An operator at Ford’s Bridgend, UK engine plant monitors progress on a flexible assembly line.
After a very tough 2009 for the global automotive industry, senior executives see stabilization over the next five years. There’s growth and new investment on the horizon, but there are still challenges ahead, among them significant overcapacity, according to KPMG’s 2010 Global Auto Executive Survey.
“The survey results give us cause for cautious optimism,” says Doug Dawdy, partner in KPMG’s transaction advisory services practice in Windsor, Ont. “If you look at the stats for the past year, it was a horrendous production year, but inventory has been corrected—probably overcorrected. This time last year we had over 100-day sales for most product lines…currently it’s just over 60.”
The 200 senior executives representing vehicle manufacturers and suppliers worldwide identified ongoing challenges as high unemployment rates (particularly in the US), better but still constrained credit markets and lack of clarity about the impact of new government regulations and stimulus programs.
Profits will also be a significant issue this year for 36% of the executives who expect a decline. More than one quarter of them predict profits will increase and 42% say they’ll be stable.
Nearly 75% of the respondents believe there will be more vehicle manufacturer alliances, mergers and acquisitions (M&As) over the next five years, as there will be for tier one suppliers (according to 70%), tier two suppliers (56%) and dealers (52%). Specific drivers include too much debt and risk of bankruptcy, access to new technologies and products, potential for product synergies, and access to new markets and customers.
“If you look at the lower end of the tier one and tier two suppliers, volumes are starting to increase fairly significantly [but] there are financial constraints to ramping up production for many of those companies,” says Dawdy, who notes the majority of respondents think there’s between 10% and 30% overcapacity still in the system.
Challenges for suppliers
He says the challenge for automotive suppliers will be to focus on new innovations and new products. “To do that, you’ve got to invest further capital and one of the challenges that comes through that is the capital markets are still not holding auto parts companies in great favour.” Ironically, they’ll be balancing a need for innovation investment with poor operating results and available capital. The challenge for assemblers will be to ensure they are allocated the proper mix of successful platforms for the future.