The automobile sector has performed impressively this year,
buoyed by economic recovery and escalating demand in the U.S. and
Asia. Auto sales soared to a remarkable high, driving the
automobile stocks higher.
In the first nine months of 2013,
General Motors Company
) was the leading automaker with an 18.0% market share in the U.S.,
Ford Motor Co.
) with a 16.0% market share.
Toyota Motor Corp.
) had a 14.4% market share, Chrysler had 11.5%, and
Honda Motor Co. Ltd.
), Hyundai-Kia and
Nissan Motor Co. Ltd.
) occupied the last spots in the above-5% bracket with 9.8%, 8.2%
and 8.0% market shares, respectively.
General Motors regained its top sales position from Toyota, which
led the market in 2012 with 9.75 million vehicles sold globally,
exceeding General Motors' 9.29 million vehicles. Germany's
Volkswagen AG (
) came third with 9.07 million vehicles sold in the year.
Zacks Industry Rank - Positive Outlook
The distinctive attributes of the auto industry impelled 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 clubbed into 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 #48,
Auto-Foreign is #15, Auto/Truck-Original is #28,
Auto/Truck-Replacement is #37, Engines is #15, Retail/Wholesale
Auto/Truck is #30 and Retail/Wholesale-Auto Parts is #77. 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 is positive. We rank all the 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 1.9% of total S&P 500
earnings in 2013, more than its 1.6% market cap weightage in the
index at present.
The second-quarter 2013 results for the sector were impressive in
terms of both beat ratios (percentage of companies coming out with
positive surprises) and earnings growth. The earnings beat ratio
was an astounding 100%, while the revenue beat ratio was 70%.
Total earnings for this sector rose 14.1% in the second quarter of
2013, bouncing back from a year-over-year decline of 20.6% in the
first quarter. The sector witnessed a 4.8% increase in revenues in
the second quarter, while revenues remained in line with the
year-ago quarter in the first quarter of 2013.
Looking at the Consensus earnings expectations for the rest of the
year, earnings for the auto sector are expected to decline 1.8% in
the third quarter of 2013, placing it among the laggards in the
sectors covered by Zacks.
However, the downturn in the third quarter is expected to be offset
by a 25.8% surge in earnings in the fourth quarter, thereby making
it one of the best performing sectors. Even the full-year earnings
growth of the auto sector is expected to be around 9%, placing it
among the expected winners in 2013.
On the revenue front, things are expected to be less volatile, with
a 5.2% and 3.4% increase expected in the third and fourth quarters,
respectively. The revenue growth in 2013 is also expected to be a
For more information about earnings for this sector and others,
please read our '
Concentration of the market share in the hands of a few companies
makes the automobile sector highly competitive. The top 10 global
automakers account for nearly 94% of the total vehicles sold in the
U.S. To remain competitive, automakers will need to design
technologically advanced and economic vehicles that will cater to
consumers in both mature and emerging markets.
Toward 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
4.5 models at each of its plants by 2015, up from 3.6 models
Automakers are also concentrating on providing optional features
(which will save gas) on small vehicles in order to attract buyers.
The inclusion of the additional features provide 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, Hyundai, Jaguar/Land Rover,
Kia, Mazda, Mitsubishi, Nissan, 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
U.S. Market Recovery
Average age of vehicles on U.S. roads reached an all-time high of
11.4 years in Aug 2013. This 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
Strong pent-up demand due to aging vehicles on U.S. roads, easier
car financing, low gas price boosted automobile sales in the
nation. Improving macroeconomic conditions, such as low interest
rates, improving employment rates and recovery of the housing
market also contributed to the sales growth.
Auto sales in the U.S. grew 13.4% to a five-year high of 14.5
million vehicles in 2012. The strong performance continued in 2013.
In August, auto sales in the U.S. grew 17% to 1.5 million units,
which is the highest since May 2007. Sales during the month rose to
16.1 million vehicles on a seasonally adjusted rate (SAAR) basis,
crossing the 16 million mark for the first time since Nov 2007.
However, auto sales declined 4% to 1.1 million units in September,
mainly due to two less selling days in the month than the
comparable year-ago period. The inclusion of the Labor Day weekend,
which usually witnesses strong sales, in August this year instead
of September as usual, also hampered sales. Sales rose 3.4% to 15.3
million vehicles on a SAAR basis.
Although the impact of the U.S. government shutdown is a concern,
the weak sales figures in September are expected to improve in the
General Motors expects full-year sales to exceed its guidance range
of 15.0-15.5 million units, while Ford expects annual sales in the
range of 15.5-16 million units, compared with 14.5 million units in
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.
Ford expects the potential growth in Asia, mainly China and India,
and rising demand for small cars to boost its global sales by 50%
to 8 million vehicles by 2015. The automaker anticipates small cars
to account for 55% of the total sales by 2020 compared with 48%
presently. One-third of the small car sales are expected to come
During late 2012, Ford decided to ship engines produced in India to
Europe, to boost export. Currently, the automaker exports 40% of
its Indian-made engines and 25% of its Indian-made cars to 35
countries. The company expects to manufacture 450,000 cars and
600,000 engines in India by 2015. It has already pumped in $2
billion to build manufacturing facilities in the country.
Meanwhile, Ford plans to triple its line-up in China by introducing
15 models by 2015. In June, Ford opened a new assembly plant in
China in collaboration with Jiangling Motors Corp. which doubled
its production capacity in the country.
General Motors has also decided to boost the annual production
capacity in China to 5 million vehicles and triple its exports from
Chinese plants by 2015. In April, the company revealed plans to
build four plants in the country to boost capacity. 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 their major expansion program.
Last year, General Motors built two plants in China to increase the
production capacity by 20%. With the addition of four new plants,
the production capacity will increase further by 30% and vehicle
exports are expected to rise to 300,000 units from 100,000 units
projected for this year.
) is seeking a share in the lucrative Chinese market and started
the reservation of Model S in the country in August. Although the
car is expected to be popular among the wealthy and environmentally
conscious consumers in China, high tariffs on imported cars and
shortage of charging stations could affect sales.
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. China
accounted for a third of light vehicle sales growth in the last
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 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 has managed to regain its position as the
world's largest automobile market. Automobile sales in China
increased for the fourth consecutive month in Aug 2013, after
months of sluggish growth due to weak economic conditions and
restrictions imposed by the government on new vehicles.
The total vehicle sales in China witnessed year-over-year growth of
10.3% in August compared with 9.9% in July, according to CAAM. The
Aug 2013 vehicle sales in China surpassed the sales of 1.5 million
units in the U.S. and 0.07 million units in the U.K.
CAAM expects automobile sales in China to cross the milestone of 20
million units for the first time this year, led by strong demand
due to economic recovery and lower prices, along with increasing
demand from unsaturated markets of smaller cities. Moreover,
prospective buyers are trying not to delay their purchase due to
the possibility of increased regulations on new vehicle
registration in Beijing.
Bailout Fund Repayments
General Motors Company and Chrysler received $62 billion from the
U.S. government under the Troubled Assets Relief Program (TARP). A
significant portion of the amount has been repaid by General Motors
out of its $49.5 billion loan and by Chrysler out of its $12.5
While the U.S. Department of Treasury has recovered $11.2 billion
out of its investment in Chrysler, the remaining $1.3 billion is
not expected to be retrieved. Meanwhile, the department recently
rolled out the third phase of divesting its stake in General
Motors. The department plans to sell the remaining shares of the
automaker by Apr 2014.
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, 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 offering.
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 supplier networks in these unfamiliar regions remains
one of their greatest challenges. Existing suppliers to automakers
often lack the financial strength to expand capacity in the 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 the auto market suppliers
vulnerable to pricing pressure and production cuts. Pricing
pressure from automakers constricts the margins of parts suppliers.
On the other hand, production cuts by automakers, driven by
frequent market adjustments, negatively affect their operations.
Some of the auto industry suppliers who are highly dependent on a
few automakers such as General Motors, Ford, Chrysler and
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. Despite the U.S. Government's
continued effort 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,
a shortage of charging stations and improving fuel economy of
non-hybrid cars are some factors that are hurting the sales of
hybrid and electric cars.
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
Daimler AG's (
) 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/EV sales constituted a meager 3.3% of the
overall sales in the U.S. 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. The biggest victim of this problem
is Toyota, which has announced at least 5 product recalls for more
than 2.5 million vehicles in the last quarter alone. The most
damaging among them was the repeat recall of 780K vehicles to fix a
problem in the rear tie rod. While vehicle recalls are very common
among automakers, a second recall for the same problem might affect
consumers' confidence in Toyota.
Automotive safety recalls were brought into focus by media after
Toyota's announcement of the then-largest global recall of 3.8
million vehicles in Sep 2009, 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 delay in recall regarding a defect in its vehicles. According
to safety regulators, it was the maximum allowable fine under the
law for not initiating a recall in a timely manner. 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 late recall of millions of defective
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.
In the spate of recalls following Toyota's, other automakers'
recalls also came into the limelight. They included Chrysler, Ford,
General Motors, Honda and Nissan. While Ford announced 4 product
recalls in the last quarter for a total of 1.5 million vehicles,
General Motors had 3 recalls for around 0.41 million vehicles and
Honda had 2 recalls for about 0.8 million vehicles.
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 following a
According to the European Automobile Manufacturers' Association
(ACEA), car sales in Europe reached 12.05 million units in 2012,
its lowest level since 1995. Sales declined 8.2% year over year, as
highly indebted banks were reluctant to finance new car purchases.
The decline was the steepest in the highly troubled Eurozone, where
car sales dipped 11.3% to roughly 9 million units, according to
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 closure of an auto factory in Germany in
2014, reduction of workforce and pay freeze across Europe.
However, it recently announced plans to invest 130 million euros
($175.4 million) in its German engine and parts plant in
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 26.6 million in Aug
2013, while the seasonally-adjusted unemployment rate increased to
12% in the same month from 11.5% in Aug 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 Britain, Poland, France and Spain
witnessed improvements in September, although sales in Germany
declined. Rating agency Moody's expects light vehicle sales in
Europe to decline 5% in 2013.
Labor Union Woes
Frequent demands for wage hike and strikes by labor unions are
matters of concern for automakers. The recent four-week strike 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).
The strike by workers in the automobile manufacturing business 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. Last week, 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 recently. 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 Won ($9,000 million) per member. This resulted in media
reports that the company is planning to wind up its operations in
FORD MOTOR CO (F): Free Stock Analysis Report
GENERAL MOTORS (GM): Free Stock Analysis Report
HONDA MOTOR (HMC): Free Stock Analysis Report
NISSAN ADR (NSANY): Get Free Report
TOYOTA MOTOR CP (TM): Free Stock Analysis
TESLA MOTORS (TSLA): Free Stock Analysis Report
To read this article on Zacks.com click here.