Auto Execs Expect Industry Renewal

Results from the 2008 Global Automotive Survey by KPMG International show the mood among the world’s automotive executives becoming more positive after several years of apprehension. According to the survey, concerns around insolvencies, bankruptcies and excess capacity are beginning to diminish, while expectations of profit are starting to grow. It also reveals that the growth of China’s automotive industry has been faster than expected.

As report author Uwe Achterholt, global chair, automotive, for KPMG in Germany, points out, the positive changes have occurred against a background of a difficult economic climate, including high oil prices and contracted credit. As such, he says, “The importance of the turnaround in mood cannot be underestimated.”

The survey indicates the industry is still going through transition, rounding out the first phase of a restructuring process that has included major cost-reduction efforts and a shift of manufacturing to developing markets and low-cost countries. Phase II will demonstrate a willingness to make vehicles geared for the 21st century consumer. “Our research shows a renewed focus on sustainability and the environment, an increase in growth-orientated investment, rising popularity of passenger cars and fuel-efficient vehicles and higher projected sales of hybrids,” says Achterholt. “It would appear that the new positive attitude of automotive executives is a result of the industry rising to meet the challenges of curbing CO2 emissions and of meeting the vehicle needs of the rising middle class in developing markets.”

Achterholt believes the change in mindset suggests the industry has bottomed out and is regrouping with new technology geared towards production efficiencies and consumer and regulator demands for fuel efficiency and clean energy. He attributes the willingness to change partly to the promise of vast numbers of new buyers in developing markets.

Report results, however, indicate the road remains bumpy, with 37% of respondents anticipating continued volatility and unpredictability over the next five years and only 26% expecting rising profitability. On the other hand, the latter figure is up 10 points from a year ago. Furthermore, fewer bankruptcies are predicted, with 61% of respondents believing the level will remain the same or decrease, compared to only 41% who believed that way last year.

In regard to matters most directly affecting real estate decisions, the survey finds that outsourcing, offshoring and low-cost country sourcing remain major cost reduction strategies, second only to technological innovation. It also says mergers among manufacturers will decrease, potentially leading to fewer facility consolidations, though continued supplier mergers could have the opposite effect.

In addition, new markets, new plants and new low-cost country suppliers for worldwide manufacturers will result from greater market vitality in Asia, especially China and India. More than 90% of respondents believe Asia will build the most new manufacturing capacity over the next five years, and more than 70% believe China will begin to export a significant number of cars to the US within 10 years. More than 80% of respondents predict Chinese domestic sales will exceed 12 million cars annually by 2013, while 58% believe they will rival US car sales by then.

KPMG says China was the major beneficiary of shifts in the manufacturing base in terms of both suppliers and manufacturers during Phase I of the current restructuring. However, executives surveyed reported a striking change of view regarding India, with 73% now expecting its market share to increase significantly, up from 55% last year.