Major Industry Trends
After the horrors of 2008, by mid-2011 the global auto industry was looking in much better shape, with a number of radical new trends driving both sales and vehicle development. The incorporation of new technologies, from composite body materials to dual-drive power systems (electric plus gasoline), and enhanced safety features are seen as driving a competitive edge for manufacturers. At the same time, alliances between manufacturers and major component providers are seen as the solution to the changing business model being forced on OEMs by low margins and intense competition, according to a survey of motor manufacturer CEOs by accountants KPMG.
The industry has come a long way from the depths of the global crash, the nadir of which saw the three giant US car makers having to go cap in hand to the government for bailout funding. The official reason for the US$25 billion in government aid was to help them re-equip, to meet new “fuel-efficient” standards set by the United States at 35 miles per gallon (mpg), or 6.7 liters per 100 kilometers. The real reason was looming bankruptcy.
The downturn affected automobile manufacturers everywhere, with short time and factory stoppages becoming commonplace throughout developed markets. In emerging markets, where sales prior to the global slowdown were skyrocketing, and profits per vehicle were three to five times higher than those being achieved by manufacturers in mature markets, the downturn scarcely dented productivity, and 2010 and 2011 have seen continued strong growth.
According to a PricewaterhouseCoopers (PwC; 2011) report, the upturn has been marked by a focus on strategic mergers and acquisitions throughout the sector, though these deals have tended to be about smaller “bolt-on” acquisitions and/or survival-driven deals. Overall deal volumes were pretty much the same as for 2009 apart from in Asia, where the deal volume more than quadrupled. Deal values in Asia were boosted by a few large transactions. The European sector saw a number of deals, accounting for 46% of the global auto M&A activity by volume.
PwC points out that, historically, deal volumes have tracked the volumes of light-vehicle assembly, but that fell away in 2010, when light-vehicle assembly recovered far faster than deal volumes.
The strength of emerging markets’ vehicle sales was highlighted in January 2010, when China said it had overtaken the United States to become the world’s biggest car and van market. The China Association of Automobile Manufacturers said 13.6 million vehicles were sold within the country in 2009. That compares with just over 10 million vehicles in the United States, which was previously the world’s largest market. The top three companies in terms of sales are all joint ventures with the Shanghai Automotive Industry Corporation (SAIC). SAIC-GM-Wuling sold just short of 1 million vehicles, Shanghai Volkswagen sold 728,200, and another SAIC-GM tie-up, Shanghai GM, accounted for 708,000 sales. Part of the rise was due to moves by the government to stimulate demand. These included cuts in sales tax for small cars.
Car sales in India also fared well through the downturn. Indeed, India’s passenger car sales rose the most in three years in 2009 as economic growth and cheaper loan rates helped the country withstand a global slump in demand. Sales totaled 1.43 million units, 18.7% more than the 1.20 million sold in 2010.
In 2011, however, rising inflation and high fuel prices had a marked negative impact on sales. The Society of Indian Automobile Manufacturers (SIAM) reported sales for May 2011 slowing to just 7% year-on-year growth, the slowest rate of increase for two years. India has raised interest rates nine times in just over a year in an effort to dampen inflation. May 2011 also saw new car sales slipping in China with sales actually fractionally down (0.1%) in comparison with May 2010. The slowdown in sales is also a reaction to the withdrawal of China’s small-car tax incentive scheme at the end of 2010, which shows just how tight the link between tax policies and vehicle sales can be.
Mature-market manufacturers have had to rethink their approach to compete for market share in emerging markets, while emerging-market players, which do not have the same cost-heavy, unionized structures as, say, the big three US manufacturers, have done much better in selling into mature markets. One of the major strategies of mature-market car manufacturers has been to move manufacturing and assembly to lower-cost locations. In the Americas, this has meant moving manufacturing from Detroit to Mexico. In Europe, it has meant moving from established markets to factories in the new accession countries in central and eastern Europe. Asian manufacturers, such as the South Korean companies Hyundai and Kia, have been able to grow sales not just in Asia but in mature markets as well.
In 2011, the trend of shifting the entire automotive sector towards more environmentally friendly vehicles and sustainable lifecycle manufacturing, with an emphasis on reuse and recycling of materials, continues to strengthen. One positive in the downturn was the way many Western countries adopted schemes to encourage consumers to dump old, fuel-inefficient vehicles for new models which produce much less pollution. This development marked the beginning of the upturn for the Western car industry, though sales of hybrid, dual power train vehicles are still in their infancy.
Sales of new cars in the United Kingdom, boosted by the government’s “new for old” stimulus, reached almost 2 million units in 2010, according to the Society of Motor Manufacturers and Traders (SMMT). Although the number of registrations was at the lowest level since 1995, sales in the latter half of the year were boosted by the government’s scrappage scheme. The scheme, which offered a £2,000 (US$3,000) incentive to scrap old cars, accounted for more than a fifth of all new car registrations since it came into effect on May 18, 2009. Other countries with programs aimed at boosting spending on cars saw a similar rebound in sales, though there were fears that the scheme was simply dragging future sales into the present at the expense of a dearth of sales once the incentive scheme was withdrawn. By mid-2011 these effects were still working their way out of the system.
The March 2011 Japanese earthquake and tsunami had a palpable impact on the auto industry, with the effects continuing to ripple through to mid-2011. This was largely due to the disruption of component shipments to vehicle assembly plants around the world as Japanese industry struggled to cope with power outages caused by damage to Japan’s nuclear power generation capacity. According to Scotia Capital (Gomes, 2011), worldwide sales were flat in May 2011 by comparison with the sales for May 2010—a significant slowdown on the 6% increase recorded for the first four months of 2011. Nevertheless, the report says, vehicle assembly numbers have bottomed out and a sequential double-digit increase in global production in the third quarter of 2011 is anticipated.
The impact of the tsunami on US car sales was also palpable, with sales dropping below an annualized 12 million units in May (down from a consistent 13 million unit annualized sales benchmark achieved in the first four months of 2011), due to a shortage in US car dealerships of Japanese models.
Market Analysis
Global sales of cars rose from 50.5 million units in 2010 to an annualized figure of 59.67 million by mid-2011. The recent dominance of Asia over developed markets continues, with North America (the United States, Canada, and Mexico) expected to chalk up a total of 15.6 million unit sales through 2011 by comparison with 13.93 million in 2010, while Asia registers 22.98 million, of which sales in China and India are expected to reach 10.35 million and 2.1 million respectively.
The turnaround for major Western car manufacturers has been pronounced. In April 2010, for example, Fiat US subsidiary Chrysler lost US$197 million—adding to the massive US$3.8 billion it lost following bankruptcy in 2009. This turned around for Chrysler in 2011, with reported first-quarter profits of US$116 million, a swing of US$313 million.
Commenting on the Fiat Group’s results as a whole for Q1 2011, Fiat CEO Sergio Marchionne said the results were “more than satisfactory given the state of the European car market.” Volumes were up 3.5% on 2010. Revenues for the group were up 14.7%, with a number of marques, including Alfa Romeo, Lancia, Maserati, and Ferrari, posting a 22.1% year-on-year increase. All in all, the Fiat Group managed to trim a €411 million loss for Q1 2010 to a loss of just €21 million for the first quarter of 2011.
Rival European car firms Volkswagen and Porsche both reported good operating profits, largely thanks to increased sales in Asian markets. Volkswagen posted Q1 operating profits of €2.91 billion, well ahead of analysts’ estimates, while Porsche recorded Q1 2011 profits of €496 million. Meanwhile, French car maker Peugeot Citroen said its group revenues increased by 10.2% for the first quarter, despite supply-chain problems stemming from the disruption caused by the Japanese tsunami. However, it also noted that it expected to take a hit of some €150 million through the first half of 2011 as a consequence of this supply-chain disruption.
Legislation-driven challenges for the global auto sector revolve around two needs: to maximize fuel efficiencies in engine and bodywork design, and to lower CO2 emissions. The sector has also had to take account of shifts in consumer preferences towards smaller, more fuel-efficient, “greener” vehicles, in response to growing concern about global warming. To protect their reputations and to be seen as good corporate citizens, manufacturers have also had to respond by “greening” their supply chains, at the same time as they move to achieve efficiencies by making greater use of outsourcing of components and assemblies.
PwC forecasts that, from now until 2015, emerging markets will enjoy 18 times the growth in light-vehicle assembly that will be achieved in mature markets. On these figures, around 95% of light-vehicle growth will originate from emerging markets, with the BRIC countries (Brazil, Russia, India, and China) growing fastest, and accounting for some 58% of anticipated growth. PwC expects China and India to lead this growth in light-vehicle output, boosted by domestic markets that account for over 2 billion people.
Technological Developments
Two exciting new directions for the auto sector are moves to build ever-cheaper and more-affordable small cars (to bring car purchases within the reach of greater numbers of emerging-market consumers), and a determined focus in some markets, such as the European Union, on achieving ever-greater fuel efficiency. In India, the country’s leading automaker, Tata Motors, announced its “People’s Car” in January 2008, with a target price of just 100,000 rupees, or US$2,500. The design makes extensive use of plastics and adhesives, instead of welding, to cut costs, and it has been produced at a price point that mature-market auto manufacturers would find impossible.
PwC argues, however, that environmental considerations should not be seen by auto manufacturers as just constraints on design, but rather as opening “the door to broader horizons.” Opportunities for new profit sources and competitive advantages are available if the industry moves in the direction of safer, more comfortable, and simpler vehicles. Innovations such as that of Tata with the Nano (People’s Car) are already dramatically altering the competitive climate, PwC argues.
Automakers’ environmental initiatives are sure to win investor attention, creating both opportunities and threats for manufacturers. The European Union’s requirement for added use of particulate filters on diesel engines for all new cars sold in that territory, which came into effect from September 2009, is one obvious example of the way in which the regulatory environment is setting constraints on the industry. Emerging-market companies will not escape this trend. China, for example, aims to implement similar standards to Europe through a set of environmental and regulatory standards called the China IV Standards, which came into force in 2008.
Then there is the impact on the auto industry of environmental and waste regulatory regimes elsewhere in the economy. One example is Europe’s REACH standard (Registration, Evaluation, and Authorization of CHemicals), which has an impact on the auto industry. REACH mandates transparency by suppliers and substance importers, and contributes to the “greening” of the supply chain.
The International Organization of Motor Vehicle Manufacturers (OICA) points out that the auto industry is an absolutely vital driver of global growth. In a Global Markets Roundtable held back in October 2010, as part of the 2010 General Assembly, OICA noted that if auto manufacture were a country it would be the sixth largest economy in the world. “Automakers’ products drive local and national economies—making this industry critical to the global economy’s strength. Vehicle manufacturing and use provide major contributions to government revenues around the world, more than €400 billion in 26 countries alone,” it says. The industry globally employs some 9 million people directly and has an output level worth more than €1.5 trillion. Each job in the sector supports a further five jobs, based on the auto industry’s dependence on a range of manufacturing sectors, including steel, iron, aluminum, glass, plastics, carpeting, textiles, computer chips, and others.
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