Estimated overcapacity in North America ranges from 11% to a high of 30%.
TORONTO: After a very tough 2009 for the global automotive industry, senior executives see stabilization over the next five years, with growth and new investment on the horizon, but there are still challenges ahead, according to KPMG’s 2010 Global Auto Executive Survey.
“The survey results give us cause for cautious optimism,” said 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.
Profitability will also be a significant issue this year with 36% expecting a decline, although over one quarter of executives expect vehicle manufacturer profits to increase and 42% expect they’ll be stable.
Nearly 75% of the respondents believe there will be more vehicle manufacturer alliances, mergers and acquisitions 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 identified by respondents include too much debt and risk of bankruptcy (89%), access to new technologies and products (84%), potential for product synergies (83%), and access to new markets and customers (82%).
Dawdy said the challenge for all 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. You’re balancing a need for innovation investment with likely 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.
Here are some other survey highlights:
• The most important issues over the next 12 months are developing new technologies, developing new products and reducing costs.
• Nine of 10 executives expect vehicle manufacturers to increase their investment over the next two years in new technologies and new models/products while just fewer than 30% expect investment in new plants.
• 91% expect suppliers to increase investment in new technologies and 78% identify new models/products but only 28% anticipate investment in new plants.
• Despite the deep cuts during the past few years, almost 90% of executives are still concerned about overcapacity. Just over one third say there is 11% to 20% overcapacity in the US, but another third say it’s in the 21% to 30% range. Only 7% see overcapacity as a serious issue in China, but 33% have concerns in three to five years and 31% in the next six to 10 years.
Dawdy said much of the overcapacity will be addressed through distress mergers and acquisitions, restructuring, continuing plant closures and downsizing at the assembly and supplier levels.
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