The auto industry is highly concentrated. The top-10 global
automakers account for roughly 80% of the worldwide production and
nearly 90% of total vehicles sold in the U.S.
In January-May 2012,
General Motors Company
) led with a 17.8% market share in the U.S., followed by
Ford Motor Co.
) with a 15.6% market share,
Toyota Motors Corp.
) with a 14.5% market share, Chrysler-Fiat with a 11.5% market
Honda Motor Co.
Nissan Motor Co.
) at the last spots with 9.6% and 8.1% market shares, respectively.
Due to a massive structural change after the global economic
meltdown in 2008, the global auto industry is expected to be ruled
by automakers and suppliers based in the six major auto markets:
China, India, Japan, Korea, Western Europe and the U.S.
To remain competitive, the automakers will need to design vehicles
that will cater to consumers in both mature and emerging markets
while manufacturing them at low costs, using the most advanced
The recent trend shows that automakers are concentrating on
offering more optional features (to save money on gas), even on the
small and less gas-guzzler vehicles, in order to attract buyers.
The sale of optional features is helping them offset lower profit
margins for small cars relative to large trucks.
The automakers 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.
According to a study by CSM Worldwide, 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
The role of governments is highly significant. 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.
In late 2011, 13 major automakers, including Ford, GM, Chrysler,
), Jaguar/Land Rover, Kia, Mazda, Mitsubishi, Nissan, Toyota and
Volvo have signed letters of commitment with the U.S. Government to
upgrade 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
Economy (CAFE) 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 gases will be curbed over the time span of the
program, which accounts for more than the total amount of carbon
dioxide emitted by the U.S. in 2010.
Rising fuel prices and global warming have turned attention to the
auto industry that either rely less on traditional fossil fuels or
use cheaper renewable sources of energy. Thus, "green" alternatives
such as fuel-efficient electric vehicles (EVs) and hybrid vehicles
will attract consumers in affluent countries while flex-fuels such
as ethanol and natural gas will be highly demanded in the emerging
auto markets due to their suitability with the local climate and
Consequently, there will be a variety of powertrain technologies in
the auto industry in this decade and "green" cars are likely to
represent about 30% of total global sales in developed auto
Globally, the hybrid market is ruled by Toyota (which includes the
popular 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 huge responses in the
auto industry, including the Ford Focus, GM Volt, Nissan Leaf and
) smart USA micro EV.
In late 2011, 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
sports utility vehicles (SUVs). The automakers have decided to sign
a definitive agreement that would lay out timelines to develop the
technology. They expect to market the product by the end of this
decade. 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 battery
A123 Systems Inc.
) for its all-electric subcompact car for the Chevrolet brand that
has 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. Didier 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% in 2011 from 8%-9% in 2009.
U.S. Market Recovery
The Big Three Detroit automakers (GM, Ford and Chrysler), who
command the lion's share of the U.S. auto market, bounced back with
the help of a recovery in the global market, restructuring of their
product portfolios and strong pent-up demand in the U.S. after they
were severely hit by the global economic crisis (GM and Chrysler
received federal bailout funds).
In fact, pent-up demand and a falling unemployment rate have been
the key factors in driving auto sales in the U.S. despite higher
gasoline prices (up 8% year-over-year to $3.02 per gallon in the
first five months of 2012). The average age of cars on U.S. roads
is 10.8 years while the average unemployment rate dipped to 8.2% in
the first five months of 2012, from 9.0% in the same period of 2011
(U.S. Department of Labor).
For 2012, GM expects industry sales volume in the range of 14.0
million-14.5 million vehicles while Ford expects industry volume in
the range of 14.5 million-15.0 million vehicles for the U.S.
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 being the rapidly growing economies. 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.
The Chinese automakers have been struggling hard to enhance their
global profile by upgrading their technology to meet the
international standards. Meanwhile, Indian automakers are also
sallying into international markets by introducing their innovative
products that could meet consumers demand abroad.
Domestic automakers are likely to rule the key growth market of
China as the government plans to consolidate the top 14 domestic
automotive companies into 10. These automakers would capture a
share of more than 90% in the local market.
In the first five months of 2012, total sales in China increased a
tad 1.7% to 8.02 million units, according to the China Association
of Automobile Manufacturers (CAAM). Auto sales in the country are
expected to improve further if the government renews some of its
policy incentives that helped the country overtake the U.S. as the
biggest auto market in 2009. It is rumored that the government
would soon resume paying subsidies to rural consumers who are
willing to trade in old vehicles for new and fuel-efficient
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 faced by them. 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 low-cost
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 high dependence on a shrinking number
of automakers. The auto parts suppliers lack in pricing power given
the enormous size and clout of their buyers (the auto makers).
Thus, despite the government's sizable investment in the industry,
it is likely that there will be auto parts suppliers who are unable
to restart operations due to lack of sufficient working capital,
even as automakers expand production. 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.
High dependence on automakers makes the auto-market suppliers
vulnerable to several maladies, primarily pricing pressure and
production cuts. Pricing pressure from automakers constricts parts
suppliers' margins. On the other hand, production cuts by
automakers driven by frequent market adjustments negatively affect
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 consumer preferences in the auto market towards
hi-tech, fuel-efficient and 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 programs, putting heavy capital burdens on
The automakers also face significant challenges in transforming
their existing powertrain technologies into the latest versions, as
far as marketability is concerned. They are adapting the internal
combustion engines to alternative energy, including ethanol and
Ultimately, a time may come when they switch to the all-electric
powertrain as their sole powertrain solution. However, the shift in
powertrain technology needs to be supported by adequate charging
outlets in order to recharge batteries, which is again a serious
matter of concern.
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 about 15 million vehicles
globally in more than 20 recalls, crossing all other automakers.
The Transportation Department of U.S. had also imposed a fine of
$48.4 million on the company due to late recall of millions of
Toyota's recalls were related to problems such as faulty
accelerator gas pedals, slipping floor mats and defective braking
systems. They led the automaker to suspend the sale of its models
several times and halt new car launches.
In the spate of recalls following Toyota's, other automakers'
recalls also came into the limelight. They include Chrysler, Ford,
GM, Honda and Nissan. Among them, GM recalled most frequently,
followed by Ford.
Japan Disasters & Floods in Thailand
The earthquake, tsunami and the nuclear crisis in Japan in March,
2011 have thrown the global automotive industry out of gear. The
auto parts supply chains have paralyzed, triggering production
shutdowns, work shift reductions and cancellations of orders.
Japan accounts for about 13% of the worldwide automobile production
with U.S. being its largest market. Production of about 40
auto-parts manufacturer in the country has been jeopardized due to
plant outages and power shortages following the earthquake.
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 are
highly complex and specifically tailored. As a result, finding
substitutes for such customized components becomes very difficult.
Further, looming power shortages in the country caused by the
meltdowns at Fukushima Daiichi nuclear power plant after the
earthquake are affecting the automakers. Currently, Japan's power
generators are mainly run by imported gas and fuel as all the
nuclear reactors have been shut down for routine safety checks due
to the meltdown issue.
No sooner had the global automakers started recovering from the
twin disasters 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 global automakers,
particularly those in Japan.
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, vehicle
production in Thailand plummeted to the lowest level in more than 9
We are also concerned about the present eurozone financial crisis,
which has impacted the operations of many global automakers,
especially GM and Ford, who have a significant exposure to the
market. Car sales in Europe continued to be low owing to weak
consumer confidence on the back of a weak economy triggered by the
crisis. The European Automobile Manufacturers' Association (ACEA)
reported a 7% fall in sales to 5,442 million cars in the continent
in the first five months of 2012.
Demand for cars in the continent has 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. Some
automakers have projected that the European auto market will shrink
5% in 2012.
Ford revealed that it is likely to lose between $500 million and
$600 million in 2012 in the 19 European markets covered by the
automaker owing to the ongoing debt crisis. The figure compared
with a meager $27 million loss recorded by the company in 2011. In
the fourth quarter of last year, the loss amounted to $190 million.
While releasing the 2012-first quarter results, Ford has toned down
the industry volume guidance (including medium and heavy trucks)
for full year 2012 to about 14 million units from the prior
guidance of 14.0 million units-15.0 million units. Meanwhile, GM's
European arm, Opel, revealed that it expects to report an operating
loss of 1 billion Euros ($1.3 billion) in 2012 due to fewer car
sales than anticipated.
Opel expects to sell 1.4 million vehicles in 2012, which are about
100,000 units less than the earlier projected sales. In order to
reverse the 12 years of losses in Europe (totaling more than $12
billion), particularly from the Opel brand, GM has recently formed
a global allowance with
PSA Peugeot Citroen
). The alliance will help both the automakers reduce at least $2
billion in costs.
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