Without a clear strategy to reduce costs in 2020 (e.g., platform integration) or a recovery in utilizations through new car launches, it would be difficult for an automaker to report outstanding earnings in the global auto sector. 2) HMG’s new car launches and Kia’s capacity expansion in a new region to help boost volume: In 2020, Hyundai and Kia are expected to enjoy volume growth, which has been sluggish since the launch of new volume models such as Hyundai Sonata, Elantra, Tucson, Kia K5, Sorrento, and young petite Nude Carnival, which will help lower incentives and boost market share. As such, the launch of luxury and new volume models in 2020 should help shore up sales and improve the product mix. The Korean auto sector was able to facilitate an earnings recovery in 2019 through a mix improvement alone, led by Palisade. Volkswagen said during the IIA 2019 Conference that it will respond effectively to the xEV market through its MEB platform.



Furthermore, the wider adoption of the third generation platform will help save additional cost in the unfavorable business environment. Only a few companies including HMG, Volkswagen, and Toyota were able to enter the electrification platform market for these reasons. According to JATO, it will be difficult to meet the strengthening CO2 emission standards in 2020 except for Toyota and PSA Renault (OTC:RNSDF). Most companies, unable to meet the CO2 emissions target (95g/km), are expected to reduce supply in order to mitigate penalties. A string of BEV launches to meet regulatory demand means intense competition, and demand will increase as a result. EVs will account for more than 60% of net increase in demand before the complete abolition of new energy car subsidies in 2021, but the base effect from a demand decrease for two consecutive years is expected to be limited. EVs will account for most of the increase in net demand ahead of the complete abolition of new energy car subsidies in 2021. In India, financial instability has weakened consumer sentiment, which led to a decline in the number of dealerships.





In particular, North American, European, and young petite nude Japanese automakers, which have built their portfolios in the US and Europe, should have limited sales strategy to protect profitability without any obvious cost-cutting strategies and or changes in new car lineups. Toyota has also been able to improve profitability through cost reduction in FY2014-2017 when the use of TNGA expanded, but the cost-cutting effects are fading. Competitors in Europe, the US, and Japan are bound to face margin squeeze because of their limited use of strategies to enhance profitability amid limited volume growth. Amid low growth, automakers continue efforts to cut costs through the relocation of labor and production. The ability to minimize the impact of reducing the production capacity of ICEVs is also important. The number of new BEV models to be launched in Europe is 12 in 2019 and 28 in 2020. To reduce fines, the supply of ICEVs will be reduced and EVs will increase. 2007 (18.17mn units), due to macro uncertainties such as the US-China trade war and Brexit as well as a decrease in core buyers and increase in mobility.



Europe (16.98mn units, -3.3%): Demand should continue to contract in 2020 due to the trade dispute, Brexit and stricter CO2 regulations. As for auto parts makers with relatively high exposure to China, earnings weakness will likely continue into 2020. In the case of parts makers with no effective strategy to secure new customers, new projects, or expand content related with xEVs and autonomous driving, it would be better to approach them from a trading perspective. Finished vehicle makers are to shift focus to profitability by lowering incentives. Major automakers that have continued to generate profits in major markets are expected to see profitability deteriorate due to tighter emission regulations in Europe and contracting demand. According to this calculation, Hyundai and Kia are also expected to face a fine of EUR2.88bn (or KRW3.8tn), which is equivalent to 49% of Hyundai’s and Kia's combined operating profit in 2020F (KRW7.77tn). Profit growth based on top-line growth is limited, and a selective investment strategy focusing on those with the prospect of bottom-line growth is valid. Against this backdrop, we believe there is a possibility that the pace of earnings growth for Korean companies will be sharper than what we expect. Indeed, the correlation between the rising mortgages from 2008 to 2018 and apartment pre-sale volume appears to be very high at 0.89. From 2012 to 2013 and 2015 to 2016 the two factors’ linkage appeared to weaken but it was only because of the volatility of pre-sale prices during the boom and slump of the Korean housing market.