The global economic crisis will be the catalyst for some profound structural and strategic shifts in the world’s automotive industry.
The industry has gone into the recession with growing capacity in all regions, while demand is stagnating and declining in North America and Europe.
Together these markets represent more than 50% of total sales, but just 12% of the world’s population.
Currently almost all vehicle manufacturers’ strategies are based on profitable growth in developing regions. Global manufacturing has been growing faster than demand.
Products have become longer lasting and require less maintenance, but increased competition, safety and emission legislation and consumer appetite for new innovative products has created shorter ownership cycles.
By 2010, global capacity will have shrunk. Manufacturers will close plants and will not invest in new facilities.
European and US players will look for Chinese and Korean partners in order to have globally acceptable products that can be produced in all regions. However, the cost will be significant in both cash and jobs.
This will not be as simple as a move from west to east.
Because public money will be needed together with public and government support, manufacturing will continue on a smaller basis in Europe and the USA, but investment in developing regions will continue on a smaller scale.
The industry will become a more integral part of the whole transport proposition, as a result of accepting public funding and some political direction.
Recently, there has been much speculation about the consolidation of the American carmakers. It is clear that if this happens it will be enabled by public money.
So far there has been no evidence of consolidation in Europe between the German, French and Italian players, but if governments become investors, the industry may well be asked to look at consolidation and restructuring.
The Japanese car industry
In Japan, while companies have reported sharply lower profits, the industry looks to be in better health and not in need of government support.
Politicians in Europe and the US, along with the voters, may favour alliances or mergers with Korean or Chinese partners to takeovers by the Japanese.
Looking forward to 2010 and the costs of saving jobs will have been quantified and the money spent.
The finite supply of oil and the need to reduce emissions will ensure that there is government pressure and incentives to replace current technology as quickly as possible.
The key challenge will be the provision of refuelling networks, power sources or any other solutions and who will fund them.
So far there has been little evidence of how these alternative power solutions will be set up and whether there will be a simultaneous approach across America and Europe as the models are introduced.
Tier 1 suppliers will rationalise their manufacturing facilities in Europe and North America and continue to develop in Asia, Eastern Europe and South America.
The investment that has been made in the last three years by private equity in Tier 1 companies such as TRW, Dana and Valeo, will prove to be a driver for consolidation. Because Tier 1 players have grown in their importance as the source of innovative R&D and have enhanced the vehicle manufacturers’ products, their influence is likely to increase further.
They will be present in all regions and it is likely that they will focus on a smaller range of products but aim to be global leaders.
Assuming that the question of how alternative energy solutions such as hydrogen or ethanol is addressed in terms of fuel accessibility, the cost of engine development and production may lead to further industry changes.
The next 10 years
Over the next 10 years there is likely to be significant development in the number of joint ventures producing engines for two or more vehicle manufacturers.
R&D and investment costs associated with engine development have become one of the most challenging issues for the industry. Greater political involvement and greater public awareness of the environment will see the pressure for change maintained.
It may be that as manufacturers consolidate globally, they separate engine manufacturing in order to create a much smaller number of specific engine producers, which they continue to have a share in.
This would have a significant effect on the cost of new vehicle development and bring greater focus to the order in which new technologies will be launched.
The challenges faced by vehicle manufacturers to their profitability as a result of the current crisis will require radical solutions. A new approach to engine R&D and manufacturing would enable them to attract investment directly from energy producers, and lead to a more co-ordinated approach across the industry.
Changes in retailing
There will also be changes in the automotive retailing model. Profit margins have been controlled by the vehicle manufacturers. This has worked in stable or growing economies but does not in falling markets.
In the future vehicle manufacturers will see their control of the entire automotive industry significantly eroded as a result of the economic crisis but a more balanced sharing of control, ownership and responsibility could produce a stronger industry more closely aligned with consumers’ and society’s needs.
- Roy Kishor is an automotive industry analyst. Formerly a chairman of the SMMT’s aftermarket division and managing director of Valeo UK, most recently he was senior automotive partner in Kroll’s corporate advisory and restructuring division.