Big Ideas

Current and Future Trends in the Automotive Industry

The effects of the global economy were on the agenda at the annual Original Equipment Suppliers Association (OESA) meeting

By Sasha Banks

November 2010

At the annual meeting of the Original Equipment Suppliers Association (OESA) on November 8 in Detroit, Michigan, executives from leading automotive original equipment manufacturers and suppliers provided an economic and operational analysis of the global automotive industry. Here are some highlights.

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How the Recession is Affecting Automakers

Overall, panelists expressed strong confidence in the economic recovery, although all agreed the turnaround is slow. Key future strategies for the automotive industry were to boost productivity and competitiveness (especially in Southern Europe), rein in healthcare and pensions costs, clean up the housing wreckage, and help the chronically unemployed.

In the United States, intensifying pressures for the domestic automotive industry are affecting the price of raw materials — up almost 50 percent — and the declining U.S. dollar. While U.S. exports have become very appealing, other countries are waging a currency war to prevent their currencies from dropping. Another factor affecting domestic automakers is the growing demand for high-tech equipment –boosting growth in production and exports by 10 to 30 percent. The rates of interest, currency, growth (less than 2 percent) and inflation, which remain low, are inhibiting a more accelerated recovery. Exacerbating this slow growth is deleveraging, where consumers increase personal savings and reduce their debt; a 9 percent unemployment rate; and uncertainty over the future of government policies such as the Bush administration’s tax cuts and the Obama administration’s healthcare bill.

In Europe, the global recession continues to thwart economic recovery as it is plagued by high unemployment, weak wage gains, and a tight credit market. These factors put tremendous restraint on consumer spending and business investment—the latter of which is limited by substantial excess capacity and concerns about the strength and sustainability of recovery. Yet while Germany has benefitted from exports to China, Italy and Spain continue to struggle, and Greece has become virtually insolvent. In fact, according to the panelists, all holders of Greek bonds will have to take a 30 percent “haircut” on their investments.

Among emerging economies, the economic condition includes low debt, strong growth of six to eight percent, rising threats of inflation, interest and pressure on exchange rates, and increasing risks of an overheated asset bubble. China has an accumulated US$2.2 trillion in reserves, speculated to mask its hidden debt, and the Asia/Pacific region is counting on exports to strengthen its domestic economy. Consumer spending accounts for only 35 percent of China’s economy versus India’s, whose consumer spending accounts for over 60 percent. While India’s economy is behind China, be prepared for the surge. In Latin America, debt levels are low and sustained growth levels are estimated to be between five to six percent.

The Future of the Automotive Industry

Analysts predict a V-shaped growth pattern for the automotive sector globally. Yet, despite market-imposed capacity constraints, anticipated production is expected to increase from 11 million units in 2010 to 15.5 million units by 2011. While the U.S. vehicle sales forecast is encouraging, healthcare and pension costs threaten margins for U.S. automakers. This year, the U.S. vehicle sales recovery has been driven by fleet sales — sales of a large number of vehicles to companies such as rental car agencies and commercial truck operators. This demand is defined by the miles driven per year, the average age of the fleet (9 years), population growth rates, and the age of drivers. Slowing the demand for new vehicles domestically is the growing rate of the retired population, who will drive their vehicles 40 percent less and make fewer new vehicle purchases.

As automakers gear for the next-generation industry transformation, panelists cited a number of factors that will be affecting the resurgence of original equipment manufacturers and suppliers alike. These include increasingly rigorous legislative mandates on emissions, safety and quality; intense pressure to scale, particularly for the emerging markets; new or evolving joint-venture business models due to all the recent mergers and acquisitions in the industry; and narrowing product portfolios. All of this must also be tied to a myopic focus on taking the number-one or number-two market positions and delivering best-in-class project margins.

Speaking about the future of the American automotive industry, Retired Vice Chairman of General Motors Company Bob Lutz delivered a riveting, sharp-tongued criticism of automakers. Lutz proclaimed that graduates of U.S. Ivy League business schools — including himself — have contributed to the demise of economic growth and product excellence in the United States. According to Lutz, MBAs don’t understand the power of image, style or fashion trends on vehicle sales and the driver experience. Instead, he said, MBA-produced analysis and profit optimization models focus only on short-term internal targets, and are not driven by the consumer market. In a plea for corrective action, Lutz demanded renewed focus on long-term product, service and customer experience excellence. He said General Motors’ management should be less concerned with cost and more concerned with whether the vehicle is selling in the market. Lutz concluded with a mandate for the industry to correct its numbers-driven myopia with a broader perspective and corporate culture based on a long-term vision of consumer-driven product excellence.

Technology and Automotives

Meeting speakers emphasized the influence of technological advances in the future of automotive companies. High-tech equipment will become more and more prevalent — for example, in-vehicle telematics which provides drivers with instant safety, security and communications services. Practical applications include voice assisted driving directions, parking, acceleration and vehicle failure detection. Telematics-driven infotainment services include Bluetooth wireless and satellite radio. Future applications will include vehicle-to-vehicle communications to ensure vehicles keep a safe distance from each other to avoid and perhaps eliminate collisions. Automakers will be pressured to develop a global platform upon which vehicles are designed, engineered and produced, to leverage the most capital-intensive equipment and resources initially, and then customize and accessorize later for regional preferences. Perhaps most critically, car manufacturers and suppliers will need to embrace a long-term consumer vision to succeed, in the same way in which Apple has done with its iPod, iPhone and iPad products.

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