The automobile market recovered significantly in 2013 from the
impact of the global financial crisis, buoyed by economic recovery
and pent-up demand in the U.S. and Asia.
Toyota Motor Corp.
) retained its market leading position in terms of global sales
volume and sold 9.98 million vehicles during the year, up 2% over
General Motors Company
) occupied the second and third positions, with sales volumes of
9.71 million and 9.7 million vehicles, respectively.
General Motors was the leading automaker in the U.S. in 2013 with
annual sales of 2.8 million units.
Ford Motor Co.
) came in second with 2.5 million units, while Toyota slipped into
the third position with registered sales of 2.2 million units.
Zacks Industry Rank - Neutral Outlook
The distinctive attributes of the auto industry prompted us to have
a dedicated sector for the industry in our database. The
automobile sector is one of the 16 Zacks sectors, unlike the
S&P classification where autos are in the Consumer
Discretionary sector (the S&P has 10 sectors vs. 16 for Zacks).
At the expanded classification level, the Zacks auto sector is
divided into five industries: Auto-Domestic, Auto-Foreign,
Auto/Truck-Original, Auto/Truck-Replacement and Engines. The level
of sensitivity and exposure to different stages of the economic
cycle vary for each industry. The sector's retail operations are
part of the Zacks Retail sector in two industries -- one for
Automobile/Trucks and the other for Auto Parts.
The current Zacks Industry Rank for Auto-Domestic is #184,
Auto-Foreign is #231, Auto/Truck-Original is #54,
Auto/Truck-Replacement is #23, Engines is #28, Retail/Wholesale
Auto/Truck is #101 and Retail/Wholesale-Auto Parts is #224. As a
reference point, the outlook for industries with Zacks Industry
Rank of #88 and lower is 'Positive,' between #89 and #176 is
'Neutral' and #177 and higher is 'Negative.'
This implies that the general outlook for all auto-related
industries varies significantly. We rank all 260-plus industries in
the 16 Zacks sectors based on the earnings outlook and fundamental
strength of the constituent companies in each industry.
Sector Level Earnings Trend
The auto sector is expected to contribute 2% of total S&P 500
earnings in 2013, more than its 1.5% market cap weightage in the
index at present.
Looking at the overall results of the Auto sector, earnings surged
32.3% year over year in the third quarter of 2013, an impressive
performance compared with the 18.5% year-over-year rise in the
previous quarter. Total revenue increased 7% year over year in the
third quarter versus a 4.7% year-over-year gain in the second
Based on the latest available information, 30% of the sector
participants have already reported December quarter results with a
beat ratio of 66.7% for both earnings and revenue. Total earnings
for the companies that have reported so far have shown an 8.9%
year-over-year increase on a 3.4% rise in revenues.
Auto sector earnings are expected to be up 20.3% in the fourth
quarter while revenues are forecast to improve 4.4%, placing it
among the winners in a whole bunch of 16 sectors covered by Zacks.
For the first quarter of 2014, earnings are expected to inch down
1.4% and decline further by 0.9% in the second quarter. Revenues
are expected to move up 3.2% in the first quarter and 3.8% in the
In 2014, earnings are expected to surge 11%, again putting it among
the best performing sectors. However, revenue growth in 2014 is
expected to be a modest 2.7%.
For more information about earnings for this sector and others,
please read our '
Market share concentration among a few companies makes the
automobile sector highly competitive. The top 10 global automakers
account for nearly 94% of total vehicles sold in the U.S. To remain
competitive, automakers need to design technologically advanced and
economic vehicles that cater to consumers in both mature and
To achieve this goal, Ford has undertaken the "One Manufacturing"
strategy, which aims at producing multiple models in worldwide
plants in order to reduce production expenditure and adapt swiftly
to changing consumer preferences. The automaker aims to manufacture
an average of 4.5 models at each of its plants by 2015.
Automakers are also concentrating on providing optional features
(which will save gas) on small vehicles in order to attract buyers.
The inclusion of these features provides scope for higher revenue
generation from small cars, which have lower profit margins
relative to large trucks.
In an attempt to reduce costs, automakers continue to shift
production facilities from high-cost regions such as North America
and the European Union to low-cost regions such as China, India and
South America. According to a study by CSM Worldwide, China and
South America together will contribute more than 50% of the growth
in global light vehicle production between 2008 and 2015.
Apart from individual company strategies, the government plays a
pivotal role in molding the future of global auto manufacturers.
The energy and environmental policies of different countries will
play a major role in shaping the future of the auto industry.
For example, in late 2011, 13 major automakers, including Ford,
General Motors, Chrysler, BMW,
Honda Motor Co. Ltd.
), Hyundai, Jaguar/Land Rover, Kia, Mazda, Mitsubishi,
Nissan Motor Co. Ltd.
), Toyota and Volvo, signed letters of commitment with the U.S.
Government to upgrade the fuel economy in cars and light-duty
trucks to 54.5 miles per gallon (mpg) by 2025. This has
significantly affected the design and cost of new automobiles.
U.S. Market Recovery
Average age of vehicles on U.S. roads reached an all-time high of
11.4 years in Aug 2013. It continues to remain above 11 years at
present and is expected to rise to 11.5 years by 2018, according to
the forecasts made by IHS Automotive.
The high average age is resulting in high replacement demand for
cars. Moreover, with the improvement in the general economic
situation, banks are offering more car loans with lower interest
Strong pent-up demand due to aging vehicles on U.S. roads, easier
car financing and low gas price are boosting automobile sales in
the nation. Improving macroeconomic conditions, such as low
interest rates, improving employment rates and recovery of the
housing market are also contributing to the sales growth.
Auto sales in the U.S. grew 8% to a six-year high of 15.6 million
vehicles in 2013. Although extremely cold weather led to a 3%
year-over-year decline in U.S. auto sales in Jan 2014, the outlook
for 2014 remains good.
Toyota and Ford expect the growth rate to slow down in 2014. Ford
expects U.S. industry volume to range between 16-17 million units
in 2014, while Toyota expects it to be about 16 million. Meanwhile,
GM expects industry sales in the range of 16-16.5 million in 2014.
Asia Promises High Growth
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. China is the biggest and fastest growing auto
market in the world in terms of number of vehicles sold. In 2013,
it became the first nation to surpass domestic sales of 20 million
The popularity of Ford's expanded product lineup in China boosted
the automaker's sales by 49% in 2013. Ford expects Asia-Pacific
(mainly China and India) to account for 70% of its global growth in
this decade and generate 40% of its vehicle sales in four to five
The company expects its global sales to increase 50% to 8 million
vehicles by 2015 on the back of the growth potential in Asia and
the rising demand for small cars. The automaker anticipates small
cars to account for 55% of the total sales by 2020. One-third of
the small car sales are expected to come from Asia. Ford projects
compact car sales in India to reach about 2 million vehicles in
2018, almost double from the 2013 level.
Moreover, Ford plans to boost exports of its engine production from
India by shipping them to Europe. Currently, the automaker exports
40% of its India-made engines and 25% of its India-made cars to 35
countries. Further, to tap the growing Chinese market, Ford plans
to triple its line-up in the nation by introducing 15 models by
Meanwhile, General Motors and its joint venture partners in China
plan to invest $11 billion in the country by 2016 and launch about
17 new and upgraded car models as part of a major expansion
program. In 2012, General Motors built two plants in China to
increase production capacity by 20%. With the planned addition of
four new plants, production capacity will increase further by 30%
to 5 million vehicles whereas vehicle exports are expected to
triple to 300,000 units by 2015.
Tesla Motors, Inc.
) is seeking a share in the lucrative Chinese market and started
the reservation of Model S in the country in Aug 2013. The electric
carmaker plans to open 10 to 12 stores in China by the end of 2014,
including its flagship store in Beijing which was opened in Nov
2013. Tesla expects China to account for 30%-35% of its global
sales growth in 2014.
In 2009, China overtook the U.S. as the biggest auto market in the
world by sales volumes when the Beijing government introduced a
stimulus package, including tax incentives for small cars. However,
the incentives were scrapped in 2011 and the Beijing government
imposed quotas on new car registrations in order to control traffic
congestion. As a result, sales in China grew only 4.3% in 2012,
lower than the 8% growth projected by the China Association of
Automobile Manufacturers (CAAM) as well as the double-digit growth
in 2009 and 2010.
Nevertheless, the nation recorded a 13.9% surge in vehicle sales to
21.98 million units in 2013. However, sales growth is expected to
slow down to 8%-10% in 2014 as per CAAM. Efforts to control
pollution and traffic congestion, along with caps imposed by
several cities to limit new vehicle registrations are expected to
Bailout Fund Repayments
General Motors Company and Chrysler received $62 billion from the
U.S. government under the Troubled Assets Relief Program (TARP).
While the U.S. Department of Treasury has recovered $11.2 billion
out of its $12.5 billion loan to Chrysler, the remaining $1.3
billion is unlikely to be retrieved. Meanwhile, the Department
completed the divestment of its entire stake in General Motors in
Dec 2013. The Treasury recovered a total of $39 billion out of its
bailout loan of $49.5 billion to the automaker following its
bankruptcy, thus, incurring a loss of $10.5 billion.
The U.S. Department of Energy (DOE) also lent more than $8.5
billion to a few automakers under the Advanced Technology Vehicles
Manufacturing (ATVM) Incentive Program in order to reduce
dependence on oil, curb greenhouse gas emissions and to create new
Ford utilized the DOE loan for retooling two plants for the
production of small cars and developing fuel-efficient vehicles
like Ford Focus EV and C-Max Energi plug-in hybrid. The automaker
is repaying the loan in equal quarterly installments of $148
million and the full amount is expected to be repaid by Jun 15,
In May 2013, Tesla became the first DOE loan recipient ($465
million) to repay the full amount. Although the loan was repayable
in quarterly installments till Dec 2017, the electric vehicle maker
made an advance repayment of the entire outstanding balance using
the proceeds from a common stock and convertible senior note
Repayment of bailout funds is enhancing the financial flexibility
and credit worthiness of these companies. The decline in debt will
allow the companies to invest freely in growth opportunities.
Although automakers continue to focus on shifting their production
facilities to new regions driven by cost and demand factors,
developing a supplier network in these unfamiliar regions remains
one of their greatest challenges. Existing suppliers to automakers
often lack the financial strength to expand capacity in new
markets. On the other hand, auto parts suppliers are sensitive to
technology transfers to local third parties, which can give rise to
High dependence on automakers makes auto market suppliers
vulnerable to pricing pressure and production cuts. Pricing
pressure from automakers constricts margins of parts suppliers. On
the other hand, production cuts by automakers, driven by frequent
market adjustments, negatively affect their operations.
Auto industry suppliers who are highly dependent on a few
automakers such as General Motors, Ford, Chrysler and Volkswagen
American Axle and Manufacturing Holdings Inc.
Goodyear Tire and Rubber Co.
Magna International Inc.
Superior Industries International Inc.
TRW Automotive Holdings Corp.
Future of Green Cars Looks Bleak
Rising fuel prices and global warming have turned attention to cars
that either rely less on traditional fossil fuels or use cheaper
renewable sources of energy. However, despite the U.S. Government's
continued efforts to promote green alternatives such as
fuel-efficient electric vehicles (EVs) and hybrid vehicles,
prospects look bleak, at least in the near future. High car prices
and improving fuel economy of non-hybrid cars are some factors that
are hurting the sales of hybrids and EVs.
Globally, the hybrid market is ruled by Toyota (which includes
Prius and Camry) and Honda (includes Civic and Insight hybrids).
Meanwhile, other automakers such as Ford, General Motors and Nissan
are also aggressively trying to drive hybrid sales. Some of the
well-recognized "green" cars include Tesla Model S; Ford Focus,
Fusion and C-MAX; Chevrolet Volt; Nissan Leaf and
) smart micro EV.
U.S. and Japan are the largest hybrid car markets in the world,
while Europe is also emerging as a lucrative market.
However, the industry has witnessed some notable adverse
developments in the drive for green technology. In Jan 2013, the
DOE backed off from President Obama's stated goal of putting 1
million electric cars on the road by 2015 due to
weaker-than-expected demand for plug-ins/EVs. According to
Hybridcars.com, plug-in vehicle sales constituted less than 1% of
the total passenger vehicle sales in the U.S. in 2013. The
proportion declined from 3.3% in 2012.
The weak demand for plug-ins/EVs forced some lithium-ion battery
makers to file for bankruptcy protection in 2012. They include A123
Systems Inc. and EnerDel, both of which were DOE grant recipients
(A123 - $249.1 million; EnerDel - $118.5 million). It also led to
writing down of the value of the third largest DOE grant recipient
($161.0 million), Dow Kokam, by chemical behemoth
), which jointly operates the entity with TK Advanced Battery LLC
Most of the major automakers have been plagued by a series of
product recalls in recent years. In 2013, automakers recalled 22
million vehicles in 632 recalls. This represents a significant
increase from 16.4 vehicles in 581 recalls in 2012.
The biggest victim of this problem is Toyota, which recalled
maximum vehicles in both 2012 and 2013. The automaker recalled
about 5.3 million vehicles in each of these years. Meanwhile,
Chrysler led in terms of number of recalls, with a total of 36
recalls announced in 2013.
Automotive safety recalls were brought into focus by the media
after Toyota's announcement of the then-largest global recall of
3.8 million vehicles in Sep 2009, which was triggered by a
high-speed crash that claimed 4 lives. Later, in Oct 2012, the
automaker announced a major worldwide recall of 7.43 million
vehicles that included more than a dozen models manufactured
between 2005 and 2010.
In Dec 2012, the U.S. Transportation Department slapped a $17.35
million fine on Toyota due to late response to safety regulators
and a delay in recalling vehicles with a defect. According to
safety regulators, it was the maximum allowable fine under the law
for not initiating a timely recall. This was not the first time the
company incurred heavy fines. Toyota also suffered a fine of
roughly $48.4 million in 2010, imposed by the U.S. government, due
to a late recall of millions of defective vehicles.
Toyota also agreed to a $1.1 billion settlement of a class-action
lawsuit related to complaints of unintended acceleration in its
vehicles. According to a plaintiff lawyer, the settlement is one of
the largest in the history of automotive industry.
Following Toyota, recalls by other automakers such as Chrysler,
Ford, General Motors, Honda, Volkswagen and Nissan also came into
Ford in particular has been having problems with its popular sports
utility vehicle (SUV) Escape of the model year 2013. The vehicle
has been recalled seven times since it was redesigned and marketed
in the spring of 2012. Further, Volkswagen's recent recall of 2.64
million vehicles was among the largest global recalls.
Economic Crisis in Europe
The Eurozone financial crisis adversely affected the operations of
many global automakers, especially General Motors and Ford, who
have a significant exposure to the market. Car sales in Europe
continued to be low due to weak consumer confidence amid a weak
According to the European Automobile Manufacturer's Association
(ACEA), car sales in the European Union reached 11.85 million units
in 2013, down 1.7% over 2012 and its lowest level since 1995. Most
of the major automakers in Europe resorted to job cuts and plant
closures, as it was no longer feasible for them to undertake
full-fledged operations in the continent.
Among the U.S. automakers, Ford announced plans to cut production
capacity by 18%, retrench 6,200 jobs and close three facilities in
Europe. General Motors also took several initiatives to sustain
profitability, including the closure of an auto factory in Germany
in 2014, reduction of workforce and pay freeze across Europe.
However, it also announced plans to invest 130 million euros
($175.4 million) in its German engine and parts plant in
Kaiserslautern. Further, General Motors is pulling out its
Chevrolet brand from the continent to focus on the expansion of its
Among the European automakers, Renault announced plans to retrench
7,500 jobs in France by 2016, while both Fiat and Peugeot decided
to eliminate 1,500 jobs each. Among the Japanese automakers, Honda
announced plans to terminate 800 jobs at its South Marston plant
near Swindon, southwest England.
Unemployment in the European Union reached 26.55 million in Nov
2013, according to Eurostat. Of these, 19.24 million people were
located in the euro area. The seasonally-adjusted unemployment rate
in the European Union was 10.9% in Nov 2013, while it increased to
12.1% in the same month in the euro area from 11.8% in Nov 2012.
However, with the recent improvement in the European economy,
things are beginning to look up for automakers. Car sales in Europe
seem to have bottomed out and are expected to rise gradually with
economic recovery in the Eurozone, although the process is expected
to be slow.
In fact, car sales in U.K. and Spain witnessed improvements in
2013, although sales in Germany, France and Italy declined.
Moreover, all these markets witnessed an increase in auto sales in
Further, passenger car sales in Europe are expected to increase 2%
Labor Union Woes
Frequent demands for wage hike and strikes by labor unions are
concerns for automakers. The four-week strike towards the end of
2013 by a labor union in South Africa led to significant losses for
automobile manufacturers as well as the South African economy.
While Toyota lost over 700 car production daily, BMW lost almost
350 sedans. Nissan's daily output of almost 250 units in South
Africa was also affected. The strike is estimated to have cost the
industry almost 20 billion rand ($2 billion).
This was followed by a labor strike in the auto components
industry, which also lasted for four weeks. The strikes have forced
car makers to rethink their investment strategies for the nation.
In Oct 2013, BMW announced the cancellation of its plans to expand
in South Africa.
However, South Africa is not the only country where automakers are
facing labor problems. General Motors has been facing trouble with
labor unions in South Korea. Labor strikes in July resulted in
production losses of over $90 million, forcing the company to reach
a wage settlement, including yearly bonuses of 10 million Korean
won ($9,000 million) per member.
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