Poland Autos Report Q1 2013

Over the first 10 months of 2012, passenger car sales in Poland increased 1.8% year-on-year (y-o-y), to229,209 units. Despite strong sales growth earlier in the year, sales have decreased in recent months asweak consumer demand continues to impact sales. The ongoing deterioration in private consumption,combined with the declining sales growth, has prompted us to revise our sales forecast to a 2% declineover the year. We believe that private consumption is likely to lag headline growth. Household spendinggrowth decelerated gradually from 3.7% y-o-y in Q410 to 1.2% in Q212, despite strong headline GDPgrowth over the period. Retail sales data indicate that this slowdown continued into the third quarter, withthe average monthly retail sales slowing to 5.3% y-o-y, from 12.9% in Q112. Falling export demand andweaker investment in 2012 has reduced nominal wage growth from a monthly average of 5.4% y-o-y inQ112 to 2.2% in Q312. Wage growth is likely to remain tepid even once the economy picks up in H213given the slack in the labour market, with unemployment at 12.4% in September. This weak privateconsumption picture has impacted passenger car sales, and partly informed our sales forecast revision.

Uncertainty surrounding the eurozone is likely to reduce private investment plans over the comingmonths. This slowdown in fixed capital formation is already well underway, with growth deceleratingfrom 6.0% y-o-y in Q112 to 1.3% in Q212. The slowdown in investment growth, combined with weakconsumer sentiment and poor macro outlook, will also impact the manufacturing sector. We believe thatthis will adversely affect commercial vehicle sales, and our 2012 sales forecasts have become morebearish across these segments. Light commercial vehicle (LCV) sales declined 5.2% y-o-y over the first10 months of 2012, to 31,264 units. BMI now forecasts a 4% decline over the year. Heavy truck salesdeclined 3.2% y-o-y over the first 10 months of 2012, to 13,604 units. BMI now forecasts a 2.5% declineover the year. Bus and coach sales declined 10.4% y-o-y in the first 10 months of 2012, to 1,017 units.

BMI now forecasts a 9% decline over the year.

In the first eight months of 2012, vehicle production in Poland contracted by 22% y-o-y, to 445,000 units.BMI forecasts total vehicle production to decline 15.9% over the course of 2012. The fall can beattributed to the broader weakness in European vehicle demand (the region is Poland's largest exportdestination) and the underperformance of Fiat in the region. Over the course of 2012, we have becomeincreasingly bearish on the sales outlook for many markets in the region. We do, however, remainpositive about the long-term growth potential in Poland's manufacturing segment, as we believe that itwill draw in investment owing to its low-cost production base and proximity to key European markets.

Poland exports nearly 90% of the vehicles it produces, most of which go to EU member countries, and itis not surprising that a combined 7.6% y-o-y contraction in car sales in the EU in the first nine months of2012 has prompted Polish carmakers to cut back on production.

More downside to Polish production came from the dominance of Fiat, which contributes to more than57% of the total production. Within Europe, Fiat has seen a substantial decline in sales volumes, and ismaking substantial operating losses in the region. In October, Fiat announced that it will cease productionof its Panda model in Poland by the end of 2012. The manufacturer is to consolidate production of thePanda model at an Italian plant. As of yet, it has not been announced what will replace the model at thesite.

Over the longer term, we maintain a slightly more bullish outlook for vehicle production in the country,forecasting a return to growth in 2014 for the remainder of our 2017 forecast period. This comes on theback of a resurgence in demand in many of the larger European markets after several years of decliningsales volumes. From 2014, we also expect to see a resurgence in domestic demand, which should furtherboost production volumes.