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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 January-February 2012, General Motors Company (GM - Analyst Report) led with a 18.3% market share in the U.S., followed by Ford Motor Co. (F - Analyst Report) with a 15.3% market share, Toyota Motors Corp. (TM - Analyst Report) with a 13.8% market share, Chrysler-Fiat with a 11.4% market share, and Honda Motor Co. (HMC - Analyst Report) and Nissan Motor Co. (NSANY) at the last spots with 9.4% and 9.0% market shares, respectively.
Due to a massive structural change after the global economic meltdown in 2008, the global auto industry is expected to be ruled by automakers and suppliers based in the six major auto markets: China, India, Japan, Korea, Western Europe and the U.S.
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.
The recent trend shows that 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 Europe to lower-cost regions such as China, India and South America. According to a study by CSM Worldwide, 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.
The role of governments is highly significant. 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.
In late 2011, 13 major automakers, including Ford, GM, Chrysler, BMW, Honda, Hyundai (HYMLF), 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.
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.
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. Thus, “green” alternatives such as fuel-efficient electric vehicles (EVs) and hybrid vehicles will attract consumers in the affluent countries while flex-fuels such as ethanol and natural gas will be highly demanded in the emerging auto markets due to their suitability with the local climate and resource base.
Consequently, there will be a variety of powertrain technologies in the auto industry in this decade and “green” cars are likely to represent about 30% of total global sales in developed auto markets.
Globally, the hybrid market is ruled by Toyota (which includes the highly acclaimed Prius) and Honda (which has 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 their “green” cars have already generated a huge response in the auto industry, including the Ford Focus, GM Volt, Nissan Leaf and Daimler AG’s (DDAIF) smart USA micro EV.
In late 2011, Ford and Toyota signed a memorandum of understanding on the equal product development collaboration in order to develop a gas-electric hybrid engine for pickup trucks and sports utility vehicles (SUVs). The automakers have decided to sign a definitive agreement 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 in the near future.
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 is 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. The head of Toyota's European operations has revealed that the percentage of consumers in Europe interested in hybrid cars for their next car purchase has increased to 16% in 2011 from 8%–9% in 2009.
"The Big Three" Detroit automakers -- GM, Ford and Chrysler -- bounced back with a recovery in the global market and restructuring of the product portfolio after they were severely hit by the global economic crisis.
In 2011, GM grew 14% to more than 2.5 million vehicles. The company expects sales in full-year 2012 to be in the range of 13.5 million to 14 million units. Ford’s sales rose 11% to nearly 2.15 million units during the year. For 2012, the automaker expects industry sales in the range of 13.5 million to 14.5 million vehicles. Meanwhile, Chrysler’s sales soared 26% to 1.37 million vehicles in 2011.
The economic crisis also exposed the inherent problem with the Big Three’s product portfolio. The majority of their sales comprised pickup trucks and SUVs rather than fuel-efficient vehicles such as small cars that the consumers have started to prefer.
Currently, Ford focuses only on its Ford and Lincoln (luxury) branded cars, shedding Mercury and Volvo brands, while GM concentrates on four core brands -- Chevrolet, Buick, GMC and Cadillac -- withdrawing Saturn, Hummer, Pontiac and Saab. The company plans to launch as many as 7 new Lincoln vehicles 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 companies 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 international standards. Meanwhile, Indian automakers are also sallying into international markets by introducing their innovative products that could meet consumers demand abroad.
Pent-Up Demand and Unemployment
Pent-up demand and falling unemployment rate have been the key factor in driving the auto sales in the U.S. despite higher gasoline prices (up 10% year-over-year to $3.74 per gallon in February) and lower spending on discounts and promotions by automakers (down 4.7% year-over-year to $2,457 per vehicle in February). The average age of cars on U.S. roads is 10.8 years while the unemployment rate dipped to 8.9% in 2011 from 9.6% in 2010 (U.S. Department of Labor).
The twin factors along with higher consumer confidence helped lifting up auto sales to a 4-year high (15.1 million vehicles) in February this year even when the average price of vehicles went up by a robust $1,943 from February last year, according to TrueCar.com.
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.
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 deteriorate, resulting from historically weak demand and high dependence on automakers.
Thus, despite the government’s sizable investment in the automakers, it is likely that there will be auto market suppliers who are unable to restart operations due to lack of sufficient working capital even as automakers start production. According to the Original Equipment Suppliers Association, 12% of the auto industry suppliers do not have sufficient working capital to support a 10%–25% expansion in production.
Higher 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. 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 - Analyst Report), Meritor Inc. (MTOR), 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).
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 programs, putting heavy capital burdens on them.
The automakers also face significant challenges in transforming their existing powertrain technologies into the latest 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 recall since November 2009. Toyota has recalled about 15 million vehicles globally in more than 20 recalls, surpassing all other automakers. The Transportation Department of U.S. also imposed a fine of $48.4 million due to a 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.
The earthquake, tsunami and the nuclear crisis in Japan in March last year have thrown the global automotive industry out of gear. The auto parts supply chains have 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 about 40 auto-parts manufacturers in the country has been jeopardized due to plant outages and power shortages following the earthquake.
The global automotive industry faces interruptions in supply of critical components such as transmissions, electric vehicle battery packs and electronic semiconductors.
Another crisis that the auto parts supplied from Japan poses is their uniqueness. Most of the auto parts sourced from Japan is highly complex and specifically tailored. As a result, finding substitutes for such customized components becomes very difficult. Moreover, it is extremely painful to shift the production of these parts to unaffected areas, where Japan has excess auto parts supplying capacities.
No sooner had the global automakers (particularly, those in Japan) started recovering from the twin disasters in Japan, than they were struck with another catastrophic natural disaster in Thailand. Thailand is an important manufacturing base in Asia for most of the global automakers.
The automobile production in Thailand severely hampered by floods in the country that killed more than 500 people and damaged many automakers’ and their parts supplier’s plants. In fact, Thai production plummeted to the lowest level in more than 9 years.
The sad aftermath of the Japan and Thailand disasters have already been reflected in the recent quarterly results of the major Japanese automakers. In the first nine months of fiscal year ending March 31, 2012, both Toyota and Honda reported a sharp fall in profit of 71% and 57.5%, respectively, on a year-over-year basis.
We are also concerned about the present eurozone financial crisis, which is likely to impact the operations of many global automakers, especially GM and Ford, who have a significant exposure to the market.
Demand for cars in the continent has started to weaken. As a result, the automakers are trying very hard to entice the consumers with the help of steep discounts and other sales promotions, which will put a downward pressure on their margins. The West European car market is expected to decline to 11 million units in 2012.
Ford revealed that it is likely to lose between $500 million and $600 million in 2012 in the 19 European markets covered by the automaker owing to the ongoing debt crisis in the region. The figure compared with a meager $27 million loss recorded by the company in 2011. In the fourth quarter of last year, the loss amounted to $190 million.
While releasing the 2011-fourth quarter results, Ford projected industry volume (including medium and heavy trucks) of 14.0 million units–15.0 million units for full year 2012 in Europe. However, industry-wide sales in the region expect to reach the lower end of the forecast, according to the Chief Financial Officer of the company, Lewis Booth.
Meanwhile, GM’s European arm, Opel, revealed that it expects to report an operating loss of €1 billion ($1.3 billion) due to fewer car sales than anticipated. The unit expects to sell 1.4 million vehicles in 2012, which are about 100,000 units less than the earlier projected sales.
In order to reverse the 12 years of losses in Europe (totaling more than $12 billion), particularly from the Opel brand, GM has recently formed a global allowance with PSA Peugeot Citroen (PEUGY). The alliance will help both the automakers reduce at least $2 billion in costs.
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