ARM Arvinmeritor, Inc.

The auto industry is highly concentrated, with the top 10 global automakers accounting for over 77% of production worldwide. In the first four months of 2011, General Motors Company (GM) led with a 19.6% market share in the U.S., followed by Ford Motor Co. (F) with a 16.2% market share, Toyota Motors Corp. (TM) with a 14.1% market share, Honda Motor Co. (HMC) with a 10.3% market share, Chrysler-Fiat with a 9.6% market share and Nissan Motor Co. (NSANY) with a 8.5% market share.

The recent economic crisis provided the impetus for 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, Greater 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.

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.

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.

"Green" Cars

Higher fuel prices and concerns over global warming have pooled attention on the auto industry 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 smart USA micro EV.

The market for hybrid cars was hit hard 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, as the economic backdrop has started improving again.

Globally, the hybrid market is ruled by Toyota and Honda. Meanwhile, other automakers such as Ford, General Motors and Nissan are also aggressively pursuing a plan to push hybrid sales.

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 268% between 2005 and 2012. Presently, there are only 12 hybrid models available in the U.S., which would increase to 52 by 2012.

Detroit’s Comeback

The ‘Big Three’ Detroit automakers – GM, Ford and Chrysler – lost consumer confidence in 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 have 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, have bounced back with a recovery in the global market and restructuring of the product portfolio at the end of 2009. In 2010, Ford’s sales went up 19% to 1.94 million vehicles, while sales of GM and Chrysler grew 7% to 2.22 million vehicles and 17% to 1.09 million vehicles during the year, respectively.

Ford focuses on its Ford, Lincoln and Mercury branded cars, shedding the Volvo cars, while GM concentrates on four core brands – Chevrolet, Buick, GMC and Cadillac – withdrawing Saturn, Hummer, Pontiac and Saab.

Further, Ford has decided to expand its luxury Lincoln line-up at the cost of its Mercury line-up, which has been phased out at the end of 2010. The company plans to launch as many as 7 new Lincoln vehicles in the next 4 years, including a small car.

In the first quarter of 2011, Ford posted a profit ($2.61 billion or 62 cents per share) for seven straight quarters after years of losses. In fact, it was the biggest profit since the same quarter in 1998. GM posted its biggest profit in 11 years ($1.7 billion or 95 cents per share) since earning $1.8 billion in the second quarter of 2000. Meanwhile, Chrysler posted its first quarterly profit ($116 million) since 2006.

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 international standards. To this end, Beijing Automotive Industry Holding Group (BAIC) purchased the intellectual property rights from GM’s Saab in 2009 in order to develop its own brands and introduce new models. BAIC purchased the rights to certain powertrain, engine and gear-box technology for Saab's 9-5 and 9-3 sedans.

In a similar move, Zhejiang Geely Holding Group bought Volvo cars from Ford in order to tap China's high-growth auto market by acquiring modern, innovative technologies from the Swedish brand to upgrade its car lineup. In December 2009, Geely also signed up with Johnson Controls Inc. (JCI) to be its global parts supplier.

The Indian automakers are also gearing up to beyond the domestic market. Tata Motors (TTM) has revealed plans to launch its European version of the small car, Nano Europa in 2011 and an U.S. version of the same car by 2012. India’s utility vehicle maker Mahindra & Mahindra has announced launching TR20 and TR40 pickups in the U.S. that are reportedly more economical compared to other pickups sold in the country.

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 background 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.

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

Thus, despite the government’s sizable investment in the automakers, it is likely that there will be auto market suppliers who are unable to restart operations due to working capital shortfalls even as automaker production resumes.

Higher dependence on automakers makes the auto market 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 sharp focus after Toyota's announcement of a series of recalls staring in late 2009. Since November 2009, Toyota has recalled more than 14 million vehicles globally in about 20 recalls, crossing all other automakers. The U.S. Transportation Department imposed a fine of $48.4 million 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 for the year.

However, Toyota has revealed that it has repaired 5 million vehicles related to its three biggest recalls announced in late 2009 and early 2010. Through the on-site SMART evaluation program since April 2010, the automaker has also noticed a sharp 80% drop in customer complaints related to the sudden acceleration problem.

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. Among these, the largest recall occurred in June last year, involving 1.5 million vehicles, in order to fix a problem with a heated windshield wiper fluid system. Meanwhile, Ford recalled nearly 600,000 vehicles throughout 2010 and more than 1 million vehicles year-to-date.

Japan Disaster

The earthquake, tsunami and the nuclear crisis in Japan have thrown the global automotive industry out of gear. The auto parts supply chains have been paralyzed, triggering production shutdowns, work shift reductions and cancellation of orders.

Japan accounts for about 13% of the worldwide automobile production with the U.S. being its largest market. Production of as many as 40 auto parts manufacturer in the country has been jeopardized due to plant outages and power shortages following the earthquake.

Another crisis that the auto parts supplied from Japan poses is their uniqueness. Most of the auto parts sourced from Japan are very complex and specifically tailored. As a result, finding substitutes for such customized components becomes very difficult. Moreover, it is extremely painful to shift the production of these parts to unaffected areas, where Japan has excess auto parts supplying capacities.

According to IHS Automotive, the global automotive industry could face interruptions in supply of critical components such as transmissions, electric vehicle battery packs and electronic semiconductors for an indefinite period.

Due to these factors, none of the major Japanese automakers, including Toyota, Honda and Nissan could provide any sales and earnings guidance for the fiscal year ending March 31, 2012 due to uncertainties emanating from the crises in Japan.
 
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