Forecasting the automotive future

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The true demand for small vehicles will be tested over the next three years, as nearly one-half of new models will be small. While I believe consumers are becoming more accepting of small vehicles, the industry may be going too far too soon.” –Jeff Schuster, executive director of automotive forecasting, J.D. Power and Associates

The other day, J.D. Power and Associates released a self-produced yet very interesting “Q&A” with its top automotive industry analysts – Jeff Schuster, J.D. Power’s executive director of automotive forecasting, and Dave Sargent, the firm’s vice president of vehicle research.

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They’ve got some interesting predictions for the automotive industry in the near term that, by extension, should directly affect the trucking industry. Not only do truckers haul brand spanking new vehicles off the production line to dealer lots, they also haul tons of components to the factories to make those new cars in the first place – not to mention the wide array of replacement parts shipped to dealers and repair shops across the country.

Automobile sales also provide a pretty good indicator of where consumers are at in terms of managing their pocketbooks because, let’s face it, a car (or light truck for that matter) is about the largest “big ticket” item most people buy in their lives, next to their house. Here are some “big picture” thoughts from the two of them to start things off:

• Sales at the beginning of 2010 are sending mixed signals about an impending recovery. Although sales reached the 10.8 million mark in January, they hit a speed bump in February. They think these numbers would have been even better, likely pushing past a seasonally adjusted annual sales rate, or SAAR, of 11 million had it not been for the payback from the strong close of 2009 and the ongoing safety crisis enveloping the world's largest automaker, Toyota.

• The situation at Toyota seems unlikely to settle down anytime soon. It's by no means the first time a major automaker to find itself at the center of a swirling controversy, and, as before, it could prove the critical test not only of the OEMs resources and resourcefulness, but also the loyalty of its buyers.

• If nothing else, the latest developments in the Toyota situation underscore that quality, reliability, dependability, transparency and, of course, safety are only becoming that much more important to consumers – and thus to the best manufacturers.

“Toyota has been a quality leader in the U.S. since J.D. Power started measuring the entire industry in the mid-1980s. Great quality is the cornerstone of how it built its reputation, so it must do everything it can to protect this,” said Sargent. “Toyota by its own admission was slow in fully reacting to the situation. However, it is clearly taking responsibility for the problems and is taking steps to ensure that its vehicles are safe. This is critical, as regaining its reputation among consumers is more important than short-term sales and profits.”

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“How much of an impact this has on sales will no doubt depend on how long the situation continues and how consumers respond to how Toyota is dealing with the recalls,” added Schuster. “In February, Toyota's total sales were down 11 percent from one year ago. For comparison, the industry was up 13 percent for the same period. Toyota's share of the industry declined to 10.7 percent in February 2010, compared with 13.5 percent in February 2009. There is no question we are seeing a negative impact currently. As the situation drags on, there is an increasing probability that the impact could shift from affecting sales within 2010 alone to a longer-term problem.”

That brings up a larger question: is the worst over in terms of the precipitous drop in auto sales?

“No question, 2009 was a difficult year, [but] we believe the worst is over,” said Schuster. “We're currently forecasting total auto sales at 11.7 million units, or 9.6 million at the retail level, both representing a 13 percent increase from dismal 2009.”

That doesn't mean 2010 is without risk, he stressed, as the key variables are the pace of the U.S.’s general economic recovery, with a focus on unemployment; the availability of credit; what manufacturers do in terms of pricing and incentives, which they insist they're going to cut; and the general level of consumer confidence.

“The recovery of the industry as a whole is dependent on the wider economic picture,” noted Sargent. But for individual automakers, the key is to maintain a portfolio of products that meet consumers' needs for value, quality, performance, economy and utility, as well as less tangible attributes such as excellent styling and a strong brand image.”

Another issue: will the industry ever return to the heady days of 16 million to 17 million unit sales levels seen between 2000 and 2007?

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“While we are projecting a slow and steady recovery during the next few years, we've gone through some significant structural changes that will likely lead to a permanent decline in the level of ‘normal’ sales,” said Schuster (at right). “We don't expect light-vehicle volumes to cross the 15-million-unit level until 2012, but they should reach 16 million by 2014. This is more of a function of stable replacement demand and the addition of new households, with less focus on fleet sales.”

He noted that the automotive industry has taken out 1.2 million units of production capacity in the U.S. since 2006, most of that by the domestic brands. However, the foreign-owned makers have actually added capacity and shifted from importing vehicles to building them domestically.

“I think there is a need for a further reduction in capacity globally, as there has been less cutting in other parts of the developed world, notably Western Europe, Japan and Korea,” Schuster said. “Whether we'll need further cuts in North America will depend on the pace of recovery and the long-term level of demand, but there is risk that over-capacity will remain an issue.”

Then there’s the government question – and it’s a big one, as they directed the bankruptcy of General Motors, just for starters.

“Short of another financial collapse of any of the domestic automakers, we would expect direct government involvement to wane over time,” said Sargent. “However, the [U.S.] government will clearly continue to play a key role in terms of the legislative and regulatory environment covering issues like fuel economy, emissions and safety. It is very unlikely that this will diminish over time. It is more likely to increase.”

One big worry is what new foreign competitors – such as India's Mahindra, which is poised to enter the American market with two trucks, and several Chinese OEMs that are hungrily eyeing North America – might do in the near term. J.D. Power’s big thinkers, however, don’t see them becoming a big threat anytime soon.

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“Mahindra is planning to enter the U.S. market this year, but the volume is expected to be low,” said Schuster. “Chinese brands are later in the future. There have been many announcements, but the launch of significant Chinese vehicles (such as the big rigs seen at left) is not expected during the next few years.”

He noted that there's a lot involved with bringing a new brand to the market; not only developing the right products, but also setting up a dealer base, developing marketing plans, plus getting all the necessary infrastructure in place – and those things take time.

“While we fully expect both Indian and Chinese makers to make a push into North America, the reality is that any significant volume is still a few years away,” Schuster said.

The big challenges in the product arena, though, largely remain the same – quality, dependability, and reliability. “Making high-tech systems as flawless and intuitive as possible will be a key battleground for all of the automakers in the future,” noted Schuster.

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“The simple answer is that no automaker will survive over the long term without competitive quality levels, and these days that requires world-class quality,” added Sargent. “This is the price of entry, and any automaker that has serious quality deficiencies will see its reputation – and ultimately its ability to earn viable profits – diminish rapidly.”

The toughest part, he said, will be closing any “perceived” quality gap with consumers. “As other automakers have found, this is harder than closing the actual quality gap,” Sargent stressed.

That’s especially true for smaller vehicles, which have been getting a large amount of attention of late.

“There is no question that consumers respond to increases in gas prices by shifting their purchase decisions downward,” Schuster noted. “However, the true demand for small vehicles will be tested over the next three years, as nearly one-half of new models will be small. While I believe consumers are becoming more accepting of small vehicles, the industry may be going too far too soon.”

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Trucks at Work: Sean Kilcarr comments on trends affecting the many different strata of the trucking industry.

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