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AlixPartners study finds post-crisis auto industry facing new set of challenges; sales projected below historical levels for foreseeable future

A recently released annual automotive industry review by AlixPartners, the global business-advisory firm, concludes that the automotive industry—after surviving the crisis of the past few years—now faces a new set of formidable competitive challenges and decisions ranging from keeping costs and capacity under control with the slow, “post-bubble” sales recovery in the US, to placing the right bets on vehicle-propulsion and other technology systems, to focusing on the right emerging markets.

The AlixPartners 2011 Automotive Outlook finds that while automakers and suppliers have seen profits bounce back—North American original equipment manufacturers (OEMs) posted $12.5 billion in 2010 profit on a net margin of 4.6% and North American suppliers pulled in $8.2 billion on a net margin of 4.3%—things are far from back to “normal,” or at least the normal defined by the consumer-incentive-induced sales levels of the past.

In sync with its past annual auto studies, AlixPartners continues to predict that US auto sales will climb more slowly, and to a lower peak, than many others are predicting. Specifically, the firm estimates US auto sales will reach just 12.7 million units in 2011 and only 13.6 million in 2012.

AlixPartners also estimates that on-going unemployment and underemployment could cost the auto industry up to 1.5 million units in lost vehicle sales this year. Another market headwind is the stagnant US housing market. According to the study, historically, approximately one of every five vehicles sold is financed by home-value appreciation, a ratio that’s likely to decrease with the continuing stagnancy in home values.

Meanwhile, according to an AlixPartners survey of 1,000 Americans regarding their views of the US economy and their personal economic situations, 83% said they had delayed or planned to wait at least a year to buy a vehicle.

The differentiators for winning in the world we are transitioning to will be significantly different from the past. The good news is that most of the US players now have their costs in line to capitalize on a slow, steady sales recovery. On the other hand, the industry is facing some truly momentous, and momentously expensive, decisions on everything from powertrain choices to emerging markets; and for OEMs to count on a US sales bubble like in the last cycle—artificially-induced to begin with—to help fund all that is wishful thinking at best.

—John Hoffecker, managing director at AlixPartners and co-lead of the firm’s Enterprise Improvement Practice.

According to the study, one of the striking features of the new automotive industry is the convergence among competitors around the globe in areas including cost, quality, production processes, supply chain, management expertise and, last but not least, profitability. Profitability parity is evidenced by the fact that last year earnings-before-income-taxes (EBIT) margins for automakers globally clustered in a tight band ranging from 4.3% to 5.7%—with OEMs in China and India at 5.2%, while suppliers from China and India enjoyed an EBIT margin of 7.5%, the highest in the world.

This competitive convergence, the study says, will require big leaps forward in differentiators such as consumer-focused innovation, product-development excellence, truly strategic partnerships at various places around the globe, careful brand-building and, perhaps above all else, a general focus on speed—in achieving either first-mover advantage or fast-follower leverage.

At the same time, says AlixPartners, the future could bring a battle for control of the entire automotive value chain, as new propulsion systems related to the “electrification of the vehicle” may provide an opening for automotive suppliers with innovative battery technologies, or even players such as electric utilities, to take over the pole position from OEMs in that chain.

Technologically, the auto industry could well be on the cusp of its biggest set of changes since the invention of the internal-combustion engine more than 100 years ago. This will put unprecedented pressure on all players to pick the right business models, the right legal and capital structures, and the right partners. And, this all comes at a time of potential margin erosion as the industry, in general, shifts to smaller vehicles, both for regulatory and consumer-preference reasons. Preventing that erosion will be key.

—John Hoffecker

The AlixPartners study predicts a 13% compound annual growth rate (CAGR) for small cars and a 7% CAGR for small crossover vehicles between now and 2015 in the US, as large cars, SUVs and pickups are expected to see a CAGR of just 2%, respectively, in that time. The study also finds that pickup-truck sales will be hurt by the continuing housing crisis. U.S. pickup sales for 2011 are estimated to reach only 1.7 million units, well below the recent peak of 2.9 million in 2006.

House appreciation historically has been used to finance the purchase of a new vehicle about 20% of the time. But today, both the ‘wealth effect’ and the real wealth from owning a home just isn’t what it used to be. By the same token, pickup-truck sales, which historically have been at the leading edge of US economic recoveries, continue to be hurt by the depressed state of housing starts.

—Mark Wakefield, a director in AlixPartners’ Global Automotive Practice

The study also finds that the bulk of future sales growth globally has likely permanently switched to emerging markets. AlixPartners finds that the global vehicle market is on track to be 76.4 million units in 2011 (10% above its pre-crisis level), and sees that number at 96 million units in 2015—signifying, among other things, that autos is a true growth industry.

However, buttressed by the recent leveling-off of sales in China, the study states that growth will not be the same in every emerging market and will be “bumpy” in most, and cautions that companies and investors in those new markets may find themselves wrestling far sooner than expected with market cyclicality and other issues that Western automakers and suppliers routinely face.

One thing is for certain. Emerging nations have gone from being just sources of cheap parts and labor to being bona fide markets, not to mention bona fide competitors. What’s not so certain is which markets in particular will really take root and blossom, and which will have a false spring and then fade away. Right now, there’s a lot of attention on Russia, but, then again, India also used to be in that position. As always, caveat emptor should always be the guiding principle for players in new markets.

—John Hoffecker

Other key findings of the AlixPartners 2011 Automotive Outlook include:

  • Raw Materials Still Pricey. In part due to the continuing weak U.S. dollar, rising costs for raw materials and energy (in particular from foreign sources) will continue to pressure manufacturers and could compress margins. Besides petroleum-based products, some of the materials under pressure include copper, steel, lead, and platinum.

  • Still Plenty of Capacity. Though some parts of the supply chain, like electronics, are in tight supply today, the study finds that the industry still has plenty of capacity to support slow, steady growth. It finds, for instance, that of the 90 US suppliers that filed for bankruptcy in the last decade, only in those cases where the company moved into some degree of liquidation is it certain that permanent capacity reduction resulted.

  • Best Bets for M&A: Key Technologies and Growth Markets. Regarding the outlook for M&A in the auto industry, the study finds that while the industry is currently seeing high valuations, there may still be investment opportunities—for both private-equity and strategic buyers—in select segments and markets. Two such areas include key technologies, such as those tied to vehicle-propulsion systems, and growth markets, from emerging markets overseas to some niche-vehicle markets in the US.

For those with a clear investment strategy and the right criteria, there may well be many opportunities to be found despite today’s high valuations. And that certainly includes private-equity investors, who remain a significant part of the automotive industry with more than 50 firms holding over 75 companies in North America alone. But, in any deal, proper due diligence and strategic fit will be critical for success.

—Christian Cook, a director in AlixPartners’ Global Automotive Practice

Additionally, the AlixPartners study suggests a comprehensive strategic and operational package to achieve success in the new post-crisis automotive reality, including:

  • Suppliers and manufacturers must rethink their manufacturing, engineering and purchasing footprints, as sales potentials continue to shift into emerging countries.

  • Growth can be found in several other key areas, including: improving internal-combustion engines; moving premium features into mass production; and adding electronic controls to models.

  • Partnering with other companies should be considered, to fill gaps in capacity, competency, technology, regional presence and customer access—but such partnering must be done while keeping issues such as “cultural fit” and long-term commitment top-of-mind.

  • Companies should be “very slow to pull out the checkbook” when it comes to increasing overhead costs—which, the study finds, are already back to pre-recession levels for North American suppliers, with cost growth even surpassing sales growth in the first quarter of 2011.

  • Companies should leverage insights into long-term demographic and socio-graphic trends – including the probable driving habits of Baby Boomers as they retire and the priorities of Gen Y when it comes to their passions for such as things as video games vs. their feelings toward cars.

The AlixPartners 2011 Automotive Outlook is based on a benchmark analysis of 226 suppliers, 44 automakers and 21 heavy-truck OEMs. Public economic data and forecasts were also used in the study.

AlixPartners LLP is a global business-advisory firm offering comprehensive services to improve corporate performance, execute corporate turnarounds, and provide litigation consulting and forensic accounting services. The firm has more than 900 professionals in 15 offices across North America, Europe and Asia.

Comments

HarveyD

Whoever can make much more efficient, much lighter, much lower cost vehicles will have customers. Will those come from China or India?

The days of 3+ ton, 8 mpg, Hummers are over.

Toyota took a major step with their HEVs in 1997/98.

Nissan and Mitsubishi took major steps with their EVs in 2010/2011.

Hyundai took major steps in 2011 with their new models, more efficient drive trains and motors.

Ford will take major steps with many of their models in the next 3 years.

Many EU manufacturers will follow the trend in the next 3 years.

GM took an important step with their PHEV Volt in 2011 but it will not be enough.

Chrysler and Fiat are undecided and even if their 3-ton Rams sell well it does not guarantee future sales.

A D

It's not with unpopular battery cars that they will expand their earnings, consumers will reject them. The truth is that these manufacturers are working for big oil instead of their paying consumers, they prefer receiving secret money under the table. It's the internationnal goverment that is regulating car manufacturers and it's big oil and swiss bankers that is managing all centralized political goverments. Only germany recently is beginning a fight with the audi's e-gas and hydrogen project. Will they do it is another story, maybe it was for receiving special gifts and they will forget it at the last minute.

To understand the energy crisis you just have to observe where the money goes. Big oil and swiss bankers is a cartel having cause the first world war, the second world war, the vietnam war, the world trade center explosion, the irak war, etc. Car manufacturers, journalists, scientists, politicians, arms traders, rock and roll stars, media artists, gcc, are just employees of big oil and swiss bankers.

danm

Interesting article. Some good pts. Tumultuous times for the auto industry and difficult for co's to know the right direction, as technology keeps changing.
Can't understand why GM developed the Volt only to overprice it. It's like they stuck one toe in the water and then yanked it out.
Confusing times for consumers, too. However, when the technology appears people will flock to it, and price will be a major component.
Above comment: no doubt big oil "influences" events but not "controls".

ToppaTom

You "Can't understand why GM developed the Volt only to overprice it."?

What?

You assume the parts, labor, development costs do not set a price?

You assume the bailout means they can/should lose money on each car?

They very likely ARE losing money on each Volt but consider it a good use of "advertising" funds.

danm

I know development costs are huge for every new car. And companies lose money on first year of production (most likely). But they still must price it as low as possible to find a wide market.
Just advertising? Maybe so. But i'll gladly get my wallet out when i can afford one.

Mannstein

The averge US worker has seen his salary flat lined for more than a decade. After the bubble burst US households are de leveraging ie paying off credit card debt etc.

Furthermore, the tax payers are now expected to pay off the huge government bailouts, war expenditures, and Pentagon pork started under Bush and continued by Obama.

The middle class is being destroyed in this process while the super rich are enjoying the lowest tax rates since the 1930s. There is a massive wealth transfer taking place in the US as a result. If the car companies think that it's going to be business as usual they are in for a surprise. The middle class just doesn't have the money to spend on $50k vehicles, electric or otherwise, even for those members that still are employed.

ToppaTom

I mean that regardless of whether or not they lose a little on each Volt, they cannot just price it at $25k (to sell more) if it costs $36k to make. In that case, they would want to sell less (they would be "in short supply") but they get the green glory.

I expect they DO make money on each Volt, with the exception of amortizing the investment/development (how could they cover that with this low volume).

For large volume models (which the Volt is NOT) development is not a big part of the price.

Most all of us will rush to Volt/Leaf type cars if/when batteries become affordable.

Arne

A D

It's not with unpopular battery cars that they will expand their earnings,

I'm not sure what your measure of 'unpopular' is, but last thing I heard was that there are long waiting lists for the Volt and LEAF and that sales have exceeded expectations.
http://green.autoblog.com/2011/07/06/nissan-on-track-to-sell-12-000-leafs-in-u-s-by-end-of-2011/

HarveyD

Mannstein.....very good and pertinent observations. Less than 5% cannot continue to pull $$T from the US economy without major impacts such as:

1. Major increase in Governments debt level.
2. Major increase in individuals debt.
3. Many in the middle class going down to lower class level.
4. Poor people getting poorer.
5. USA's economy progressively going to third world level.

TT....you've said it right. We can no longer compete with countries with higher productivity per $ input. Our production cost is too high due to:

1. Higher workers pay and fringe benefits.
2. Much high management pay and bonuses.
3. Higher profit margins
4. Not enough re-investment in improved production methods.
5. Lower individual worker productivity (25% to 35% lower than Toyota and Honda).
4. Lower quality products.

Anne:....it may be true for the Leafs but not so sure for the Volts.

A D

To anne.

I just found this article in another website: ''A global survey conducted by the folks over at international consulting firm Deloitte shows that the current batch of electric vehicles do not meet consumers' expectations ''

http://green.autoblog.com/2011/08/01/survey-electric-vehicle-expectations-out-of-touch-with-reality/#aol-comments

Basically these 'new' electric cars are just costly, inneficient toys from high-financial circles. They are meant to lauph of the efforts of consumers to try to find a better dealThey are tailor-made to protect petrol use like it is since 100 years and give nothing more to the unfortunate motorist trying to avoid fuel cost in outdated ice cars, trucks, etc.

Arne

A D

You would have gotten the same result had you done a survey about 'mobile' phones 25 years ago.

I would reverse it:

From a purely functional pont-of-view the current EV's are no match for gasoline cars in terms of price/performance and practicality. That is a fact. That they sell in the thousands (more if production was in full sing), says a lot about their popularity.

Every mass market starts with only a handful of early adopters. It remains to be seen if and how fast this mass market will develop, but at this point, you can't say EV's are gathering dust in dealer lots.

Lucas

I live a hundred miles from the nearest Wal-Mart. Two hundred miles from the nearest (small) big city. (Salt Lake) Think I would have any interest in the longest range, pure EV?

Not without a genset ...

ToppaTom

The cost to make the new EVs (Volt and Leaf) make the sales price too high to sell in volume.

If they made a LOT more they would not sell them all, because the price would be only moderately lower, and even though the cost per car would be somewhat lower the slim margin and unsold autos would spell disaster.

This is BASIC (really basic) economics.

It's naive (or worse) to believe volume is the answer, yet no car maker in the world knows it.

The new EVs are very exciting and desirable, much as a sky boat might be desirable, but not a good investment - yet.

Early adopters and volume production are not relevant.
Batteries are too expensive.

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