Facing overcapacity issues and a murky profit outlook, 150 global automotive executives surveyed by KPMG in autumn 2006 expect an industry shakeout with some companies facing bankruptcy and others seeking to merge or form alliances over the next five years.

Executives overwhelmingly expect alliances, mergers and acquisitions among vehicle manufacturers and suppliers to increase globally over the next five years.

Commenting on the findings, Mike Steventon, head of automotive at KPMG in the UK, said: "With global overcapacity still a major concern, a reduction in car production capacity and developing competitive cost structures are the key priorities for the industry. The majority of the auto industry expects to see an increase in rationalisation, alliances, mergers and acquisitions. The reasons for this consolidation are clearly cost reduction and perhaps new business opportunities. It is also indicative of the industry's determination to tackle the fundamental problems which have resulted in the industry collectively, and the US manufacturers and suppliers in particular, not generating an adequate financial return. This is likely to be a painful journey in the short term but absolutely necessary to build a long term, sustainable industry."

For the fourth consecutive year, slightly more than half of the executives surveyed (57%) agreed that alliances will be more important than mergers and acquisitions in the automotive industry over the next five years.

Not surprisingly, a majority of executives (87%) believe the level of bankruptcies in the industry will increase or remain the same over the next few years, while only 10% see a decrease.

Steventon continued: "With shrinking market share, ongoing cost cutting and other pressures, beleaguered US companies are tempted to reorganise by way of bankruptcy, which provides them protection from creditors while they sort out their affairs. This does not necessarily mean they are going out of business, just that they are strategically restructuring, gaining breathing room to meet their obligations."

In the KPMG survey, 47% of auto execs see non-competitive cost structure as the driving force of bankruptcy. But the story is different when broken down by region:

70% of European executives cited non-competitive cost structure as the greatest cause of bankruptcies in the industry with the second most popular response, pensions liabilities, trailing well behind at just 18%;

Only 46% of Asian execs cited cost structures, with excess debt being the next most popular answer with 17%;

American execs were less clear on what the key driving force is. Thirty percent chose cost structures, along with a declining revenue base (30%) and health care benefit costs (28%).

In terms of profitability, 42% of executives are predicting that industry profits will be flat or generally rise over the next five years, showing marginally high optimism when compared to last year's 39%.  Asian executives (43%) and their European counterparts (45%) are more positive about profits increasing over the next five years than North American executives (38%) who feel the industry will continue to be volatile and unpredictable. Meanwhile, 54% of vehicle manufacturers and 41% of Tier 2-3 suppliers believe profitability will remain flat or rise compared to only 37% of Tier 1 suppliers.

Steventon concluded: "Last year, expectations for profitability were low across the industry. This year, there are early signs of improving optimism driven by a real sense that the industry, and particularly the US manufacturers, are finally addressing their overcapacity issues and uncompetitive cost structures. This can only bode well for the long term health of the automotive industry."