The auto industry is highly concentrated. About 10 global
automakers account for over 77% of the production worldwide and 13
automakers account for more than 90% of total vehicles sold in the
In the first 10 months of 2011,
General Motors Company
) led with a 19.8% market share in the U.S., followed by
Ford Motor Co.
) with a 16.8% market share,
Toyota Motors Corp.
) with a 12.6% market share, Chrysler-Fiat with a 10.7% market
Honda Motor Co.
Nissan Motor Co.
) at the last spots with 9.1% and 8.1% market shares, respectively.
The global economic meltdown in 2008 provided an impetus to massive
structural changes in the auto industry, setting the stage for
growth over the next decade. Given the high barriers to entry and
the need for scale economies (in operations, supply chain and
marketing), the global auto industry landscape is expected to be
ruled by global automakers and suppliers based in the six major
auto markets -- China, India, Japan, Korea, Western Europe and the
To remain competitive, automakers will need to design vehicles that
meet the requirements of consumers in both mature and emerging
markets. Automakers will focus on more user-friendly and low-cost
vehicles that are also the most advanced technologically.
The automakers will continue to shift their production facilities
from high-cost regions such as North America and the European Union
to lower-cost regions such as China, India and South America. For
example, China and South America together are projected to
represent more than 50% of growth in global light vehicle
production in the auto industry from 2008 to 2015.
There are two underlying factors behind this location shift in the
auto industry. The first is the cost factor. The cost of labor in
emerging auto markets continues to be a fraction of that in the
developed world. The second is the demand factor.
Many low-cost regions, including the emerging auto markets, have
high potential for growth. Thus, the shift in auto industry
production facilities will lead to a localization of the
manufacturing base that will bring down transportation costs. The
emergence of trading blocs is also giving this process a push. It
is likely that over time there will be fewer car imports from
outside a trade zone.
Further, automakers have started to reduce the number of
technological platforms with a greater diversity of models produced
from each platform in order to remain cost competitive in the auto
industry. For example, Honda, with its flexible common platform,
has developed three dimensionally distinct versions of the Accord,
allowing for designs where 60% of the components are common. Ford
aims to build 680,000 vehicles per core global platform by 2015, up
from the current level of 345,000 units.
The role of governments must not be overlooked. Governments in all
major countries have become active auto industry players. Their
energy and environmental policies will be strongly responsible in
molding the auto industry in the coming years.
Recently, the U.S. Government and 13 major automakers, which
includes Ford, GM, Chrysler, BMW, Honda,
), Jaguar/Land Rover, Kia, Mazda, Mitsubishi, Nissan, Toyota and
Volvo, will have upgraded the fuel economy standard of cars and
light-duty trucks to 54.5 miles per gallon (mpg) by 2025.
The new standard is more than double the Corporate Average Fuel
) standard of 24.1 mpg. It is expected to save 12 billion barrels
of oil and curtail oil consumption by 2.2 million barrels per day,
which accounts for half of the oil imported by the U.S. from OPEC
countries on a daily basis.
The new standard also aimed at reducing carbon pollution to 163
grams per mile of CO2. With this, more than 6 billion metric tons
of greenhouse gas will be curbed over the time span of the program,
which amounts to more than the total carbon dioxide emitted by the
U.S. in 2010.
Higher fuel prices and concerns over global warming have pooled
attention on the auto industry that either rely less on traditional
fossil fuels or use renewable sources of less expensive energy.
Thus, "green" alternatives such as fuel-efficient electric vehicles
(EVs) and hybrids will attract consumers in the wealthier countries
while flex-fuels such as ethanol and natural gas will be highly
sought-after in the emerging auto markets where the local climate
or resource base favors their usage by automakers over petroleum.
Consequently, there will be a variety of powertrain technologies in
the auto industry by the next decade. It is likely that "green"
cars will represent up to a third of total global sales in
developed auto markets and up to 20% in urban areas of emerging
auto markets by 2020. They are projected to become popular options
for car buyers, particularly in the U.S. and Europe.
Globally, the hybrid market is ruled by Toyota (which includes the
highly acclaimed Prius) and Honda (includes Civic and Insight
hybrids). Meanwhile, other automakers such as Ford, General Motors
and Nissan are also aggressively pursuing a plan to push hybrid
sales. Some of their "green" cars have already generated a huge
response in the auto industry, including the Ford Focus, GM Volt,
Nissan Leaf and
) smart USA micro EV.
Recently, Ford and Toyota have signed a memorandum of understanding
on the equal product development collaboration in order to develop
a gas-electric hybrid engine for pickup trucks and sport utility
vehicles (SUVs). The automakers have decided to sign a definitive
agreement next year that would lay out timelines to develop the
technology. They expect to market the product by the end of this
The development of electric hybrid engines would help both the
companies meet stringent fuel economy and pollution standards in
the U.S. and elsewhere in the near future.
GM also plans to manufacture a luxury electric car dubbed ELR,
based on the technology used in its Volt plug-in hybrid for its
Cadillac brand as a part of its long-term goal to become a leader
in the fuel-efficient vehicles market. The company has also chosen
A123 Systems Inc.
) for its all-electric subcompact car for the Chevrolet brand that
is yet to be built.
U.S. is the largest hybrid car market in the world with sales
accounting for 60%-70% of global hybrid sales. According to J.D.
Power and Associates, hybrid-electric vehicle sales volumes in the
country are expected to grow by 268% between 2005 and 2012.
Presently, there are only 12 hybrid models available in the U.S.,
which would increase to 52 by 2012.
Leroy, head of Toyota's European operations, has revealed that the
percentage of consumers in Europe interested in hybrid cars for
their next car purchase has increased to 16% from 8%-9% in 2009.
The 'Big Three' Detroit automakers -- GM, Ford and Chrysler -- lost
consumer confidence in 2009 after they were severely hit by the
global economic crisis. The crisis also exposed the inherent
problem with the Big Three's product portfolio, which lacked
up-to-date engineering and extensive research and development.
Further, the majority of their sales comprised pickup trucks and
SUVs rather than fuel-efficient vehicles such as the small cars
that consumers have started to prefer. This skewed portfolio was
further aggravated by the government's push for fuel-efficient and
environment-friendly cars. Ford rallied better than its hometown
rivals, with an early response to the shift in consumer preference
towards small cars.
The Detroit automakers bounced back with a recovery in the global
market and restructuring of the product portfolio. In the first 10
months of 2011, GM's sales went up 14.9% to 2.09 million vehicles,
while sales of Ford and Chrysler grew 10.8% to 1.77 million
vehicles and 23.5% to 1.12 million vehicles, respectively, during
the same period.
Ford focuses on its Ford, Lincoln and Mercury branded cars,
shedding the Volvo brand, while GM concentrates on four core brands
-- Chevrolet, Buick, GMC and Cadillac -- withdrawing Saturn,
Hummer, Pontiac and Saab.
Further, Ford has decided to expand its luxury Lincoln line-up at
the cost of its Mercury line-up, which was phased out at the end of
2010. The company plans to launch as many as seven new Lincoln
vehicles in by 2015, including a small car.
The Rise of Asian Automakers
The Asian countries, especially China and India, are expected to
account for 40% of growth in the auto industry over the next five
to seven years. According to Global Insight -- a U.S. based
provider of economic and financial information -- 14.7% of growth
is expected to come from India and 8.3% from China by 2013
(compared with 2008 levels) based on their rapidly growing economy.
Domestic automakers are likely to rule the key growth market of
China as the government plans to consolidate the top 14 domestic
automotive players into 10. These automakers would capture share of
more than 90% in the local market.
Chinese automakers have been struggling to enhance their global
profile by upgrading their technology to meet international
standards. Meanwhile, Indian automakers are also sallying into
international markets by introducing their innovative products that
could meet consumers demand abroad.
Although automakers continue to focus on shifting their production
facilities to new regions driven by cost and demand factors,
developing the supplier networks remains one of the greatest
challenges they face in the auto industry. Existing suppliers to
automakers often lack the financial background to expand capacity
in new markets. On the other hand, auto market suppliers are
sensitive to technology transfers to local third parties, which may
result in new and lower-cost competitors.
Since 1999, more than 20 of the largest global auto parts suppliers
have filed for bankruptcy. The financial condition of the majority
of auto market suppliers continues to deteriorate, resulting from a
historically weak demand and higher dependence on automakers.
According to the Original Equipment Suppliers Association, 12% of
the auto industry suppliers do not have sufficient working capital
to support a 10%-25% expansion in production.
Thus, despite the government's sizable investment in the
automakers, it is likely that there will be auto market suppliers
who are unable to restart operations due to working capital
shortfalls even as automaker production resumes.
Higher dependence on automakers makes the auto market suppliers
vulnerable to several maladies, primarily pricing pressure and
production cuts. Pricing pressure from automakers is constricting
auto market suppliers' margins. On the other hand, production cuts
by automakers driven by frequent market adjustments are negatively
affecting their operations.
Some of the auto industry suppliers who have a high reliance on a
few automakers such as General Motors, Ford, Chrysler and
American Axle and Manufacturing
Goodyear Tire and Rubber Co.
The shift in auto market consumer preferences towards hi-tech,
fuel-efficient, environment-friendly vehicles, such as small
cars/hybrids/EVs, is another issue. Auto market suppliers are
expected to quickly adapt to the new technologies by investing in
research and development, putting heavy capital burdens on them.
The automakers also face significant challenges in transforming the
existing powertrain technologies into the new versions, as far as
marketability is concerned. They are adapting the internal
combustion engines to alternative energy, including ethanol and
bio-fuels. Ultimately, a time may come when they switch to the
all-electric powertrain as their sole powertrain solution. However,
the shift in powertrain solution technology needs to be supported
by adequate charging outlets in order to recharge batteries.
Automotive safety recalls were brought into focus by media after
Toyota's announcement of a series of recall since November 2009.
Since November 2009, Toyota has recalled more than 14 million
vehicles globally in about 20 recalls, crossing all other
automakers. The U.S. Transportation Department also imposed a fine
of $48.4 million due to a late recall of millions of defective
In the spate of recalls following Toyota's, other automakers'
recalls also came into the limelight: Chrysler, Ford, GM, Honda and
Nissan. Among them, GM recalled most frequently, followed by Ford.
Since the beginning of 2010, GM has recalled more than 3 million
vehicles in the U.S., Canada, Mexico and South Korea. Meanwhile,
Ford recalled nearly 600,000 vehicles throughout 2010 and more than
1 million vehicles in 2011 to-date.
The earthquake, tsunami and the nuclear crisis in Japan have thrown
the global automotive industry out of gear. The auto parts supply
chains have paralyzed, triggering production shutdowns, work shift
reductions and cancellation of orders.
Japan accounts for about 13% of the worldwide automobile
production, with the U.S. being its largest market. Production of
as many as 40 auto parts manufacturers in the country has been
jeopardized due to plant outages and power shortages following the
The global automotive industry faces interruptions in supply of
critical components such as transmissions, electric vehicle battery
packs and electronic semiconductors.
Another crisis that the auto parts supplied from Japan poses is
their uniqueness. Most of the auto parts sourced from Japan is
highly complex and specifically tailored. As a result, finding
substitutes for such customized components becomes very difficult.
Moreover, it is extremely painful to shift the production of these
parts to unaffected areas, where Japan has excess auto parts
The sad aftermath of the disaster has already been reflected in the
recent quarterly results of the major Japanese automakers. In the
first half of fiscal year ending March 31, 2012, both Toyota and
Honda reported a sharp fall in profits of 72% and 77%,
respectively, on a year-over-year basis.
No sooner had the global automakers (particularly those in Japan)
started recovering from the twin disaster in Japan, than they were
struck with another catastrophic natural disaster in Thailand.
Thailand is an important manufacturing base in Asia for most of the
The automobile production in Thailand severely hampered by floods
in the country that killed more than 500 people and damaged many
automakers' and their parts supplier's plants. In fact, Thai
production plummeted to the lowest level in more than 9 years.
Ford was forced to halt its production at its joint venture,
AutoAlliance, in Rayong province, which is not a flood-affected
area, due to disruptions in parts supply. The automaker revealed
that it has lost production of 30,000 vehicles. Toyota stated that
it lost production of 150,000 vehicles, including 90,000 units in
Thailand and 40,000 units in Japan due to the same problem.
Honda'd automobile factory in the country will remain closed due to
the floodwaters. However, the company has resumed production of
motorcycles and power products at its subsidiary plant in the
country after their suspension in October.
The lost production in Thailand is expected go up to 250,000
vehicles globally. However, it is lower than 700,000 vehicles in
lost production due to the twin disasters in Japan to date.
Both Toyota and Honda failed to provide any guidance for vehicle
unit sales, net revenues and earnings for the fiscal year ending
March 31, 2012 as it needed more time to complete the examination
of production and sales plans due to the impact of floods in
We are also concerned about the present Eurozone financial crisis,
which is likely to impact operations of many global automakers,
especially GM and Ford, who have a significant exposure to the
Demand for cars in the continent has already started to weaken. As
a result, the automakers are trying very hard to entice the
consumers with the help of steep discounts and other sales
promotions, which will put a downward pressure on their margins.
The West European car market is expected to decline to 11 million
units in 2012.
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