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Latest KPMG Study Finds Industry More Upbeat

KPMG says the new positive outlook is a result of the industry rising to meet the challenges of curbing (carbon-dioxide) emissions and the needs of the growing middle class in developing markets.

The mood among automotive executives has taken a turn for the better, KPMG LLP’s latest annual survey finds.

Concerns regarding insolvencies and bankruptcies, as well as worries relating to overcapacity, are diminishing, while profitability expectations are starting to grow, according to the study.

KPMG interviewed 150 senior executives at auto makers and suppliers in the U.S., Canada, the U.K., France, Germany, Sweden, India, China, South Korea, Japan and Australia.

Those polled generally believe the major opportunity for cost savings in the industry continues to be through innovation and expect mergers and acquisitions to rise among suppliers and dealers.

Some 92% of respondents say Asia will have the most manufacturing capacity over the next five years.

“These positive changes have occurred against a background of a difficult economic climate, including high oil prices and contracted credit,” KPMG spokesman Uwe Achterholt says in a statement. “As such, the importance of the turnaround in mood cannot be underestimated.”

But Achterholt says the survey indicates the industry still is undergoing a stage of transition.

“The industry is developing from what we term ‘phase one’ of a restructuring process,” he says. “Phase one included major cost-reduction efforts and a shift of manufacturing to developing markets and low-cost countries. As the industry enters ‘phase two,’ it will demonstrate a willingness to make vehicles for the consumer of the 21st century.”

KPMG’s study shows a renewed focus on sustainability and the environment, an increase in growth-orientated investment, rising popularity of passenger cars and fuel-efficient vehicles and higher projected sales of hybrids.

“It would appear the new positive attitude of automotive executives is a result of the industry rising to meet the challenges of curbing (carbon-dioxide) emissions and of meeting the vehicle needs of the rising middle class in developing markets,” Achterholt says.

The report says evidence the auto industry has entered phase two of the restructuring program appears in respondents’ views concerning global industry profitability, cost savings, bankruptcy, M&A activity and investment and production capacity.

Some 58% of respondents believe these factors ultimately will lead to North American OEMs becoming more efficient and competitive.

Although 37% of respondents continue to anticipate volatility and unpredictability over the next five years, 26% predict rising profitability.

Executives continue to see major opportunities for cost savings through manufacturing and product-material innovation, outsourcing, offshoring and low-cost-country sourcing.

“While M&A activity is expected to decline over the next five years among manufacturers, it is expected to rise among suppliers, especially Tier 1 suppliers, and dealers,” the report states. “Executives continue to see alliances and mergers as significant vehicles for industry restructuring and new market entry.”

Continued high levels of activity are predicted in Asia, Eastern Europe and other developing markets.

New markets and plants and low-cost product offerings and suppliers are seen as the result of market vitality in China and India.

Asian brands are the most likely to increase market share in these developing markets, the study finds. In particular, 78% of respondents cite Chinese brands, 75% South Korean marques and 73% Indian brands as the ones most likely to exhibit marked growth.

More than 80% of those polled predict Chinese sales will top 12 million units annually in five years. Some 58% believe Chinese car sales will rival those in the U.S. in the same time period, and 72% of respondents cite India as the next major growth market after China.

Interestingly, one-third of executives anticipate China will be selling a significant number of cars in the U.S. in three to five years, while 42% predict six to 10 years as a more likely timeframe.

Overcapacity is less of a concern than in previous years. Respondents experiencing 11%-20% overcapacity fell by 12 percentage points, and the group with zero overcapacity increased by 24 percentage points.

“The top four issues challenging executives continue to be product quality, reducing costs, effectively exploiting new technologies and the state of the global economy,” the report states. “Environmental issues, while not the most important concern, overall, have grown by 11%, far more than any other issue.”

Consumers’ top-five shopping criteria remain quality, fuel efficiency, safety, affordability and the ability to use alternative fuel sources, with the latter category increasing 12%.

“Over the next two years, investments will be growth-orientated, with new models, products and technologies leading the way,” the report says. “Some of the most important innovations will be in relation to hybrid systems and fuel-cell technology.

“This suggests the industry has seen the bottom of the market and is regrouping with new technology geared toward both production efficiencies and meeting continuing consumer and regulator demands for fuel efficiency and clean energy – and with the promise of vast numbers of new buyers in developing markets.”

Although 37% of executives continue to expect volatility and unpredictability over the next five years, another 23% expects little change in profitability and, in one of the survey’s most significant findings, a third group (26%) anticipates rising profitability.

“Suppliers are expected to be the least profitable segment – perhaps a reflection of their squeezed margins due to pressure from OEMs to provide low-cost products,” the study says.

Some 48% of respondents predict bankruptcy rates will stay the same, up from 31% in 2006. Conversely, fewer respondents expect bankruptcies to increase: 36%, down from 56% in 2006.

The study says M&A and alliance activity is a measure of an industry that still is growing.

“This is clearly the case in Asia, Eastern Europe and other developing markets,” it states. “Executives continue to see alliances and M&A as significant vehicles for industry restructuring, with Asia leading the rest of the world and Eastern Europe maintaining the same moderately high level as last year.”

Expectations for North American M&A and alliance activity during the next five years fell by 22 percentage points, a symptom that extensive consolidation already has run its course.

“Another sign of an incipient phase two is executives’ overall view of the U.S. market,” the survey says. “With almost 60% of respondents agreeing that restructuring programs in the U.S. will enable domestic OEMs to be more efficient and competitive, they are seeing a silver lining in the difficulties of the last few years.”

Some 64% of executives predict the restructuring will be completed within three years, while 76% expect this to be finalized in four years.

“Given all the negative pressures on North American companies, including corporate average fuel economy (standards) and labor contract negotiations, this seems to support the view that these companies are moving in the right direction,” the study says.

“Note that 54% still believe U.S. brands will lose share over the next five years, while European, Japanese and South Korean brands are expected to hold steady,” the survey states. “Considering that executives expect the restructuring to continue for three to four years or longer, this data supports the notion the bottom has been hit and the upswing has begun.”

TAGS: Powertrain
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