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The auto industry is highly concentrated. The top 10 global automakers account for roughly 80% of the worldwide production and nearly 90% of total vehicles sold in the U.S.
In the first five months of 2013, General Motors Company (GM - Analyst Report) led with a 18.0% market share in the U.S., followed by Ford Motor Co. (F) with a 16.4% market share, Toyota Motors Corp. with a 14.2% market share, Chrysler-Fiat with a 11.7% market share, and Honda Motor Co. (HMC - Analyst Report) and Nissan Motor Co. (NSANY) at the last spots with 9.5% and 8.1% market shares, respectively.
Toyota recaptured the sales crown from General Motors by selling 9.75 million vehicles globally in 2012, which exceeded GM’s sales of 9.29 million vehicles. Germany’s Volkswagen AG (VLKAY) came third with sales of 9.07 million vehicles for the year.
Zacks Industry Rank
Given the industry’s unique attributes that distinguish it from other industrial groups, we have a dedicated sector for the industry in our databases. As such, the automobile sector is one of the 16 Zacks sectors, unlike the S&P classification where autos are clubbed into the Consumer Discretionary sector (the S&P has 10 sectors vs. 16 for Zacks).
At the expanded classification level, the Zacks auto sector is into five industries at the expanded level: Auto-Domestic, Auto-Foreign, Auto/Truck-Original, Auto/Truck-Replacement, and Engines. The level of sensitivity and exposure to different stages of the economic cycle vary for each industry. The sector’s retail operations are part of the Zacks Retail sector in two industries -- one for Automobile/Trucks and the other for Auto Parts.
The current Zacks Industry Rank for Auto-Domestic is #117, Auto-Foreign is #212, Auto/Truck-Original is #108, Auto/Truck-Replacement is #85 and Engines is #212, Retail/Wholesale Auto/Truck is #65 and Retail/Wholesale-Auto Parts is #225. As a reference point, the outlook for industries with Zacks Industry Rank of #88 and lower is 'Positive,' between #89 and #176 is 'Neutral' and #177 and higher is 'Negative.'
What this means is that the outlook for dealers -- both new and second hand -- is positive, while the rest of the auto-related industries lean neutral to negative. We rank all the 260 plus industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry.
To remain competitive, the automakers will need to design vehicles that will cater to consumers in both mature and emerging markets while manufacturing them at low-cost using the most advanced technology.
For example, Ford has undertaken “One Manufacturing” strategy, which aims at producing multiple models from plants across the world in order to save production costs and fast adaptation to changes in consumer tastes. The automaker anticipates producing 4.5 models at each of its plants by 2015, up from 3.6 models currently.
Further, the automakers are concentrating on offering more optional features (which will save money on gas), even on the small and less gas-guzzler vehicles in order to attract buyers. The sale of optional features is helping them offset lower profit margins for small cars relative to large trucks.
The automakers 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. According to a study by CSM Worldwide, China and South America together will represent more than 50% of growth in global light vehicle production in the auto industry from 2008 to 2015.
The role of governments is highly significant. Their energy and environmental policies will be strongly responsible in molding the auto industry in the coming years. In late 2011, 13 major automakers, including Ford, GM, Chrysler, BMW, Honda, Hyundai, Jaguar/Land Rover, Kia, Mazda, Mitsubishi, Nissan, Toyota and Volvo, have signed letters of commitment with the U.S. Government to upgrade the fuel economy standard of cars and light-duty trucks to 54.5 miles per gallon (mpg) by 2025.
U.S. Market Recovery
Strong pent-up demand due to aging vehicles on the U.S. roads along with falling unemployment rate have been the key factors in driving the auto sales in the U.S. Average age of vehicles on U.S. roads increased to 11.3 years in January 2013 from 10.8 years in 2012. Banks were also friendlier as they offered greater access to loans with lower interest rates.
Auto sales in the U.S. grew 13.4% to the five-year high of 14.5 million vehicles in 2012. In May 2013, auto sales in the U.S. grew 8.2% to 1.44 million units while it rose 10.9% to 15.3 million vehicles on a seasonally adjusted rate (SAAR) basis.
GM expects a 7% rise in industry sales in 2013. Meanwhile, Ford predicted an 8% gain in the year, which reflects more than threefold rise compared with the overall economic growth of 2%–2.5% forecasted by the automaker.
Bailout Fund Repayments
General Motors Company and Chrysler received $62 billion under the Troubled Assets Relief Program (TARP). Of the total amount, a significant amount has been repaid by General Motors (more than 61%) out of its $49.5 billion loan and by Chrysler (nearly 90%) out of its $12.5 billion loan.
The U.S. Department of Energy (DOE) also lent more than $8.5 billion to a few automakers in the name of reducing dependence on oil, curbing greenhouse gas emissions and creating new jobs.
Ford utilized the DOE loan for retooling two plants for small-car production and developing fuel-efficient vehicles like the Ford Focus EV and C-Max Energi plug-in hybrid. The automaker revealed that $577 million of the loan is due in 2013, and the full amount will be repaid by Jun 15, 2022.
Tesla Motors Inc. (TSLA - Analyst Report) became the first DOE loan recipient ($465 million) to repay the full amount much earlier than expected. The electric vehicle maker paid off the remaining $451.8 million loan using the near-$1 billion proceeds from the common stock and convertible senior note offering made last week. The company reported its first-ever quarterly profit of $15.4 million or 12 cents per share (on an adjusted basis) in the first quarter of 2013.
Asia Promises High Growth
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 being the rapidly growing economies.
Ford anticipates global sales to expand by 50% to 8 million vehicles by 2015 given the potential growth in Asia, mainly China and India; and rising demand for small cars. The automaker anticipates small cars to account for 55% of the total sales by 2020 compared with 48% presently. One third of the small car sales are expected to come from Asia.
In late 2012, Ford announced plans to boost exports of its engine production from India by shipping them for the first time to Europe. Currently, the automaker exports 40% of its Indian-made engines and 25% of its Indian-made cars to 35 countries. The company expects to manufacture 450,000 cars and 600,000 engines in India by 2015. It already pumped in $2 billion to build manufacturing facilities in India.
In April this year, General Motors revealed plans to build four new plants in China in order to boost annual production capacity to 5 million vehicles and triple its exports from Chinese plants by 2015. GM and its joint venture partners in China plan to invest $11 billion in the country by 2016 as part of their major expansion program.
Last year, GM built two plants in China, increasing the production capacity by 20%. With the addition of four new plants, the production capacity will increase further by 30% and vehicle exports are expected to go up to 300,000 units from 100,000 units projected for this year. Currently, the company owns 13 assembly plants in China.
In 2009, China overtook the U.S. as the biggest auto market in the world by sales volumes when the Beijing government introduced a stimulus package, including tax incentives for small cars. China accounted for a third of light vehicle sales growth in the last five years.
However, the incentives were scrapped in 2011 and the Beijing government imposed quotas on new car registrations in order to control the traffic congestions. In 2012, sales in China grew 4.3% to 19.3 million units, which is lower than the 8% growth projected by China Association of Automobile Manufacturers (CAAM) as well as the double-digit growth in 2009 and 2010.
Auto sales in the country are expected to improve if the government renews some of its policy incentives that helped the country overtake the U.S. as the biggest auto market. According to the Chinese government, total vehicle sales in China are expected to rise 7.8% to 20.8 million vehicles in 2013 from 19.3 million last year, led by strong demand for passenger vehicles and economic recovery. The CAAM believes SUVs will remain the fastest-growing segment in the year while commercial vehicles will record a moderate gain in sales.
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 their greatest challenges. Existing suppliers to automakers often lack the financial strength to expand capacity in new markets. On the other hand, auto parts suppliers are sensitive to technology transfers to local third parties, which can give rise to low-cost competitors.
High dependence on automakers makes the auto market suppliers vulnerable to several maladies, primarily pricing pressure and production cuts. Pricing pressure from automakers constricts parts suppliers’ margins. On the other hand, production cuts by automakers driven by frequent market adjustments negatively affect 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), Meritor Inc. (MTOR - Analyst Report), Goodyear Tire and Rubber Co. (GT - Analyst Report), Magna International (MGA - Analyst Report), Superior Industries (SUP - Analyst Report), Tenneco Inc. (TEN - Analyst Report) and TRW Automotive (TRW - Analyst Report).
Future of Green Cars Looks Bleak
Rising fuel prices and global warming have turned attention to the auto industry that either rely less on traditional fossil fuels or use cheaper renewable sources of energy. Despite the U.S. Government’s continued effort to promote “green” alternatives such as fuel-efficient electric vehicles (EVs) and hybrid vehicles, things look bleak, at least in the near future.
Globally, the hybrid market is ruled by Toyota (which includes the Prius) and Honda (includes Civic and Insight hybrids). Meanwhile, other automakers such as Ford, General Motors and Nissan are also aggressively pursuing a plan to push hybrid sales. Some of the well-recognized “green” cars include the Ford Focus, GM Volt, Nissan Leaf and Daimler AG’s (DDAIF) smart USA micro EV. U.S. is the largest hybrid car market in the world with sales accounting for 60%–70% of global hybrid sales.
However, the industry has witnessed some notable adverse developments in the drive for green technology. In January 2013, the U.S. Department of Energy (DOE) backed off President Barack Obama’s stated goal of putting 1 million electric cars on the road by 2015 due to weaker than expected demand for plug-ins/EVs. According to Hybridcars.com, plug-in/EV sales constituted a meager 3.3% of the overall sales in the U.S. in 2012.
The weak demand for plug-ins/EVs has led some lithium-ion battery makers file for bankruptcy protection in 2012. They include MA-based A123 Systems Inc. and NY-based EnerDel, despite both being DOE grant recipients (A123 - $249.1 million; EnerDel - $118.5 million). It also led another DOE grant recipient (in fact, the third largest with $161.0 million), Dow Kokam, to be written down by chemical behemoth Dow Chemical (DOW), who jointly operated the entity with TK Advanced Battery LLC since 2009.
Since November 2009, Toyota recalled about 20 million vehicles globally, surpassing all other automakers. In Oct 2012, the automaker had announced a major worldwide recall of 7.43 million vehicles that included more than a dozen models manufactured between 2005 and 2010.
In 2012, the Transportation Department of U.S. slapped a fine of $17.35 million on Toyota due to late response regarding a defect in its vehicles to safety regulators as well as late recall of those vehicles. According to the department, it was the maximum allowable fine under the law for not initiating a recall in a timely manner. The latest fine added to $48.4 million imposed by the U.S. government on the company in 2010 due to late recall of millions of defective vehicles.
Toyota would also need to pay $1.1 billion to settle a class-action lawsuit related to complaints of unintended acceleration in its vehicles. According to a plaintiff lawyer, the settlement is one of the largest in a lawsuit in the history of automotive industry.
In the spate of recalls following Toyota’s, other automakers’ recalls also came into the limelight. They included Chrysler, Ford, GM, Honda and Nissan.
Economic Crisis in Europe
The present Eurozone financial crisis has adversely affected the operations of many global automakers, especially GM and Ford, who have a significant exposure to the market. Car sales in Europe continued to be low owing to weak consumer confidence on the back of a weak economy triggered by the crisis.
According to the European Automobile Manufacturers’ Association (ACEA), car sales in Europe reached its lowest level of 12.05 million units in 2012 since 1995, indicating a year-over-year decline of 8.2% due to the sagging demand for cars, as highly indebted banks were reluctant to finance new car purchases for customers. The decline was the steepest in the highly troubled Eurozone, where car sales dipped 11.3% to roughly 9 million units, according to Reuters.
Most of the major automakers in Europe are resorting to job cuts and plant closures, as it became no longer feasible for them to undertake full-fledged operations in the continent. Unemployment in the EU reached 26.5 million in Mar 2013, while the unemployment rate increased to 10.9% in the same month from 10.3% in Mar 2012.
Among the U.S. automakers, Ford plans to shut vehicle and component plants in the U.K. and Belgium in the next two years while General Motors would suspend car production at its Bochum plant in Germany -- which employs 3,100 workers -- in 2016.
Among the European automakers, Renault plans to retrench 7,500 jobs in France by 2016 while each of Fiat and Peugeot has decided to eliminate 1,500 jobs. Among the Japanese automakers, Honda announced plans to terminate 800 jobs at its South Marston plant near Swindon, southwest England in the second quarter of 2013.