Wherever you look, prospects in the auto industry appear decidedly downbeat. Not only are the 'triad' markets - North America, Western Europe and Japan - under pressure, but so are the emerging markets that it was hoped would take up the slack. We have undertaken a business assessment of the major vehicle makers and Tier 1 suppliers to consider their prospects.

Vehicle manufacturers

Toyota's revision of its earnings outlook, a first in several years is a grim indicator of the health of the global automotive industry. Stalwart in its product segment, BMW has also come under criticism for building a volume intensive oriented business model - an arrangement which propelled the company to become a leader gaining a 50% increase in sales since 2000.

Average disposable income across developed economies is expected to decline with increasing job losses and salary reductions. In the same breath, cost of borrowed money has risen to historic levels stalling expansion projects where funding was yet to be secured and endangering M&A deals completed using bridging loans and exotic finance schemes.

Adding further pain to the existing system are changing consumer preferences. OEMs have until recently kept away from small cars and the resultant smaller margins. Buyer preferences have changed and more and more buyers now prefer smaller, more fuel-efficient vehicles. Alternative propulsion technologies are also gaining ground with increasing numbers of buyers showing interest in eco-friendly cars. The overall market size however is shrinking. Vehicle sales in North America in 2009 are expected to reach 11.7m units. OEMs with smaller cash reserves and dated vehicle platforms are facing difficult times. 

Previously announced product investments and acquisitions are being stalled. One such case is Daimler's US$2bn acquisition of Russian truck manufacturer OAO KamAZ. Tata Motors is also having problems in arranging lines of credit to close the Land Rover-Jaguar buyout deal with Ford. 

Several manufacturers are stalling production, laying off temporary workforce or closing plants to rid themselves of piling inventory. Volvo's order bookings in the third quarter in fiscal 2008 dropped 99.63% year on year. 

Suppliers

The collapse of the global financial order triggered by the aggregation of toxic assets by banks and financial intermediaries has brought forth a challenging situation for the automotive industry. The lack of availability of consumer finance has forced willing buyers to defer their purchase plans as the financers are redefining their risk profiles. Moreover average disposable income across developed economies is expected to decline with increasing job losses and salary reductions. In the same breath, cost of borrowed money has risen to historic levels stalling expansion projects where funding was yet to be secured and endangering M&A deals completed using bridge loans and exotic finance schemes.

Coupled with the crisis is another challenge that is dynamically reshaping the prospects of component suppliers - that of changing consumer preferences. Buyers in North America have rapidly moved away from gasoline-guzzling utility vehicles and trucks towards smaller more fuel efficient vehicles. Furthermore, alternative propulsion technologies are gaining ground with increasing numbers of buyers showing interest in eco-friendly cars. The majority of the supply base of GM, Ford and Chrysler had oriented their facilities to cater to larger vehicles, but are now finding they suddenly have lesser buyers.

Other suppliers with a more rational supply programme are struggling to reduce their high-cost manufacturing footprint. One such interesting case is that of Goodyear. The company is striving to relocate half of its capacity to low cost countries while upgrading its high-cost facilities for producing higher value-added tyres. Suppliers across all regions have embarked on cost reduction drives to bring down fixed cost expenses.

Anticipating a shift in product mix, certain suppliers have taken strong measures to develop technologies that will help them partner with OEMs on programmes based on alternative propulsion technologies. Bosch, Denso and Johnson Controls have committed significant investment to achieve the first mover advantage in hybrid vehicle compatible batteries.

Increasingly suppliers with overcapacity are reworking their aftermarket strategies to ensure that their margins remain healthy. Tyre manufacturers are launching higher value added products first in the replacement market and then on OE programmes to ensure that demand remains healthy. 

Asia-based suppliers are also facing margin pressures due to sharp currency fluctuations following the infusion of fresh liquidity by several Central Banks across the world. 

Outlook reports package from just-auto

This is a package of just-auto's latest 'Prospects for the world's major vehicle manufacturers' and the latest 'Prospects for the major auto component manufacturers', providing you with a comprehensive insight into the top auto companies at a discounted price.

Report package: just-auto's prospects for the major vehicle manufacturers and major component manufacturers (download)