Automotive sector outlook

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For U.S. automakers and suppliers, the past year can best be described as 12 months of mixed results, leaving unanswered questions about the future direction of the industry and what is required for manufacturers and suppliers to thrive.” –Scott Corwin, partner, Booz & Co.

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The automotive industry generates a lot of freight for the trucking industry in a host of different ways, from raw materials and components headed to assembly plants to parts for dealer and store shelves, not to mention of course the gleaming, finished cars and trucks headed to the showroom floors of dealerships across the U.S.

With all of that in mind, how’s the automotive industry shaping up for 2012? And does trucking stand to benefit?

Global consulting firm Booz & Co. recently compiled an “outlook brief” to help provide some insight into these (and other) questions concerning the automotive industry; an outlook that seems to discern some pretty good trends, which – if they become reality – will no doubt boost freight demand from this sector of the U.S. economy.

Booz & Co. partners Scott Corwin, Evan Hirsh, Jan Miecznikowski, and Brian Collie – along with Mike Beck, the firm’s senior executive adviser, and Senior Associate Patrick Mulcahy – noted that U.S. light car and truck sales should exceed 12.5 million at the close of 2011; a number they characterize as “a nice bump up” from 11.6 million in 2010 and 10.4 million in 2009.

Yet those figures are what the group calls “a far cry” from the 17.3 million units worth of annual sales witnessed in 2000 – indeed, even the most overly optimistic analysts forecast that U.S. vehicle sales will rise to no more than 14 million units in 2012.

Data tracked by J.D. Power & Associates and LMC Automotive confirms Booz’s projections, by the way, with those two companies holding to their forecast for 12.7 million total light-vehicle unit sales for all of 2011, with LMC adding that it’s maintaining its 2012 forecast 13.8 million total light-vehicle unit sales in no small part based on the strength of sales volumes posted in December this year.

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“For the third straight time, light-vehicle sales are posting strong selling rates at the close of the year," said Jeff Schuster, LMC’s senior VP-forecasting. “Next year, the automotive industry will look to build upon the strong finish to 2011, but the real test in 2012 will be weathering a summer selling slowdown and posting a full year of a progressive recovery.”

Total light-vehicle sales in December, by the way, are expected to come in at 1.23 million units, which is 8% higher than in December of 2010, J.D. power and LMC noted. Fleet sales are expected to increase by 1% compared with December of 2010, with fleet sales forecasted to account for 16% of total sales, which is slightly lower than the 17% recorded one year ago, noted John Humphrey, J.D. Power’s senior VP-global automotive operations.

“The industry has managed through another series of external shocks and is in a healthier position as the year closes,” he added.

Booz’s brain trust echoed that perspective, noting that U.S. sales figures might have been higher if not for the impact dealt by the tsunami and earthquake in Japan, along with major flooding in Thailand, which forced Toyota, Honda, and, to a lesser extent, Nissan to curtail production in virtually all of their assembly plants around the world.

On top of that, auto sales growth is becoming far more rapid in emerging nations such as China and India, according to Booz’s research, with average annual sales gains since 2001 of 23% and 15% respectively.

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“All of this should be good news for U.S. automakers, which have restructured their operations to be profitable at lower volumes in the U.S.,” the group noted. “General Motors, Ford, and Chrysler all gained market share at the expense of the Japanese manufacturers, and the Detroit Three have now posted several quarters of consistently strong operating performance.”

Booz cautions, however, that “Detroit Three” automakers need to successfully answer some critical questions if they’re going to maintain their current run of success:

• As their output returns to normal, will Japanese companies reclaim their market share?

• Will the Detroit Three maintain their focus on new vehicle development and launches and continue to practice pricing discipline, which favors maximizing profits over volume or market share growth?

• How will rapid introductions to the U.S. market of highly competitive new models from automakers around the globe, combined with slow growth, play out?

• How will automakers differentiate their vehicles and earn the pricing and volume they need?

• What will they do to ensure that each program delivers an attractive return on invested capital?

• How will automakers serving the U.S. market protect themselves against the risk of supply chain disruption (such as what natural disasters in Japan and Thailand caused) and can they do it at an affordable cost?

That last one, of course, is one in which truckers can play a big role in answering.

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There are other related challenges as well; ones that could impact auto sales and by extensive the freight volumes truckers see from this market.

A huge one is that gasoline expenditures – as a percentage of the family budget – have approached their highest level in 30 years, according to data compiled by the Oil Price Information Service (OPIS). The company says that some 8.4% of the average family income is now spent on gasoline, reaching a record annual level of $4,155.

The last time topping off the tank took this big a bite out of a driver’s wallet was 1981, as the country was sliding into recession and home mortgage rates hovered around 16%, OPIS noted.

Automakers are also facing technological challenge, too, noted Booz. For example, advances in braking, parking assistance, propulsion, sensors, and other critical areas are bringing us closer and closer to the era of “self-driving” automobiles – but that comes with a big price tags in terms of the electronics needed to operate in such a mode.

In urban areas, in particular, these innovations could improve traffic flow, provide revenues (through "smart tags" and traffic congestion pricing) and reduce accidents through vehicle-to-vehicle communication and coordination, Booz noted.

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“Both original equipment manufacturers (OEMs) and suppliers will have to anticipate which new technologies and add-on services will justify the cost of innovation,” Booz’s brain trust said. “Clearly, anything that consumers are willing to pay for, that increases safety or functionality, or that reduces cost has the potential to be successful.”

At the same time, however, they cautioned that OEMs must be careful to integrate new technology into vehicles effectively and only when it is well perfected. The risk of course is that OEMs add features that are annoying or, worse yet, prone to breaking down – and that negatively affects consumer perceptions about the quality of the automaker’s products.

“In mature markets such as the U.S., success depends on bringing to market ever-evolving new vehicles that consumers enthusiastically want and would be proud to drive, but the best ways to do this are rarely clear,” Booz’s team noted.

Take powertrain technologies as but one example, as OEMs try to balance the need to keep working on internal combustion, hybrid, electric, and fuel cells until there is greater clarity about the future.

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“The challenge is exacerbated by fluctuating fuel prices and inconsistent government policies that make setting a long-term course and sticking to it extremely difficult and costly,” Booz’s team said. “Therefore, manufacturers need to develop distinctive practices-which might include open networks, frugal engineering, more intensive partnerships with suppliers, or other refinements-to out-innovate the competition at an affordable cost.”

Yet the firm noted that a return to competition based on innovation is “a refreshing change” from the dismal situation the industry faced just two years ago.

Suppliers are also relatively well positioned after several difficult years, Booz pointed out, with many suppliers posting strong profits, restructured balance sheets and lower break-even points in 2011.

Yet dark clouds remain for the automotive industry’s supplier base, Booz stressed, with raw material prices, already elevated, continuing to rise even as many suppliers struggle to find the necessary capital for ramping up production to meet increasing demand.

“Moreover, most suppliers must continue to deal with what has become an endemic issue: a talent shortage, as top-flight engineers willing to work in the auto industry are increasingly hard to find,” Booz’s team noted.

But the big silver lining for trucking going forward is that Booz believes the economics of manufacturing in low-cost countries are starting to shift significantly.

“With Chinese wages on the rise and an artificially strong currency, the tide of [automotive] production shifting to Asia has slowed,” Booz’s team noted. “In fact, for some products that do not ship well or have relatively low labor content, ‘regional production’ facilities are increasingly preferable. The question to ask is what factory network will allow OEMs to meet forecasted demand for products more cost-effectively and more cheaply than the competition.”

That presents trucking with a big opportunity within the automotive sector as time goes on – one that could generate a lot of good freight in the not-so-distant future, methinks.

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