The auto industry is highly concentrated, with the top 10 global
automakers accounting for over 77% of production worldwide. In the
first four months of 2011,
General Motors Company
(GM) led with a 19.6% market share in the U.S., followed by
Ford Motor Co. (F) with a 16.2% market share,
Toyota Motors Corp. (TM) with a 14.1% market
share,
Honda Motor Co. (HMC) with a 10.3% market
share, Chrysler-Fiat with a 9.6% market share and
Nissan
Motor Co. (NSANY) with a 8.5% market share.
The recent economic crisis 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
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, Greater 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.
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.
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.
"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 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
smart USA micro EV.
The market for hybrid cars was hit hard 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, as the economic
backdrop has started improving again.
Globally, the hybrid market is ruled by Toyota and Honda.
Meanwhile, other automakers such as Ford, General Motors and Nissan
are also aggressively pursuing a plan to push hybrid sales.
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 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 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, have
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.
In the first quarter of 2011, Ford posted a profit ($2.61 billion
or 62 cents per share) for seven straight quarters after years of
losses. In fact, it was the biggest profit since the same quarter
in 1998. GM posted its biggest profit in 11 years ($1.7 billion or
95 cents per share) since earning $1.8 billion in the second
quarter of 2000. Meanwhile, Chrysler posted its first quarterly
profit ($116 million) since 2006.
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 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 gearing up to beyond the domestic
market. Tata Motors (TTM) has revealed plans to launch its European
version of the small car, Nano Europa in 2011 and an U.S. version
of the same car by 2012. India’s utility vehicle maker Mahindra
& Mahindra has announced launching TR20 and TR40 pickups in the
U.S. that are reportedly 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 to automakers 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 efiled for bankruptcy. The financial condition of the majority
of auto market suppliers continues to deteriorate, resulting from a
historically weak demand and higher dependence on automakers.
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.
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 working capital
shortfalls even as automaker production resumes.
Higher dependence on automakers makes the auto market 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),
ArvinMeritor Inc. (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 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.
Safety Recalls
Automotive safety recalls were brought into sharp focus after
Toyota's announcement of a series of recalls staring 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 imposed 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.
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. Among these,
the largest recall occurred in June last year, involving 1.5
million vehicles, in order to fix a problem with a heated
windshield wiper fluid system. Meanwhile, Ford recalled nearly
600,000 vehicles throughout 2010 and more than 1 million vehicles
year-to-date.
Japan Disaster
The earthquake, tsunami and the nuclear crisis in Japan have thrown
the global automotive industry out of gear. The auto parts supply
chains have been paralyzed, triggering production shutdowns, work
shift reductions and cancellation of orders.
Japan accounts for about 13% of the worldwide automobile production
with the U.S. being its largest market. Production of as many as 40
auto parts manufacturer in the country has been jeopardized due to
plant outages and power shortages following the earthquake.
Another crisis that the auto parts supplied from Japan poses is
their uniqueness. Most of the auto parts sourced from Japan are
very 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.
According to IHS Automotive, the global automotive industry could
face interruptions in supply of critical components such as
transmissions, electric vehicle battery packs and electronic
semiconductors for an indefinite period.
Due to these factors, none of the major Japanese automakers,
including Toyota, Honda and Nissan could provide any sales and
earnings guidance for the fiscal year ending March 31, 2012 due to
uncertainties emanating from the crises in Japan.
AMER AXLE & MFG (AXL): Free Stock Analysis Report
FORD MOTOR CO (F): Free Stock Analysis Report
GENERAL MOTORS (GM): Free Stock Analysis Report
GOODYEAR TIRE (GT): Free Stock Analysis Report
HONDA MOTOR (HMC): Free Stock Analysis Report
MAGNA INTL CL A (MGA): Free Stock Analysis Report
NISSAN ADR (NSANY): Free Stock Analysis Report
SUPERIOR INDS (SUP): Free Stock Analysis Report
TENNECO INC (TEN): Free Stock Analysis Report
TOYOTA MOTOR CP (TM): Free Stock Analysis Report
TRW AUTOMTV HLD (TRW): Free Stock Analysis Report
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