles Ageing Advanced Eagles Populating Premiun

100+ 100+ Female Male Female Male Female Male 90-94 90-94

80-84 80-84

70-74 70-74

60-64 60-64

50-54 50-54

40-44 40-44

30-34 30-34

20-24 20-24

10-14 10-14

0-4 0-4 4 3 2 1 0 1 2 3 4 5 4 3 2 1 0 1 2 3 4 5 5 4 3 2 1 0 1 2 3 4 5

55 A BBVA Research model for long-term automobile projections Labor force will gradually decline in EM but still maintains an important premium with Developed

Labor Force Population Population Growth Labor Force Population Population Growth (% yoy) (% yoy) Source: BBVA Research and UN Source: BBVA Research and UN

4 Mid Long 4 Mid Long term term term term 3 3

2 2

1 1

0 0 China Korea Russia Turkey -1 India Indonesia -1 Brazil Mexico G7 G7 -2 -2 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

66 A BBVA Research model for long-term automobile projections ..But Household size will also decline limiting the population decline impact in some goods

Household Size and GDP Per cápita World Household Size (in members ans log of gdp per capita) (members per housold unit) Source: BBVA Research and UN Source: BBVA Research and UN 8 7.0

7 6.5

6.0 6 5.5

5 5.0 4.5 4 4.0 Household size Household 3.5 3 3.0

2 2.5

2.0 Finland Germany Netherlands KingdomUnited Belgium France Canada Hungary Lithuania Bulgaria Russia Spain Ireland Poland Slovenia Uruguay Israel Herzegovina and Bosnia Brazil Lanka Sri Macedonia FYR Rica Costa Panama Botswana Malawi Mexico Belize Paraguay Vietnam Bangladesh Iran Tanzania Chad Tunisia Republic African Central India Sudan Jordan Yemen 1 0 1 2 3 4 ln of real PPP-adjusted GDP

7 A BBVA Research model for long-term automobile projections The Wealth Effects: GDP per capita growth differences will remain important…

GDP per capita Growth Rate (1980-2020) (% yoy, in nominal PPP-adjusted USD) Source: BBVA Research

Advanced economies Economies Advanced 1990-00 Major advanced economies (G7) 2000-10 2010-20 European Union

Other advanced economies 0 1 2 3 4 5 6 7 8 910 Central and eastern Europe

Commonwealth of Independent States Economies Emerging

Newly industrialized Asian economies

Developing Asia

Latin America and the Caribbean

Middle East and North Africa 0 1 2 3 4 5 6 7 8 910 8 A BBVA Research model for long-term automobile projections

…With a Fast track in Middle Classes creation

Estimation of income distribution by GDP per capita in emerging economies (1980-2020) (millions of people and % of total population; original data in real PPP-adjusted USD) Source: BBVA Research

6000 100% Slow Motion Distribution changes Fast Track Slow Motion Distribution changes Fast Track 90% 5000 80%

4000 70% 60% 3000 50% 40% 2000 30%

1000 20% 10% 0 0% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Affluent High Middle Class Medium Middle Class Affluent High Middle Class Medium Middle Class Low Middle Class Low Income Poor Low Middle Class Low Income Poor 9 Affluent (>40000 USD) High Middle Income (25000 to 40000 USD) Medium Middle Income (15000 to 25000 USD) Low Middle Income (5000 USD to 15000 USD) 9 Low Income (1000 USD to 5000 USD) Poor( <1000 USD A BBVA Research model for long-term automobile projections

… Specially in some areas…

Estimation of income distribution by GDP per capita in emerging economies regions (1980-2020) (millions of people and % of total population; original data in real PPP-adjusted USD) Source: BBVA Research

2500 2000 East Asia South Asia 2000 1600

1500 1200

1000 800

500 400

0 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

350 600 Emerging Europe Latam 300 500

250 400 200 300 150 200 100

50 100

10 Affluent (>40000 USD) High Middle Income (25000 to 40000 USD) Medium Middle Income (15000 to 25000 USD) Low Middle Income (5000 USD to 15000 USD) 10 Low Income (1000 USD to 5000 USD) Poor( <1000 USD A BBVA Research model for long-term automobile projections … and in some segments related to different consumption patterns

Low Medium Income Medium Middle Income High Middle Income Affluent (5000 to 15000 USD) (15000 to 25000 USD) (25000 to 40000 US D) 300 (>40000 USD) 2000 800 250 Africa Africa Africa Africa Em.Europe 1800 Em.Europe Em.Europe Em.Europe LatAm LatAm 250 LatAm 200 LatAm 1600 East Asia East Asia East Asia 600 East Asia South Asia South Asia South Asia 1400 200 South Asia

1200 150

1000 400 150

800 100 Million People 100 600 200 400 50 50 200

0 0 1980 1990 2000 2010 2020 0

1980 1990 2000 2010 2020 0 1980 1990 2000 2010 2020 1980 1990 2000 2010 2020 Consumers Cycle Basic Goods Motorcycles Tourism cars Luxury Cars Food White Goods White Goods Tourism… 11 Housing Services A BBVA Research model for long-term automobile projections Middle classes will trigger demand for semi necessities and discretionary spending…

Consumption Patterns in China (2000-2020) (% of total urban household spending) Source: Mckinsey

12 A BBVA Research model for long-term automobile projections …Urbanization will increase very fast in some of the regions…

World Urbanization Rates(1980-2020) World Urbanization Rates(1980-2020) (Urban population as a % of total) (Annual Change in Urbanization Rates) Source: United Nations Source: United Nations 90 0.8 0.7 80 0.6 70 0.5 60 0.4 50 0.3 40 0.2

30 0.1

20 West Europe N.América 0 East Europe Asia -0.1 10 Latam Africa 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 0 West Europe N.América East Europe Asia Latam Africa

13 A BBVA Research model for long-term automobile projections Regional Aggregates mask some rapid changes in some countries (Andeans & South East Asia)

World Urbanization Rates(2011) World Urbanization Rates(2030) (Urban population as a % of total) (Urban population as a % of total) Source: United Nations Source: United Nations

14 A BBVA Research model for long-term automobile projections …and we will observe an intensive Urban agglomeration process specially in Asia

Percentage of urban population and agglomerations by size class Source: UN Urbanization Prospects, 2011 revision

2011 2025

15 A BBVA Research model for long-term automobile projections … But Emerging Markets still lags in transport infrastructure …

Road Density World Map Paved Road World Map (% of total roads, from 0=lighter to 100= Darker) (Sinthetic indicator, from -1=lighter to 1= Darker) Source:World Bank Development Indicators Source:World Bankand BBVA Research

16 A BBVA Research model for long-term automobile projections .. and this leads to important opportunities of investment in this segment…

Public Private Initiatives Infrastructure Transport Projects (US Billions) Source:World Bank

35 Middle East & Africa

30 Asia Latam 25 Emerging Europe

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

17 A BBVA Research model for long-term automobile projections

Contents

Analysis of long run determinants of Car Industry

Global results

Annex: The BBVA Research CAR Model

18 A BBVA Research model for long-term automobile projections A brief reminder on the composition of aggregates

EAGLEs Nest G7 Other

Russia Poland France Spain Germany Europe Turkey Ukraine Italy UK

Brazil Argentina Canada Mexico Chile USA America Colombia Peru Bangladesh China Japan Australia Malaysia India Asia Pakistan Indonesia Pacific Philippines Korea Thailand Taiwan Vietnam Middle E. Egypt Iran & Africa Nigeria S.Arabia S.Africa 19 A BBVA Research model for long-term automobile projections Increase and distribution of world car fleet by decades: Eagles (China) will lead the next decade

Distribution of world car fleet (1980-2020) Increase of world car fleet by decades (mn) (% of total world car fleet) (Million cars) Source: BBVA Research Source: BBVA Research 100% 350 China 90% EAGLEs exChina 300 80% Nest US 70% 250 G6 60% Others 200 50%

40% 150

30% 100 20%

10% 50

0% 1980 1990 2000 2010 2020 0 China EAGLEs exChina Nest US G6 Others 1980-1990 1990-2000 2000-2010 2010-2020

20 A BBVA Research model for long-term automobile projections Expected increase in 2010-2020 and levels of car fleet by 2020

Increase of world car fleet ex China (2020 vs 2010) Car fleet of largest markets in 2020 (mn) (Million cars) (Million cars) Source: BBVA Research Source: BBVA Research China 30 240 EAGLEs exChina China 220 Nest EAGLEs exChina 25 200 US Nest G6 180 20 US Others 160 G6 140 15 Others 120 100 10 80 60 5 40

0 20 0 US UK Iran Peru India US UK Brazil Egypt Korea Russia Iran France Italy Poland Turkey Nigeria Mexico Argenti… Canada India S.Africa Ukraine Indones… Spain Brazil China S.Arabia Vietnam Japan Korea Thailand Malaysia Australia Russia France Poland Colombia Turkey Mexico Canada S.Africa Ukraine S.Arabia Thailand Malaysia Australia Germany Indonesia Argentina

21 A BBVA Research model for long-term automobile projections Determinants of the expected increase in the car fleet. Wealth not population as the main driver

Determinants of Car Fleet Expansion (1980-2020) Determinants of Car Fleet Expansion (1980-2020) (million Cars) (million Cars) Source: BBVA Research Source: BBVA Research 180 30 160 Population Car Ownership 25 Population 140 Car Ownership 120 20 100 15 80

60 10 40 5 20

0 0 US G6 US UK Nest Iran Peru China India Brazil Others Russia France Poland Turkey Mexico Nigeria Canada S.Africa Ukraine S.Arabia Vietnam Thailand Malaysia Australia Colombia Indonesia Argentina EAGLEs exChina

22 A BBVA Research model for long-term automobile projections

Change and levels of car ownership

Car ownership Evolution(1980-2020) Car ownership Groups Evolution(1980-2020) (Cars Units per 1000 people) (Cars Units per 1000 people. Bubble size proportional to car fleet Source: BBVA Research Source: BBVA Research 600 800 China G7 (2020) EAGLEs exChina 500 700 Nest US 600 G6 400 Others G7 (1980) 500 300

400 200 Nest (2020) EAGLEs (2020) 300 100

200 0 Nest (1980) Car ownership (units per 1,000 people) 1,000 Car ownershipper (units 100 EAGLEs (1980) -100 0 7 8 9 10 11 1980 1990 2000 2010 2020 log of GDP per capita (real PPP-adjusted USD)

23 A BBVA Research model for long-term automobile projections Expected annual increase in car fleet for the next decade concentrated in Asia and Latam

Expected annual increase in World Car Fleet (2010-2020) (% yearly growth) Source: BBVA Research

0% 2% 4% 6% ≥8%

24 A BBVA Research model for long-term automobile projections

Different “Growth Areas” across the world

Car Ownership “Gomperzt” Curve Car Fleet Growth Areas (Car Ownership and Sensitivity to GDP per Capita Growth (Car Ownership and Sensitivity to GDP per Capita Growth as a function of GDP per capita levels) as a function of GDP per capita levels) Source: BBVA Research Source: BBVA Research 500 3.5 Long-term income per Sensitivity of car COW sensitivity to real GDP pc growthpc GDP real to sensitivity COW 450 capita (in real PPP- ownership to income Car Ownership 3.0 Growth Area

Growth adjusted USD) per capita* 400

Explosive Sensitivity From… …to From… …to 350 Accelerating 2.5

Strong growth Strong Accelerating Growth 1,100 4,600 1 2.5 Saturation area Saturation

300 growth Moderate Explosive Growth 4,600 12,500 2.5 3.1 (max) 2.0 Strong Growth 12,500 15.800 1.75 2.5 250 Growth 15.800 19,900 1 1.75 1.5 200 Moderate Growth 19,900 24,400 0.5 1 Saturation 24,400 + min»0 0.5 150 1.0 *Change of car ownership (units per 1,000 people) to a change of 100 USD in income per capita 100 0.5 Car ownership (units/1000 people) (units/1000 ownership Car 50

0 0.0 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 Real GDP per capita inPPP-adj. USD

25 A BBVA Research model for long-term automobile projections Explosive and strong growth will be concentrated in Asia, Latam and Turkey

Car Fleet Growth Areas (Car Ownership and Sensitivity to GDP per Capita Growth as a function of GDP per capita levels) Source: BBVA Research

Long-term income Sensitivity of car per capita (in real ownership to Growth Area PPP-adjusted USD) income per capita* Countries and Groups From… …to From… …to Accelerating Growth 1,100 4,600 1 2.5 Bangladesh, Pakistan, Nigeria, Vietnam, Philippines, India, Cameroon, Kenya Explosive Growth 4,600 12,500 2.5 3.1 (max) Indonesia, Egypt, Ukraine, Thailand, Colombia, China, S.Africa, Peru, Brazil, Paraguay, Bolivia, Ecuador Strong Growth 12,500 15.800 1.75 2.5 Turkey, Mexico, Panama, Uruguay, Bulgaria, Romania Growth 15.800 19,900 1 1.75 Malaysia, Chile, Russia, Argentina, Hungary, Croatia, Lithuania, Latvia Moderate Growth 19,900 24,400 0.5 1 Poland, Portugal, Slovakia, Saudi Arabia, Greece, Estonia, Oman Saturation 24,400 + min»0 0.5 Korea, G7, Australia, Spain, Switzerland, Netherlands, Czech Republic, Slovenia, New Zealand *Change of car ownership (units per 1,000 people) to a change of 100 USD in income per capita

26 A BBVA Research model for long-term automobile projections

Growth markets will lie in the Emerging Markets area Expected increase in Car Fleet (2000-10) Expected increase in Car Fleet (2010-20) (% yearly growth) Source: BBVA Research (% yearly growth) Source: BBVA Research China China India UAE India Peru Venezuela Colombia Peru Panama Mexico Turkey Brazil Bolivia Turkey Paraguay Bolivia Chile Panama Russia Uruguay Korea Brazil Chile Argentina Colombia Venezuela Argentina Mexico Australia Russia Spain Portugal UAE United Kingdom Australia Switzerland United States Belgium Korea France United Kingdom Japan France Italy United States Belgium Germany Spain Uruguay Switzerland Paraguay Italy -10 -5 0 5 10 15 20 25 Japan Portugal Germany 27 0 2 4 6 8 10 12 14 A BBVA Research model for long-term automobile projections

Contents

Analysis of long run determinants of Car Industry

Global results

Annex: The BBVA Research CAR Model

28 A BBVA Research model for long-term automobile projections

Literature on car ownership

Dargay, Gately and Sommer (2007): They use a similar saturation model. Panel of 45 countries. They assume a different sensitivity of every country to GDP per capita.

Chamon, Mauro, and Okawa (2008): They assume there is no saturation rate . They concentrate on estimating a “take off” income threshold at which car demand starts to grow exponentially.

Medlock, K. B., and Soligo, R. (2002): Panel of 28 countries. The model includes the user cost of capital and assume and find different saturation levels for each country.

29 A BBVA Research model for long-term automobile projections

Enhancements of BBVA Car Model

• We include the level of financial development and an infrastructure quality indicator as determinants of each country saturation level.

• We associate the saturation level to a long-term or «structural» level of income instead of the observed GDP per capita .

• We allow short term deviations of income per capita from its «structural» level to account for short-term variations in car ownership , instead of relying on the lagged value of the dependent variable to model short-term dynamics.

30 A BBVA Research model for long-term automobile projections

Model specification

The model is estimated by maximum likelihood using a non-linear estimator with robust standard errors. The equation that we finally estimate is the following:

̻͉̽͌͑͢͠ $/ ͩ4 ͥͩ4 Ɣ ͢͠ ƣƳ ƍ ͥʚ́̾͊͊̽ $/ Ǝ ́̾͊͊̽ $/ ʛ ϥ Ϥ ϥ ƍ ͦʚ͈͍̾̿ʛ$/ ƍ ͧʚ͈͍̾̿ʛ$/ ƍ ͨʚ͏̼͌ʛ$/ Ϥ ͩ4 ƍ ͨʚ͏̼͌ʛ$/ ƍ ͪ ʚ͉̻͍͌̾͋ʛ$ƍ ͫ͊̽͌̿̾ $/ Ʒ ͥͩ4 ͥͩ4 ∗ exp ∗ exp ͬ ́̾͊͊̽ $/ ƍ ͭ ́̾͊͊̽ $/ Ǝ ́̾͊͊̽ $/ ͥͩ4 Ϥͤ ƍ ͥͤ ʚ́̾͊͊̽ $/ Ǝ ́̾͊͊̽ $/ ʛ Ƨ

CAROW = Car Ownership, GDPPC = Real GDP per capita in PPP-adj. USD, DENS = Population Density, URB = Urbanization Ratio, ROADSQ = Quality of Road Infrastructure, PCRED = Private Credit Ratio

31 A BBVA Research model for long-term automobile projections

Estimated regression

Variable Coefficient α (max. constant Saturation Level) 499.9*** Long-term per γ (Gompertz curve shape) -3.95*** capita income β (real GDPpc PPP-adj. 15y MA) -0.00017*** Real GDPpc PPP-adj. deviation 5yMA-15yMA 0.007*** Saturation Population density (above US) -0.18*** Level determinants Other Population density (below US) -0.19 structural Urbanization rate (above US) 2.259*** determinants Urbanization rate (below US) -1.06* Roads quality Indicator 90.86*** Credit to private sector 1.152*** Real GDPpc PPP-adj. dev. Obs.-5yMA 0.009*** Short-Term determinants Real GDPpc PPP-adj. dev. obs.-5yMA (in recessions) -0.01*** Adjusted R 2 0,991 Number of Observations 2.001 Number of Countries 92 *** indicates significance at a 1% confidence level, ** at a 5% level and * at a 10% level 32 A BBVA Research model for long-term automobile projections BBVA Research forecasts (2012) compared with previous IMF work (2008)

Growth of Car fleet (2010-2020) Car fleet of largest markets in 2020 (average % yoy) (Million cars) Source: BBVA Research Source: BBVA Research 14 1200 13 BBVA Research (2012) BBVA Research (2012) 1100 12 IMF (2008) IMF (2008) 1000 11 900 10 9 800 8 700 7 600 6 500 5 400 4 300 3 2 200 1 100 0 0 WORLD Advanced Emerging USA* India China WORLD Advanced Emerging USA* India China

*BBVA Research uses only passenger cars and not light trucks 33 A BBVA Research model for long-term automobile projections

Variables definition and source

Variable Definition Source Car ownership Passenger cars per 1,000 people World Bank and UN GDP per capita Real GDP per capita in PPP-adjusted USD 2005 constant terms) IMF and BBVA Research Population density Population per km 2 of area United Nations Urbanization Percentage of urban population United Nations Road density 1 Road kilometers per km 2 of area World Bank Road density 2 Road kilometers per capita World Bank Private credit Private credit to non-financial institutions to GDP ratio World Bank, Haver and BBVA Research

34 A BBVA Research model for long-term automobile projections

Cross-country emerging markets analysis unit

Chief Economist Álvaro Ortiz Vidal-Abarca [email protected] +34 630144485 Ext 51933 Senior Economist David Martínez Turégano [email protected] +34 690 845 429 SeniorEconomist Alfonso Ugarte Ruiz [email protected] +34 91 3743530