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) led with a 20% market share in the U.S.,
followed by
Ford Motor Co. (F) with a 16.9% market
share,
Toyota Motors Corp. (TM) with a 12.8%
market share, Chrysler-Fiat with a 10.2% market share, replacing
Honda Motor Co. (HMC) 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.
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, 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.
Green Cars
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.
Detroit’s Comeback
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.
WEAKNESSES
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),
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 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.
Japan Disaster
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.
AMER AXLE & MFG (AXL): Free Stock Analysis Report
DAIMLER AG (DDAIF): 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
TATA MOTORS-ADR (TTM): Free Stock Analysis Report
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