A new study by management consultants AT Kearney forecasts that 2010 US light vehicle sales volume will be 11.7m and trend back to historical levels (approximately 16m) by 2012.

AT Kearney’s analysis suggests that since 2007, approximately 20m units of pent-up demand have accumulated, of which more than 9m units will be recovered during the anticipated economic recovery over the next five years.

However, the firm says that the lack of financing for non-prime buyers means that some 3.5m units of pent-up demand will materialise as used vehicle sales rather than new vehicle sales.

“At current loan rates, a one-point increase in loan approval rates can increase the demand for new vehicles by as much as 350,000 units,” says Dan Cheng, Partner and Leader of AT Kearney’s Automotive and Transportation Practice.

While the sales forecast is dependent upon the recovery of the US economy, Cheng said that other than the non-prime credit challenges, key indicators are on-track for a ‘robust US automotive industry recovery’.

These positive indicators include: continued consumer need for light vehicles due to the geographical dispersion of US population density around major city centres; the lack of well-developed mass transit systems as a viable alternative to light vehicles; the increase in used vehicle prices that typically accompanies a period of economic contraction when consumers shift from new vehicle purchases to used vehicles; and recent signs of an increase in vehicle loan approval rates.

“Credit availability will play a key role in the speed of the auto industry recovery,” Cheng said.

Scale economies and platform consolidation to drive more industry restructuring

The study also highlighted the concept of the ‘global car’ and showed that OEMs are increasingly turning to global platforms to achieve significant economies of scale.

“Over the next five years, the production volume of the ‘Top 30’ global platforms will increase by 38 percent, a significant increase over the past five years,” Cheng said.

“In 2010, eight OEMs have 12 platforms with over one million units – this will grow to 10 OEMs with 20 platforms over one million units by 2015.”

The study also found that a global platform with one million units of production provides that OEM with a USD700 per vehicle cost advantage.  The primary drivers of savings are: increased sourcing leverage, shared tooling and facilities, and the savings associated with global development.

Cheng also predicts another wave of industry restructuring. “The cost advantages made possible by global platforms will eventually trigger another wave of alliances and/or mergers as OEMs seek to further maximize global economies of scale,” he says.

Cheng did however warn of ‘wild cards’ that could potentially derail the US economic recovery and impact the speed of the US auto market recovery.

“If we were to endure a European financial meltdown, a US-China trade war, an extended supply chain disruption due to the Icelandic volcano, or a significant terrorist strike, certainly all bets for a solid recovery in the auto industry would be off,” he said.

Other findings in the A.T. Kearney study:

  • Volatility of gasoline price increases impact small car sales. The study found that small car sales are highly influenced by the rate of change in gasoline prices. When the quarterly rate of change of gasoline prices exceeds eight percent, expectations of future gasoline price volatility are ‘built in’ to future vehicle selection decisions – sustaining small car sales for up to five years even as gas prices subsequently decline. Based on the study’s gasoline price scenarios, small car market share could range anywhere from 18% to 30% by 2015. OEMs that can flex their manufacturing capacity to meet changing consumer preferences will be in the best position to succeed.
  • Suppliers are seeing reduced economic risk. Most suppliers will have enough working capital to meet increased North American production levels. Only eight percent by revenue of North American Tier 1 suppliers are at “high risk” of running short of working capital. The study also found that since 2005, Tier 1 suppliers have increased the time between when parts are received to when payment is made to their Tier 2 suppliers by 21 days.  This represents a one-time cash hit to Tier 2 suppliers of approximately USD8bn.
  • New CAFE requirements will incentivise OEMs to bring greener vehicles to market. While it will be challenging for OEMs to meet the new 2016 CAFE requirements, AT Kearney says OEMs should take a portfolio approach and leverage the following four options: (1) alternative fuel credits, (2) incorporation of proven technologies (e.g. turbocharging, gas direct injection) into specific vehicle models, (3) purchasing credits from other OEMs, and (4) investing in electric vehicles to generate additional CAFE credits.