PRINT THIS PAGE Automotive industry restructuring to gather pace
11/04/2007. Source:KPMG.
Facing overcapacity issues and financial underperformance, we can expect a continuing industry shakeout with some companies facing bankruptcy and others seeking to merge or form alliances over the next five years, finds KPMG. According to the annual KPMG survey of the global automotive industry, based on interviews with 150 senior executives at vehicle manufacturers and suppliers, there is an overwhelming expectation that alliances, mergers and acquisitions among vehicle manufacturers, Tier 1 and Tier 2 – 3 suppliers will increase globally over the next five years.
When viewed by region, 81% of Asian executives expect global consolidations and alliances to increase over the next five years, followed by 58% of North American executives and 56% of Eastern European executives. Only in Western Europe were executives less bullish with 32% of respondents expecting an increase in global alliances, mergers and acquisitions.
Commenting on the findings, Mike Steventon, Head of Automotive at KPMG in the UK, said: “With global overcapacity still a major concern, a reduction in car production capacity and developing competitive cost structures are the key priorities for the industry. The majority of the auto industry expects to see an increase in rationalization, alliances, mergers and acquisitions. The reasons for this consolidation are clearly cost reduction and perhaps new business opportunities. It is also indicative of the industry’s determination to tackle the fundamental problems which have resulted in the industry collectively, and the US manufacturers and suppliers in particular, not generating an adequate financial return. This is likely to be a painful journey in the short term but absolutely necessary to build a long term, sustainable industry.”
For the fourth consecutive year, slightly more than half of the executives surveyed (57%) agreed that alliances will be more important than mergers and acquisitions in the auto industry over the next five years.
Not surprisingly, a majority of executives (87%) believe the level of bankruptcies in the industry will increase or remain the same over the next few years, while only 10% see a decrease.
Steventon continued: “With shrinking market share, ongoing cost cutting and other pressures, beleaguered U.S. companies are tempted to reorganize by way of bankruptcy, which provides them protection from creditors while they sort out their affairs. This does not necessarily mean they are going out of business, just that they are strategically restructuring, gaining breathing room to meet their obligations.”
In the KPMG survey, 47% of auto execs see non-competitive cost structure as the driving force of bankruptcy. But the story is different when broken down by region:
70% of European executives cited non-competitive cost structure as the greatest cause of bankruptcies in the industry with the second most popular response, pensions liabilities, trailing well behind at just 18%;
Only 46% of Asian execs cited cost structures, with excess debt being the next most popular answer with 17%;
American execs were less clear on what the key driving force is. Thirty percent chose cost structures, along with a declining revenue base (30%) and health care benefit costs (28%).
In terms of profitability, 42% of executives are predicting that industry profits will be flat or generally rise over the next five years, showing marginally high optimism when compared to last year’s 39%. Asian executives (43%) and their European counterparts (45%) are more positive about profits increasing over the next five years than North American executives (38%) who feel the industry will continue to be volatile and unpredictable. Meanwhile, 54% of vehicle manufacturers and 41% of Tier 2-3 suppliers believe profitability will remain flat or rise compared to only 37% of Tier 1 suppliers.
Steventon concluded: “Last year, expectations for profitability were low across the industry. This year, there are early signs of improving optimism driven by a real sense that the industry, and particularly the US manufacturers, are finally addressing their overcapacity issues and uncompetitive cost structures. This can only bode well for the long term health of the automotive industry.”
KPMG also discovered that the Sports Utility Vehicle (SUV) – or 4x4 – sector appears to have become the primary casualty of high oil prices and a hardening consumer desire to purchase more fuel efficient and environmentally friendly cars.
According to the annual KPMG survey of the global automotive industry, expectations for growth within the SUV sector have now hit rock bottom amongst North American industry executives while they have also slid considerably amongst their European and Asian counterparts.
Just three percent of American executives expect to see growth in the SUV sector this year, compared to 39% in Europe (down from 50% last year) and 52% in Asia.
It is perhaps no coincidence that this loss of confidence comes at the same time that 79% of the executives surveyed agreed that oil prices have now permanently changed consumers’ purchasing habits – a figure which rises even higher amongst the North American (85%) and European (84%) respondents.
On top of that, 89% of all respondents now feel that fuel efficiency will be an important factor in a consumer’s purchasing decision, ranking it as the single most important factor – ahead of quality, safety, affordability and product design.
Commenting on the findings, Mike Steventon, Head of Automotive at KPMG in the UK, said: “These results highlight the extent to which the industry is having to adapt and realign itself to changing customer preferences. The impact of oil prices and the desire for greater fuel efficiency are clear for all to see. Issues which were once thought of as purely European concerns have now been elevated to a global level with even the US market finally succumbing. The principal casualty of these changing preferences is the SUV which has experienced substantial year on year growth for the past decade. With sales already falling – and with strident media criticism of the sector appearing to strike a chord with the purchasing public – the days of the sector being a key driver of industry profitability, particularly in North America, may be coming to an end.”
“In North America, and to a lesser extent in Europe, SUVs and truck based vehicles have historically bolstered domestic manufacturers’ profits, so it now remains to be seen whether alternative segments, such as hybrids, crossovers and luxury vehicles can take on that mantle. Hybrids and passenger cars – particularly low cost cars – are predicted to be the key growth areas for the next five years but the jury seems to still be out on whether these segments can deliver the profits the industry needs as they need constant attention and restyling, as opposed to the rather more static, truck-orientated sectors.”
The KPMG survey – for which 150 senior executives at vehicle manufacturers and suppliers were interviewed – does highlight a growing bullishness over the likely sales of hybrid cars. Two hundred thousand hybrid units were sold in 2006 and 34% of industry execs expect that to grow to as much as 300,000 in 2007. A further 37% feel that 300,000 to 500,000 units is a more realistic expectation. Although the segment is starting from a very low base, the fact that it can grow so rapidly off the back of a limited number of models suggests that hybrids are now becoming an established mainstream sector in their own right.
Another sector which execs expect to see grow is the luxury car sector; an assertion which may initially seem at odds with a growing consumer preference for fuel efficient vehicles. Fifty-seven percent of European respondents expected luxury vehicles to grow their market share (up from 37% last year) while 37% of North Americans predicted an increase (up from 10% last year). The larger outlay required to purchase a luxury car would appear to negate concerns over fuel prices, leaving the sector well shielded from the desire for greater fuel efficiency amongst the general car buying populace. Quality and the strength of the brand remain the key concerns for luxury car manufacturers and purchasers alike.
Other key findings within the KPMG survey include:
64% of executives said they expect passenger cars to increase global market share over the next five years, easily outpacing larger vehicles such as minivans which were cited as a growth area by just 33% of respondents;
55% also expected to see market share growth within the crossover sector, seeing this sector as the next evolutionary step in providing an alternative to doughty minivans or fuel-thirsty SUVs;
46% of execs felt that environmental friendliness (not to be confused with fuel efficiency) would be an important consumer consideration over the next five years, suggesting that “green” concerns will continue to escalate in importance.
KPMG LLP is a UK limited liability partnership which operates from 22 offices across the UK with over 9,000 partners and staff. It is a global network of professional firms providing Audit, Tax, and Advisory services. For more information about KPMG’s services to the technology industry, please contact Crispin O’Brien on 0207 3113080.
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