Auto Industry Outlook and Review (March 2011)

By Mar 10, 2011, 4:34 PM Author's Blog  

The auto industry is a highly concentrated one, with roughly 10 global automakers accounting for over 77% of total production worldwide. In 2010, General Motors Company (GM) led with a 19.1% market share in the U.S., followed by Ford Motor Co. (F) with a 16.7% market share, Toyota Motors Corp. (TM) with a 15.2% market share, Honda Motor Co. (HMC) with a 10.6% market share, Chrysler-Fiat with a 9.4% market share and Nissan Motor Co. (NSANY) with a 7.8% market share.

The economic downturn provided the impetus for a massive structural change in the auto industry, setting the stage for growth over the next decade. Given the high barriers to entry and the need for scale economies (in operations, supply chain and marketing), the global auto industry landscape is expected to be ruled by global automakers and suppliers based in the six major auto markets -– China, India, Japan, Korea, Western Europe and the U.S.

OPPORTUNITIES

To remain competitive, automakers will need to design vehicles that meet the requirements of consumers in both mature and emerging markets. Automakers will focus on more user-friendly and low-cost vehicles that are also the most advanced technologically.

The automakers will continue to shift their production facilities from high-cost regions such as North America and the European Union to lower-cost regions such as China, India and South America. For example, Greater China and South America together are projected to represent more than 50% of growth in global light vehicle production from 2008 to 2015.

There are two underlying factors behind this location shift in the auto industry. The first is the cost factor. The cost of labor in emerging auto markets continues to be a fraction of that in the developed world. The second is the demand factor. Many low-cost regions, including the emerging auto markets, have high potential for growth. Thus, the shift in auto industry production facilities will lead to a localization of the manufacturing base that will bring down transportation costs.

The emergence of trading blocs is also giving this process a push in the auto market. It is likely that over time there will be fewer car imports from outside a trade zone.

The role of governments must not be overlooked. Governments in all major countries have become active auto industry players. Their environmental policies will be strongly responsible in molding the auto industry in the coming years.

Further, automakers have started to reduce the number of technological platforms with a greater diversity of models produced from each platform in order to remain cost competitive.

For example, Honda, with its flexible common platform, has developed three dimensionally distinct versions of the Accord, allowing for designs where 60% of the components are common. Ford aims to build 680,000 vehicles per core global platform by 2015, up from the current level of 345,000 units.

Green Cars

Higher fuel prices and concerns over global warming have pooled attention on the auto industry that either rely less on traditional fossil fuels or use renewable sources of less expensive energy. Thus, “green” alternatives such as fuel-efficient electric vehicles (EVs) and hybrids will attract consumers in the wealthier countries, while flex-fuels such as ethanol and natural gas will be highly sought-after in the emerging auto markets where the local climate or resource base favors their usage.

Consequently, there will be a variety of power-train technologies in the auto industry by the next decade. It is likely that “green” cars will represent up to a third of total global sales in developed auto markets and up to 20% in urban areas of emerging auto markets by 2020. Some of the “green” cars have already generated a huge response in the auto industry. These include the Ford Focus, GM Volt, Nissan Leaf, Toyota Prius and Daimler AG’s Smart fortwo micro EV.

The market for hybrid cars was dealt a severe blow by the global economic downturn due to poor availability of consumer credit, low gas prices and other unfavorable economic conditions. However, they are projected to become a popular option for car buyers, particularly in the U.S. and Europe.

Globally, the hybrid market is ruled by Toyota and Honda at present. But other automakers such as Ford, General Motors and Nissan are also aggressively pursuing a plan to push hybrid sales.

The U.S. is the largest hybrid car market in the world, with sales accounting for 60%–70% of global hybrid sales. According to J.D. Power and Associates, hybrid-electric vehicle sales volumes in the country are expected to grow by 268% between 2005 and 2012. Presently, there are only 12 hybrid models available in the U.S., which would increase to 52 by 2012.

Detroit’s Comeback

The ‘Big Three’ Detroit automakers –- GM, Ford and Chrysler -– lost consumer confidence in 2009 after they were severely hit by the global economic crisis. The crisis also exposed the inherent problem with the Big Three’s product portfolio, which lacked up-to-date engineering and extensive research and development.

Further, the majority of their sales comprised pickup trucks and SUVs rather than fuel-efficient vehicles such as the small cars that the consumers have started to prefer. This skewed portfolio was further aggravated by the government’s push for fuel-efficient and environment-friendly cars. Ford rallied better than its hometown rivals, with an early response to the shift in consumer preference towards small cars.

However, the Detroit automakers, especially Ford and GM, bounced back with a recovery in the global market and restructuring of the product portfolio at the end of 2009. In 2010, Ford’s sales went up 19% to 1.94 million vehicles, while sales of GM and Chrysler grew 7% to 2.22 million vehicles and 17% to 1.09 million vehicles during the year, respectively.

Ford focuses on its Ford, Lincoln and Mercury branded cars, shedding the Volvo cars, while GM concentrates on four core brands -– Chevrolet, Buick, GMC and Cadillac -– withdrawing Saturn, Hummer, Pontiac and Saab.

Further, Ford has decided to expand its luxury Lincoln line-up at the cost of its Mercury line-up, which has been phased out at the end of 2010. The company plans to launch as many as 7 new Lincoln vehicles in the next 4 years, including a small car.

The Rise of Asian Automakers

The Asian countries, especially China and India, are expected to account for 40% of growth in the auto industry over the next five to seven years. According to Global Insight -– a U.S. based provider of economic and financial information –- 14.7% of growth is expected to come from India and 8.3% from China by 2013 (compared with 2008 levels) based on their rapidly growing economy.

Domestic automakers are likely to rule the key growth market of China as the government plans to consolidate the top 14 domestic automotive players into 10. These automakers would capture a share of more than 90% in the local market.

The Chinese automakers have been struggling hard to enhance their global profile by upgrading their technology to meet the international standards. To this end, Beijing Automotive Industry Holding Group (BAIC) purchased the intellectual property rights from GM’s Saab in 2009 in order to develop its own brands and introduce new models. BAIC purchased the rights to certain powertrain, engine and gear-box technology for Saab’s 9-5 and 9-3 sedans.

In a similar move, Zhejiang Geely Holding Group bought Volvo cars from Ford in order to tap China ‘s high-growth auto market by acquiring modern, innovative technologies from the Swedish brand to upgrade its car lineup. In December 2009, Geely also signed up with Johnson Controls Inc. (JCI) to be its global parts supplier.

The Indian automakers are also contemplating entry in the international markets by introducing their innovative products that could meet consumers demand abroad. Tata Motors (TTM) has revealed it will launch its European version of the small car, Nano Europa in 2011 and an U.S. version of the same car by 2012. On the other hand, India’s utility vehicle maker Mahindra & Mahindra has announced launching TR20 and TR40 pickups in the U.S. that are more economical compared to other pickups sold in the country.

WEAKNESSES

Although automakers continue to focus on shifting their production facilities to new regions driven by cost and demand factors, developing the supplier networks remains one of the greatest challenges they face. Existing suppliers often lack the financial background to expand capacity in new markets. On the other hand, auto market suppliers are sensitive to technology transfers to local third parties, which may result in new and lower-cost competitors.

Since 1999, more than 20 of the largest global auto parts suppliers have filed for bankruptcy. The financial condition of the majority of auto market suppliers continues to remain weak, owing largely to historically weak demand and heavy dependence on automakers.

Higher dependence on a handful of global automakers makes suppliers vulnerable on several front, primarily pricing pressure and production cuts. Pricing pressure from automakers is constricting auto market suppliers’ margins. On the other hand, production cuts by automakers driven by frequent market adjustments are negatively affecting their operations.

Some of the auto industry suppliers who have a high reliance on a few automakers such as General Motors, Ford, Chrysler and Volkswagen include American Axle and Manufacturing (AXL), ArvinMeritor (ARM), Goodyear Tire and Rubber (GT), Magna International (MGA), Superior Industries (SUP), Tenneco Inc. (TEN) and TRW Automotive (TRW).

The shift in auto market consumer preferences towards hi-tech, fuel-efficient, environment-friendly vehicles, such as small cars/hybrids/EVs, is another issue. Auto market suppliers are expected to quickly adapt to the new technologies by investing in research and development, putting heavy capital burdens on them.

The automakers also face significant challenges in transforming their existing power-train technologies, as far as marketability is concerned. They are adapting the internal combustion engines to alternative energy, including ethanol and bio-fuels. Ultimately, a time may come when they switch to the all-electric power-train as their sole solution. However, the shift in power-train solution technology needs to be supported by adequate charging outlets in order to recharge batteries.

Safety Recall – The New Crisis

Automotive safety recalls were brought into focus by Toyota’s recalls in late 2009. Since November 2009, Toyota has recalled more than 14 million vehicles globally in about 20 recalls, crossing all other automakers. The U.S. Transportation Department had to impose a fine of $48.4 million due to late recall of millions of defective vehicles.

Toyota’s recalls were related to problems such as faulty accelerator gas pedals, slipping floor mats and defective braking systems. They led the automaker to suspend the sale of its models several times and halt new car launches for the year.

However, Toyota has revealed that it has repaired 5 million vehicles related to its three biggest recalls announced in late 2009 and early 2010. Through the on-site SMART evaluation program since April 2010, the automaker has also noticed a sharp 80% drop in customer complaints related to the sudden acceleration problem.

Following Toyota, other automakers had to issue recalls as well. They include Chrysler, Ford, GM, Honda and Nissan. Among them, GM recalled most frequently, followed by Ford. Since the beginning of 2010, GM recalled more than 3 million vehicles in the U.S., Canada, Mexico and South Korea. Among these, the largest recall occurred in June, involving 1.5 million vehicles, in order to fix a problem with a heated windshield wiper fluid system that had been causing fire in the vehicles.

Meanwhile, Ford recalled nearly 600,000 vehicles throughout 2010 and more than 1 million vehicles in 2011-till date. The 2011 recall included 507,000 units of F-150 pickups and 525,000 units of its Windstar minivans due to a corrosion related problem.

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