ARM Arvinmeritor, Inc.

The automotive industry is highly concentrated, with the top-10 global automakers accounting for roughly 80% of worldwide production and nearly 90% of total vehicles sold in the U.S.

In the first nine months of 2012, General Motors Company (GM) led with a 18.1% market share in the U.S., followed by Ford Motor Co. (F) with a 15.5% market share, Toyota Motors Corp. (TM) with a 14.4% market share, Chrysler-Fiat with a 11.5% market share, and Honda Motor Co. (HMC) and Nissan Motor Co. (NSANY) at the last spots with 9.8% and 7.9% market shares, respectively.

Due to a massive structural change after the global economic meltdown in 2008, the global auto industry is expected to be ruled by automakers and suppliers based in the six major auto markets – the U.S., Western Europe, Japan, China, India and Korea.

OPPORTUNITIES

To remain competitive, the automakers will need to design vehicles that will cater to consumers in both mature and emerging markets while manufacturing them at low-cost using the most advanced technology.

The recent trend shows that automakers are concentrating on offering more optional features (which will save money on gas) even on the small and less gas-guzzler vehicles in order to attract buyers. The sale of optional features is helping them offset lower profit margins for small cars relative to large trucks.

The automakers 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. According to a study by CSM Worldwide, 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.

The role of governments is highly significant. 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.

In late 2011, 13 major automakers, including Ford, GM, Chrysler, BMW, Honda, Hyundai (HYMLF), Jaguar/Land Rover, Kia, Mazda, Mitsubishi, Nissan, Toyota and Volvo, have signed letters of commitment with the U.S. Government to upgrade 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

Rising fuel prices and global warming have turned attention to the auto industry that either rely less on traditional fossil fuels or use cheaper renewable sources of energy. Thus, “green” alternatives such as fuel-efficient electric vehicles (EVs) and hybrid vehicles will attract consumers in the affluent countries while flex-fuels such as ethanol and natural gas will be highly demanded in the emerging auto markets due to their suitability with the local climate and resource base.

Consequently, there will be a variety of powertrain technologies in the auto industry in this decade, and “green” cars are likely to represent about 30% of total global sales in developed auto markets.

Globally, the hybrid market is ruled by Toyota (which includes the highly acclaimed Prius) and Honda (includes Civic and Insight hybrids). Meanwhile, other automakers such as Ford, General Motors and Nissan are also aggressively pursuing plans to push hybrid sales. Some of their “green” cars have already generated a huge response in the auto industry, including the Ford Focus, GM Volt, Nissan Leaf and Daimler AG’s (DDAIF) smart USA micro EV.

In late 2011, Ford and Toyota have signed a memorandum of understanding on the equal product development collaboration in order to develop a gas-electric hybrid engine for pickup trucks and sports utility vehicles (SUVs). The automakers have decided to sign a definitive agreement 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 in the near future.

In August 2012, Ford revealed its plan to invest $135 million to develop key components, including advanced battery systems, for its next-generation hybrid-electric vehicles. The automaker is looking forward to double its battery-testing capabilities to 160 individual battery-test channels by 2013.

It aims to boost development of hybrid-electric vehicles by at least 25%. The company will utilize its 285,000-square-foot research and development lab, Ford Advanced Electrification Center, in Dearborn, Michigan to focus almost entirely on hybrids and electric vehicles. Presently, 1,000 engineers are working on hybrid and electrification programs at the facility, formerly known as Advanced Engineering Center.

Ford aims to reduce cost of its current hybrid system by 30% compared with its previous-generation system. The company plans to launch five fuel-efficient hybrid-electric vehicles this year including Focus Electric, C-MAX Hybrid, C-MAX Energi plug-in hybrid, new Fusion Hybrid and Fusion Energi plug-in hybrid. It also plans to triple production capacity of electrified vehicles by 2013.

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 is 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. Leroy, head of Toyota's European operations, has revealed that the percentage of consumers in Europe interested in hybrid cars for their next car purchase has increased to 16% in 2011 from 8%–9% in 2009.

U.S. Market Recovery

The Big Three Detroit automakers (GM, Ford and Chrysler), who command the lion’s share of the U.S. auto market, bounced back with the help of a recovery in the global market, restructuring of the product portfolio, strong pent-up demand and cheap financing (when average interest rate was 4.1% – the second-lowest since December 2011) in the U.S. after being severely hit by the global economic crisis.

In fact, higher average age of cars on U.S. roads (10.8 years) and falling unemployment rate have been the key factors in driving the auto sales in the U.S. despite higher gasoline price. In September, U.S. auto sales reached its highest monthly seasonally adjusted annual rate (SAAR) of 14.9 million vehicles since March 2008, four months after the global economic recession set in. For 2012, industry sales are expected to grow 13.3% to 14.5 million vehicles on a SAAR basis from 12.8 million vehicles last year.

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 being the rapidly growing economies. 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.

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 consumers demand abroad.

Recently, Ford announced plans to boost exports of its engine production from India by shipping them for the first time to Europe. Currently, the automaker exports 40% of its Indian-made engines and 25% of its Indian-made cars to 35 countries. The company’s plan to rev up Indian exports is in line with its capacity expansion programs in the country. The company expects to manufacture 450,000 cars and 600,000 engines in India by 2015.

Ford already pumped in $2 billion to build manufacturing facilities in India. However, it is still lagging behind Hyundai Motor and Maruti Suzuki India Ltd, which occupy the lion’s share in the Indian car market.

Auto sales in China had grown at a double-digit pace since 1999, but fell in 2008 when the global economic crisis crept in. In 2009, China overtook the U.S. as the biggest auto market in the world by sales volumes when the Beijing government introduced a stimulus package, including tax incentives for small cars with engine sizes of 1.6 liters or smaller.

However, the incentives were scrapped last year and the Beijing government imposed quotas on new car registrations in order to control traffic congestion. In the first nine months of 2012, passenger vehicle sales in China increased a tad 3.4% to 14.1 million units, according to the China Association of Automobile Manufacturers (CAAM).

Auto sales in the country are expected to improve further if the government renews some of its policy incentives that helped the country overtake the U.S. as the biggest auto market. It is rumored that the government would soon resume paying subsidies to rural consumers who are willing to trade in old vehicles for new and fuel-efficient vehicles. According to CAAM, passenger car sales in 2012 is expected to grow by 9% in the country, which is much higher than 2011 (2.5%).

Domestic automakers are likely to rule the key growth market of China as the government plans to consolidate the top 14 domestic automotive companies into 10. These automakers would capture a share of more than 90% in the local market.

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 strength to expand capacity in new markets. On the other hand, auto parts suppliers are sensitive to technology transfers to local third parties, which can give rise to low-cost competitors.

Since 1999, more than 20 of the largest global auto parts suppliers have filed for bankruptcy. The financial condition of the majority of auto market suppliers continues to deteriorate, resulting from a historically weak demand and high dependence on automakers.

Thus, despite the government’s sizable investment in the industry, it is likely that there will be auto parts suppliers who are unable to restart operations due to lack of sufficient working capital even as automakers start production. 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.

High dependence on automakers makes the auto market suppliers vulnerable to several maladies, primarily pricing pressure and production cuts. Pricing pressure from automakers constricts parts suppliers’ margins. On the other hand, production cuts by automakers driven by frequent market adjustments negatively affect their operations.

Some of the auto industry suppliers who have high reliance on a few automakers such as General Motors, Ford, Chrysler and Volkswagen include American Axle and Manufacturing (AXL), Meritor Inc. (MTOR), Goodyear Tire and Rubber Co. (GT), Magna International (MGA), Superior Industries (SUP), Tenneco Inc. (TEN) and TRW Automotive (TRW).

Technological Challenges

The shift in consumer preferences in the auto market towards hi-tech, fuel-efficient and environment-friendly vehicles, such as small cars/hybrids/EVs, is another issue. Auto market suppliers are expected to quickly adapt to new technologies by investing in research and development programs, putting heavy capital burdens on them.

The automakers also face significant challenges in transforming their existing powertrain technologies into the latest 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 technology needs to be supported by adequate charging outlets in order to recharge batteries, which is again a serious matter of concern.

Safety Recalls

Automotive safety recalls became a serious issue after they were brought into focus by media after Toyota’s announcement of a series of recalls since November 2009. Toyota has recalled more than 15 million vehicles globally in more than 20 recalls, surpassing all other automakers. The Transportation Department of U.S. had also imposed a fine of $48.4 million on the company 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.

Recently, the Japanese automaker announced its largest global recall in its 75-year history of 7.43 million vehicles due to defective power window switches that can cause fires. The recall includes models such as Yaris, Vios, Corolla, Matrix, Auris, Camry, RAV4, Highlander, Tundra, Sequoia, xB and xD, manufactured between 2005 and 2010.

In the spate of recalls following Toyota’s, other automakers’ recalls made headlines. They include Chrysler, Ford, GM, Honda and Nissan. Among them, GM recalled most frequently, followed by Ford.

Japan Disaster & Floods in Thailand

The earthquake, tsunami and the nuclear crisis in Japan in March 11, 2011 have thrown the global automotive industry out of gear. The auto parts supply chains have 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 about 40 auto-parts manufacturer in the country has been jeopardized due to plant outages and power shortages following the earthquake.

The global automotive industry faces interruptions in supply of critical components such as transmissions, electric vehicle battery packs and electronic semiconductors.

Another crisis that the auto parts supplied from Japan poses is their uniqueness. Most of the auto parts sourced from Japan is unbelievably complex and specifically tailored. As a result, finding substitutes for such customized components becomes very difficult.

Further, looming power shortages in the country caused by the meltdowns at Fukushima Daiichi nuclear power plant after the earthquake are affecting the automakers. Currently, Japan’s power generators are mainly run by imported gas and fuel as all the nuclear reactors have been shut down for routine safety checks due to the meltdown issue.

No sooner had the global automakers (particularly those in Japan) started recovering from the twin disasters in Japan than they were struck with another catastrophic natural disaster in Thailand. Thailand is an important manufacturing base in Asia for most global automakers, particularly those in Japan.

The automobile production in Thailand severely hampered by floods in the country that killed more than 500 people and damaged many automakers’ and their parts supplier’s plants. In fact, vehicle production in Thailand plummeted to the lowest level in more than 9 years.

Eurozone Crisis

The present Eurozone financial crisis has adversely affected the operations of many global automakers, especially GM and Ford, who have a significant exposure to the market. Car sales in Europe continued to be low, owing to weak consumer confidence on the back of a weak economy triggered by the crisis. The European Automobile Manufacturers’ Association (ACEA) reported a 7.1% fall in sales to 8.3 million cars in the continent in the first eight months of 2012.

Demand for cars in the continent has started to weaken. As a result, the automakers are trying very hard to entice the consumers with the help of steep discounts and other sales promotions, which will put a downward pressure on their margins. The West European car market is expected to decline to 11 million units in 2012. Some automakers have projected that European auto market will shrink 5% in 2012.

Ford revealed that it is likely to lose between $500 million and $600 million in 2012 in the 19 European markets covered by the automaker owing to the ongoing debt crisis. The figure compared with a meager $27 million loss recorded by the company in 2011. In the fourth quarter of last year, the loss amounted to $190 million.

Ford has toned down the industry volume guidance (including medium and heavy trucks) for full year 2012 to about 14 million units from the prior guidance of 14.0 million units–15.0 million units. Meanwhile, GM’s European arm, Opel, revealed that it expects to report an operating loss of €1 billion ($1.3 billion) in 2012 due to fewer car sales than anticipated.

Opel expects to sell 1.4 million vehicles in 2012, which are about 100,000 units less than the earlier projected sales. In order to reverse the 12 years of losses in Europe (totaling more than $12 billion), particularly from the Opel brand, GM has recently formed a global allowance with PSA Peugeot Citroen (PEUGY).

They may agree to form a 50-50 joint venture between GM’s Opel division and Peugeot’s core manufacturing arm. The alliance will help both the automakers reduce at least $2 billion in costs.

 
(ARM): ETF Research Reports
 
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