The auto industry is highly concentrated. About 10 global automakers account for over 77% of the production worldwide and 13 automakers account for more than 90% of total vehicles sold in the U.S.
In the first 7 months of 2011, General Motors Company (GM - Analyst Report) led with a 20% market share in the U.S., followed by Ford Motor Co. (F - Analyst Report) with a 16.9% market share, Toyota Motors Corp. (TM - Analyst Report) with a 12.8% market share, Chrysler-Fiat with a 10.2% market share, replacing Honda Motor Co. (HMC - Analyst Report) and Nissan Motor Co. (NSANY) at the last spots with 9.3% and 8.0% market shares, respectively.
The global economic meltdown in 2008 provided an impetus to 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.
To remain competitive, automakers will need to design vehicles that will 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, China and South America together are projected to represent more than 50% of growth in global light vehicle production in the auto industry 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.
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 in the auto industry.
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.
The role of governments must not be overlooked. Governments in all major countries have become active auto industry players. Their energy and environmental policies will be strongly responsible in molding the auto industry in the coming years.
Recently, the U.S. Government and 13 automakers, which includes Ford, GM, Chrysler, BMW, Honda, Hyundai (HYMLF), Jaguar/Land Rover, Kia, Mazda, Mitsubishi, Nissan, Toyota and Volvo, upgraded the fuel economy standard of cars and light-duty trucks to 54.5 miles per gallon (mpg) by 2025.
The new standard is more than double the Corporate Average Fuel Economy (CAFE) standard of 24.1 mpg. It is expected to save 12 billion barrels of oil and curtail oil consumption by 2.2 million barrels per day, which accounts for half of the oil imported by the U.S. from OPEC countries on a daily basis.
The new standard also aimed at reducing carbon pollution to 163 grams per mile of CO2. With this, more than 6 billion metric tons of greenhouse gas will be curbed over the time span of the program, which accounts for more than the amount of carbon dioxide emitted by the U.S. in 2010.
Higher fuel prices and concerns over global warming have pooled attention on alternatives 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 by automakers over petroleum.
Consequently, there will be a variety of powertrain 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 (DDAIF) smart USA micro EV.
The market for hybrid cars was dealt a severe blow by the global economic recession in the second half of 2008 due to poor availability of consumer credit, low gas prices and other economic conditions. However, they are projected to become popular option for car buyers, particularly in the U.S. and Europe.
Globally, the hybrid market is ruled by Toyota and Honda. Meanwhile, other automakers such as Ford, General Motors and Nissan are also aggressively coming out with their hybrid offerings.
Recently, Ford and Toyota signed a memorandum of understanding to jointly develop a gas-electric hybrid engine for pickup trucks and sport utility vehicles (SUVs). The automakers have decided to sign a definitive agreement next year that would lay out timelines to develop the technology. They expect to market the product by the end of this decade.
The development of electric hybrid engines would help both the companies meet stringent fuel economy and pollution standards in the U.S. and elsewhere.
GM also plans to manufacture a luxury electric car dubbed ELR based on the technology used in its Volt plug-in hybrid for its Cadillac brand as a part of its long-term goal to become a leader in the fuel-efficient vehicles market. The company has also chosen battery supplier A123 Systems Inc.
(AONE) for its all-electric subcompact car for the Chevrolet brand that has yet to be built.
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. There is growing interest in hybrid cars in Europe as well, as recently indicated by a senior Toyota official.
The ‘Big Three’ Detroit automakers – GM, Ford and Chrysler – lost consumer confidence in 2008/2009, 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 consumers had 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 the first 7 months of 2011, Ford’s sales went up 11.7% to 1.25 million vehicles, while sales of GM and Chrysler grew 15.7% to 1.48 million vehicles and 21.2% to 751,958 vehicles during the same period, respectively.
Ford shifted its focus to the Ford and Lincoln brands, while shedding Volvo, Land Rover, and Jaguar while phasing out Mercury. GM narrowed its focus to four core brands – Chevrolet, Buick, GMC and Cadillac – withdrawing Saturn, Hummer, Pontiac and Saab.
Further, Ford decided to expand its luxury Lincoln line-up at the cost of its Mercury line-up, which was phased out at the end of 2010. The company plans to launch as many as 7 new Lincoln vehicles in by 2015, 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. Meanwhile, Indian automakers are also sallying into international markets by introducing their innovative products that could meet consumer demand abroad.
Uncertain Economic Backdrop
The cyclical leverage of the industry exposes it to the uncertain outlook for the U.S. and global economy. Recent weak economic readings have increased the odds of a fresh recession in the U.S. The loss of triple-A rating, the downward revisions to earlier GDP growth numbers, and the continued weak labor market are adding to the weak U.S. economic picture.
Europe is dealing with a persistent sovereign debt problem that has pushed the peripheral economies of Greece, Ireland, Portugal and Spain into a recession and significantly affected the outlook for Germany and France.
The emerging markets of China, India and Brazil are much better financial shape, but they are all dealing with inflationary pressures. It is far from clear at this stage if they will be able to control the inflation problem without materially damaging the growth momentum of their economies.
Weak Auto Suppliers
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 in the auto industry. Existing suppliers to automakers often lack the financial resources 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.
Higher dependence on a handful of very large automakers makes the auto suppliers vulnerable to several maladies, 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 - Analyst Report), ArvinMeritor Inc. , Goodyear Tire and Rubber (GT - Analyst Report), Magna International (MGA - Analyst Report), Superior Industries (SUP - Analyst Report), Tenneco Inc. (TEN - Analyst Report) 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 the existing powertrain technologies into the new versions, 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 powertrain as their sole powertrain solution. However, the shift in powertrain solution technology needs to be supported by adequate charging outlets in order to recharge batteries.
Automotive safety recalls were brought into focus by media after Toyota’s announcement of a series of recalls. Since November 2009, Toyota has recalled more than 14 million vehicles globally in about 20 countries, surpassing all other automakers. The U.S. Transportation Department also imposed a fine of $48.4 million due to the 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.
In the spate of recalls following Toyota’s, other automakers’ recalls also came into the limelight. 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. Meanwhile, Ford recalled nearly 600,000 vehicles throughout 2010 and more than 1 million vehicles in 2011 to date.
The earthquake, Tsunami and the nuclear crisis in Japan threw the global automotive industry out of gear. The auto parts supply chains got paralyzed, triggering production shutdowns, work shift reductions and cancellation of orders.
Japan accounts for about 13% of the worldwide automobile production with U.S. being its largest market. Production of as many as 40 auto parts manufacturer in the country were jeopardized due to plant outages and power shortages following the earthquake.
The disruptions to the industry's supply chain had a material impact on overall manufacturing activities in the U.S. In fact, this was one of the often cited cause for the economic slowdown in the second quarter of the year. The industry is only now coming out of the effects of that disruption.