ChiefExecutive.net

Automakers Foresee Profitable Growth After Near Term Bloodbath

January 27 2008 by Fayazuddin A Shirazi

Last week Alan Mulally, CEO Ford Motors expressed his apprehensions on the performance of US economy in 2008. The fears are so ingrained that the motor company is even geared up to cut on production, if there’s a fall in the demand. However, if the global auto survey report is to be believed, the auto industry currently hampered by overcapacity issues and an uncertain global economy is set to overcome its persistent gloomy trend.

The annual global automotive survey by KPMG, the US audit, tax and advisory firm, predicts automotive executives are growing more confident about the nearer term prospects of global profitability. An increasing number of survey respondents are foreseeing a quicker turnaround by Detroit manufacturers, thereby signaling a much-needed positive change in the backdrop of a fear psychosis triggered by an impending economic recession.

The KPMG survey, which interviewed 113 senior executives at vehicle manufacturers and suppliers worldwide, found that 26 percent of executives are optimistic of global profits in the next five years, and 14 percent anticipated a decline, which is a significant improvement over the last two years. Last year 16 percent of the respondents expected profits while 28 percent said profits would decline.

“These positive changes have occurred against a background of a difficult economic climate, including high oil prices and contracted credit,” Uwe Achterholt, the German-based global head of KPMG’s automotive practice said in a media statement.

Industry experts believe that the auto industry, which has seen the bottom of the market, is now poised to focus on the future by investing in new technologies and production efficiencies. “Increased competition is fueling higher levels of optimism. Many executives in our survey are seeing the light at end of the tunnel with respect to the turnaround prospects for North American OEMs,” said Daren Gifford, national automotive industry leader with KPMG.

On questions related to restructuring by US OEMs, 64 percent of the executives surveyed believed restructuring would be successfully completed by 2011. And 58 percent said the restructuring would help OEMs in delivering goods more efficiently, with only 10 percent disagreeing.

Experts believe that the increased optimism is also to do with executives predicting a decrease in overcapacity. 14 percent of the executives felt overcapacity was greater than 20 percent, down from 25 percent a year ago and 34 percent in the 2005 survey, the report said. “Overcapacity will continue to be an issue, especially when the investments in Asian manufacturing facilities come on line,” said Gifford.

However, 45 percent of the executives said that overcapacity would become a serious problem in China in the next five years, which according to 80 percent of the respondents will be one of the biggest markets with sales hovering around 12 million vehicles by 2011.

The report says that the M&A is also on the rise, largely driven to obtain product synergies and a desire to undergo cost reduction, especially in buying raw materials. 47 percent executives believe increased M&A with OEMs, and 72 percent believe it to happen with Tier 1 suppliers and 64 percent with Tier 2 and 3 suppliers, says the report.

In sharp contrast (however not at the global level) to this poll, Ford forecasts indicate that U.S. demand for light trucks and cars could dip below 15.5 million units (16.1 million units last year) on an annualized basis over the next six months, which can be very disturbing for the industry, say analysts.

As fallout of the current economic situation, Detroit based auto majors have already gone in for severe lay-off exercises. General Motors, Ford and Chrysler have all cut thousands of jobs both in United States and Canada, mostly to check issues of overcapacity, reflecting a slump in market share lost to Japanese carmakers such as Toyota and Honda.

Reacting to the latest the developments in US, Betsy Meter, the Detroit based automotive audit sector leader, with KPMG said, while the going is tough in US, the survey was focused at the global level with a balanced number of respondents between North America, Europe and Asia. “There have been increasing signs during the past six months of economic instability in the U.S., but at the global level it is not so. The directional improvements voiced by the respondents this year were based on global demand, not simply a view of the U.S. market,” Betsy Meter told CE Online.