The Automotive Industry – Primed For Success
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By Melissa Anderson
If you believe the maxim, “What doesn’t kill you makes you stronger,” then the U.S. auto industry must be strong as an ox. Consider what we went through beginning in 2007:
*North American light duty vehicle production fell from 15.0 million units in 2007 to 8.56 million in 2009, a 43 percent decline;
*In one quarter, from Q4 2008 to Q1 2009, there was a 37 percent plunge in vehicle production;
*U.S. vehicle sales dropped from 16.1 million units in 2007 to 13.1 million in 2008 and 10.4 million in 2009.
Picture an industry with the buildings, equipment and people to deliver vehicle production in excess of 16 million units a year suddenly facing demand equaling half that amount and you can well imagine — or may have lived through — the resulting stress. It is no wonder that 82 percent of suppliers responding to IRN’s annual industry survey in late 2009 said that they were moderately or significantly weaker financially than they had been two years prior. IRN provides market data for and about suppliers in the transportation equipment industry.
The measures taken in 2008 and 2009 transformed the domestic auto industry in many respects. GM provides a stark example. The company emerged from its Chapter 11 bankruptcy proceedings in July 2009 with 34 U.S. manufacturing plants compared to 47 plants going in; reduced its hourly headcount to 40,000 from 61,000; cut its brands from eight to four, and pared away at its dealer network. The other automakers and component suppliers were also diligent about not letting a good crisis go to waste. In 2010, almost 90 percent of IRN’s supplier survey respondents said they had cut at least 10 percent from their cost structures and half of them had cut at least 20 percent, on top of the efforts that began in 2009.
Sales Bobbing Back Up
Fortunately, in our cyclical industry, what goes down must eventually come up, so the principal question is “when?” not “whether?” The overall macroeconomic situation has been discouraging in some areas that are key indicators for the auto industry. For example, we still appear to be several years away from a return to employment levels that foster regular turnover in the average car buyer’s garage. Another problematic area has been the slow recovery in new home construction. The housing market has been working against the auto industry recovery in two ways. Home equity values have diminished in many regions, leaving homeowners with less wherewithal for vehicle purchases. In addition, slow growth in new home starts retards light vehicle sales because so many pickup trucks are utilized by contractors in residential construction.
The indicators and dynamics are improving, however. Measures of consumer confidence are rebounding and consumer spending is strengthening. Having had a couple of years to get their financial houses in order, consumers are finding it easier to get automotive financing. The auto industry is also benefiting from the simple fact of vehicle age. Some people have delayed purchasing a vehicle for so long that they basically do not have a choice, so those buyers have been driving the market for replacement sales.
Supplies of used vehicles are tight and are expected to remain so for most of 2012. With demand high relative to supply, the prices of used vehicles are high as well. Consumers tend to favor buying a new vehicle altogether when used car prices are elevated. They should be able to find something they like on the dealer lot now that new vehicle inventories have finally stabilized to the point where there is satisfactory choice and availability, after a challenging 2011 when natural disasters disrupted the global supply chain for many automakers.
Through the end of April 2012, U.S. vehicle sales were up 10 percent compared to the prior year. The automakers have started ratcheting up their internal forecasts for the year, which is important because they have kept a tight rein on vehicle inventories as part of their new religion of not depending on sales incentives to move the metal.
Higher Volumes, Different Kinds
IRN was an early believer in the recovery of the U.S. light vehicle industry, and our sales forecast for 2012 calls for 14.5 million units in U.S. sales from a 2011 level of 12.8 million. We expect another million units in sales for 2013 to 15.6 million. IRN’s North American light vehicle production forecast is projecting 14.4 million units in 2012 and 15.3 million in 2013, with a modest annual increase occurring each year after that through the five-year forecast horizon.
Within the auto sector, we will see some shifts in the fortunes of vehicle segments. Going forward, the so-called crossover vehicles are expected to be the fastest-growing segment. Crossovers are sport-utility-type vehicles that are built on a unibody or car-based platform rather than body-on-frame construction. As a result they have better ride and handling characteristics while still offering the functionality of an SUV. Examples of these models include the Jeep Compass, Ford Edge, Buick Enclave, and the Toyota RAV4. IRN is also projecting growth in the market share of small and midsize cars as an outcome of the increased consumer interest that gas prices near $4 a gallon engenders; but also as a reflection of the new commitment of automakers to invest in these segments, which have historically been less attractive low-profit zones. Some of the models that fit into these segments are the midsize Ford Focus, Chevy Cruze and Volt, the small Fiat 500, Ford Fiesta and Nissan Versa.
Technology shifts being driven by the stringent fuel economy and emissions standards are also underway in various forms. At a minimum, the automakers are intent on achieving engine optimization using technologies that tweak the internal combustion engine, including: variable valve timing; cylinder deactivation; direct injection; six and eight-speed transmissions and more. A change in industry tradition is engine downsizing, i.e., offering fewer engine options per model and finding methods to squeeze more power out of smaller powerplants to improve fuel economy with minimal trade-off to consumers. Hybrid vehicles, where the engine shuts off in stop-and-go traffic and an electric motor assists the gas engine, are being offered as alternatives on many models but the take rates for hybrid variants are not high, averaging perhaps 8 percent to 10 percent of a model’s sales. And finally, the industry is keeping its hand in pure electric cars that use power stored in batteries to drive motors and have no internal combustion engine at all. IRN’s forecast for electric vehicles is conservative at less than 1 percent of total production.
Automotive Companies Determined To Grow
The rising tide of vehicle sales and production will likely lift all boats over the next five years. The boost from market demand will obscure challenges that individual car companies and component suppliers face, though. Chrysler has performed surprisingly well under the leadership of its Fiat chief Sergio Marchionne, but its product pipeline has been relatively sparse through the downturn. GM has also made significant strides in profitability and selected vehicle introductions, but it has been hurt by the interruption of its full-size pickup and SUV product development cadence during bankruptcy and it still has not figured out how to solve the losses of its European operations. Ford is in better shape from streamlining its global operations and maintaining a broad product line, although its weaker balance sheet could have an impact down the road.
Each of the Japanese Big Three has had its share of struggles with vehicle supply since the 2011 earthquake and tsunami. Toyota has finally replenished its inventory and is regaining market share this year. Honda has had some bumps with disappointing product introductions and is still filling the dealer pipeline, so its performance has been sluggish. Nissan has been aggressive in both new product planning and in moving production out of Japan to counter the strong Japanese yen. Hyundai has been enjoying a rapid growth curve that is expected to be tempered this year by constraints in production capacity, but it has a very strong product pipeline.
Finally, Volkswagen has been increasing its Passat output in Chattanooga, Tenn., building up a North American footprint as part of its campaign to become the largest auto producer in the world.
In spite of global overcapacity, as evidenced by numbers of plants vs. demand overall, the automotive industry will continue to see some level of construction and expansion by automakers and the suppliers that support them because the existing capacity is not always in the right geographic location. Foreign-owned companies are still investing in expansion of their southeastern U.S. facilities (i.e., Kia, Honda, and BMW have all announced expansions within the past year). Mexico is attracting significant factory investment, with Mazda, Honda, Nissan, and VW having committed to new plants and Ford expanding its existing stamping and assembly plant in Hermosillo. The good health and optimism of the automakers encourages corresponding investment by the supplier community, so the industry is well-positioned to enter a period of prosperity and relative stability.
Melissa Anderson is the vice president of IRN Inc., based in Grand Rapids, Mich. The firm provides integrated market data, intelligence, and insight for and about suppliers in transportation equipment markets. To learn more, visit www.think-irn.com.