After a promising 2013, global automobile sales are expected to
rise to 85 million units in 2014 from 82.84 million in the earlier
year, according to IHS Automotive. Even the 100 million-unit
milestone is not far and is expected to be reached in 2018.
Last year, the automobile market recovered significantly from the
impact of the global financial crisis, buoyed by economic recovery,
pent-up demand in the U.S. and high growth in Asia. Japanese
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
the 2012 level.
General Motors Company
) occupied the second and third positions, with sales volumes of
9.71 million and 9.7 million vehicles, respectively.
The upswing is expected to continue in 2014, based on increasing
sales in the U.S. and China and slow turnaround of the European
market. However, the high incentives being offered by the
automakers and increasing recall-related costs are affecting their
Zacks Industry Rank - Positive to 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 versus 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 being
Automobile/Trucks and the other Auto Parts.
The current Zacks Industry Rank for Auto-Domestic is #102,
Auto-Foreign is at #156, Auto/Truck-Original at #68,
Auto/Truck-Replacement at #13, Engines at #3, Retail/Wholesale
Auto/Truck at #30 and Retail/Wholesale-Auto Parts at #102. 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 ranges from Positive to Neutral. 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
Sector Level Earnings Trend
The auto sector is expected to contribute 1.8% of total S&P 500
earnings in 2014, more than its 1.5% market cap weightage in the
index at present.
Looking at the overall result of the Auto sector, earnings fell
22.1% year over year in the first quarter of 2014, compared with
the 17.9% year-over-year rise in the previous quarter. Total
revenue increased 2.1% year over year in the quarter versus a 4.1%
year-over-year gain in the fourth quarter of 2013. The beat ratio
was 60% for both earnings and revenues.
Auto sector earnings are expected to be down 2% in the second
quarter of 2014 and plunge 18.6% in the third quarter, placing it
among the laggards in the whole bunch of 16 sectors covered by
Zacks. Revenues are expected to move up 2.9% in the second quarter
and 0.8% in the third quarter.
In 2014, earnings are expected to inch up 0.6%, making it the
weakest performing sector. Revenue growth in 2014 is expected to be
a modest 0.9% for the sector.
For more information about earnings for this sector and others,
please read our '
Earnings Trends' report
Market share concentration among a few companies makes the
automobile sector highly competitive. The top 10 global automakers
account for nearly 81% of total vehicles sold, according to
marketrealist.com. To outperform competitors, automakers are
focusing on designing technologically advanced and economically
viable vehicles that cater to consumers in both mature and emerging
Automakers are also concentrating on providing optional features in
vehicles in order to attract buyers. The sale of these features
provides scope for additional 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. Consequently, China is expected to account for 50%
of the growth in auto production over the next 7 years, according
to the research by IHS Automotive.
Apart from individual company strategies, the governments of
different countries and their energy and environmental policies
will play a pivotal role in shaping the future of the global auto
industry. For instance, in late 2011, 13 major automakers,
Ford Motor Co.
), 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 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.
Strong U.S. Market
Average age of light vehicles on U.S. roads reached an all-time
high of 11.4 years in Aug 2013 and continues to remain close to
that level at present. It 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 as well as car parts. Moreover, with the improvement in the
general economic situation, banks are offering more car loans with
lower interest rates. The availability of car loans plays an
important role in increasing car sales in the U.S.
Higher incentives by automakers, pent-up demand due to aging
vehicles and easier car financing are boosting automobile sales in
the nation. Improving macroeconomic conditions, such as low
interest rates, rising employment rates, growing consumer
confidence and recovery of the housing market are also contributing
to the sales growth.
Auto sales in the U.S. grew 8% to a 6-year high of 15.6 million
vehicles in 2013. Although extremely cold weather led to a decline
in U.S. auto sales in January and February, sales picked up
thereafter. Improvement in the U.S. auto sales in the last two
months is expected to continue in the months ahead, backed by a
strong outlook for 2014.
Toyota and Ford expect the growth rate to slow down in 2014. Ford
expects the 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.
High Growth Prospects in Asia
Asian countries, especially the rapidly growing Chinese and Indian
economies, are expected to account for a large portion of the
growth in the auto industry over the next 5 to 7 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 auto sales of 20 million units. Sales are expected
to be even higher in 2014, based on the statistics so far. Auto
sales in China increased 9.1% year over year to 7,925,100 units in
the first 4 months of 2014.
To tap the growing Chinese market, Ford plans to triple its line-up
in the nation by introducing 15 new or revamped vehicles by 2015.
The popularity of Ford's expanded product line-up in China boosted
the automaker's sales by 49% in 2013. The improvement continued in
2014, with a 45% increase in sales to 271,321 vehicles in the first
quarter. 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 the coming 4 to 5 years.
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 of the 2013 level. In order to support the
increasing sales, Ford aims to increase its dealerships in India to
500 by 2015 and in China to 680 by 2016.
Meanwhile, General Motors and its joint venture partners in China
plan to invest $12 billion in the country by 2017. The company also
plans to launch about 17 new or 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. General Motors also
projects production capacity growth of 65% by 2020 in China, which
is its largest market.
Tesla Motors, Inc.
) is seeking a share in the lucrative Chinese market. It started
delivering the Model S in China in April. The electric carmaker
plans to open 10 to 12 stores in the country 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. The company is planning to start manufacturing cars
in China in the next 3 to 4 years. The high import tariff charged
on vehicles sold in the nation can be avoided once local production
commences. This will slash vehicle prices in the nation, and will
likely boost sales.
In 2009, China overtook the U.S. as the biggest auto market in the
world with respect to 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 per CAAM. Efforts to control pollution
and traffic congestion, along with caps imposed by several cities
to limit new vehicle registrations are expected to affect sales.
However, following the recent ruling by the World Trade
Organization that the duties imposed by China on cars imported from
the U.S. violate global trade rules, China will likely have to
remove these duties. This will significantly reduce the cost of
imported cars in the nation, which will likely boost sales.
Repayment of Bailout Funds
General Motors and Chrysler received $62 billion from the U.S.
government under the Troubled Assets Relief Program (TARP). The
U.S. Department of Treasury incurred a loss of $2.9 billion on its
$12.5 billion loan to Chrysler.
Meanwhile, the Department recovered a total of $39 billion out of
its bailout loan of $49.5 billion to General Motors following its
bankruptcy, thus incurring a loss of $10.5 billion. Another $826
million was lost due to write-off of administrative claims against
the company, taking the total loss to $11.2 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 issue 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, technology transfers to local third
parties can give rise to low-cost competitors for auto parts
Moreover, high dependence on automakers makes auto market suppliers
vulnerable to pricing pressures and production cuts. Pricing
pressure from automakers constricts margins of parts suppliers.
Simultaneously, 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.
and Rubber Co.
Magna International Inc.
Superior Industries International Inc.
TRW Automotive Holdings Corp.
Safety recalls and related costs have become a big problem for many
major automakers 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.
Currently, General Motors is facing a hard time due to safety
issues in its cars. Recently, the automaker agreed to pay a fine of
$35 million to the U.S. safety regulators for the late recall of
2.6 million cars. Currently, this is the maximum amount the
government can fine a company. General Motors is facing many
lawsuits and investigations related to the issue, which also
resulted in negative publicity.
In the wake of the problems faced due to this delayed recall, the
company has become extra cautious and has announced a series of
recalls to avoid further problems. General Motors has recalled more
than 13.6 million vehicles in 31 recalls so far this year. The
automaker estimates that it will incur a charge of about $400
million in the second quarter for repairing all the vehicles
recalled during this quarter. The company recorded a $1.3 billion
charge for recall-related repairs in the first quarter.
Another big victim of this problem is Toyota, which recalled the
most amount of vehicles in both 2012 and 2013 - 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 regarding a defect in
its vehicles to safety regulators and a delay in recalling the
defective vehicles. According to safety regulators, it was the
maximum allowable fine at that time for not initiating a timely
recall. Toyota also paid a fine of roughly $48.4 million to the
U.S. government in 2010 due to a late recall of millions of
defective vehicles. Toyota also made one of the largest settlements
in the history of automotive industry, paying $1.6 billion in a
class-action lawsuit related to complaints of unintended
acceleration in its vehicles.
In Mar 2014, Toyota agreed to pay $1.2 billion to the U.S.
Attorney's Office for the Southern District of New York in relation
to the criminal charges for problems in accelerator pedals and
floor mats of its cars, which led to sudden acceleration and even
crashes. This is the highest penalty imposed on any automaker.
Moreover, in Apr 2014, Toyota announced its second largest recall
of 6.36 million vehicles globally. 27 Toyota models were recalled
for 5 different issues and some of the cars were recalled for
multiple issues. If we double count such vehicles, the total number
of recall increases to 6.76 million. Apart from these, Toyota has
announced many other comparatively smaller recalls, including one
for 1.9 million third-generation Prius cars in Feb 2014.
Following Toyota, recalls by other automakers such as Chrysler,
Ford, General Motors, Honda, Volkswagen and Nissan grabbed people's
attention. Volkswagen's recall of 2.64 million vehicles in Nov 2013
is also among the larger global recalls.
Slow Recovery in Europe
While the automobile market in Europe has started recuperating in
the last few months, sales remain low. A large part of the increase
in auto sales in recent months can be attributed to high discounts
offered by automakers. While Europe has begun recovering from the
sovereign debt crisis, employment levels and consumer confidence
continue to remain weak and economic growth has not stabilized yet.
Unemployment rate in the European Union declined marginally to
10.5% in Mar 2014 from 10.9% in Mar 2013, according to Eurostat.
About 25.7 million people were unemployed during the month, of
which 18.9 million people were located in the Euro area. The
seasonally adjusted unemployment rate in the European Union was
10.5% in Mar 2014 compared with 10.9% in Mar 2013, while it
decreased to 11.8% in the Euro area from 12% in Mar 2013.
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. Most of the major
automakers in Europe resorted to job cuts and plant closures, as it
was no longer feasible for them to carry on full-fledged operations
in the continent.
General Motors is suffering from significant losses in its European
business segment and hopes to achieve breakeven level next year.
Ford's European operations also continue to incur losses, although
the amount of loss has started reducing and the company expects to
earn profits in 2015.
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.
However, in the first four months of 2014, passenger car sales
increased 7.4% to 4.3 million units in the region.
With the recent improvement in the European economy, things are
beginning to look up for automakers. Car sales in Europe are
expected to rise gradually, although the process is expected to be
slow. Car sales in Europe are expected to increase 2-3% in 2014.
Low Popularity of Green Cars
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 for the environment-friendly cars 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, Avalon, Camry and Highlander) and Honda (including 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.
The 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 adverse developments in the drive for
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
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.
It also led to writing down of the value of the third largest DOE
grant recipient, Dow Kokam, by chemical behemoth
), which jointly operates the entity with TK Advanced Battery LLC
Labor Union Woes
Frequent demands for wage hikes and strikes by labor unions are
concerns for automakers. The 4-week strike toward 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. These 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 Jul 2013 resulted in
production losses of over $90 million, forcing the company to reach
a wage settlement. In Mar 2014, Toyota had to stop production for a
few days in two of its Indian assembly plants as demands for wage
hike led to disrupted production and labor unrest.
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