Executives across the automotive industry may be underestimating the extent of overcapacity within the industry says management consultant KPMG in the UK. KPMG estimates global overcapacity in the industry at 25 percent and highlights overcapacity in China as a particular concern.
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KPMG LLP’s annual survey of senior automotive executives reveals a belief that global overcapacity is on the decrease. Seventy-five percent of respondents claim that overcapacity is now less than 20 percent. Last year, only 63 percent felt that it was below that mark. However, KPMG feel that these responses are overly optimistic.
Although the numbers may be surprising, the responses relating to the Chinese marketplace look even more startling, says KPMG. Despite capacity being added at a rapid rate, 37 percent feel that there is no overcapacity at all in China, while a further 28 percent feel that it is below ten percent.
Commenting on the results, Mike Steventon, Head of Automotive at KPMG in the UK, said: “While a number of vehicle manufacturers have commenced reorganisation programmes to address overcapacity, it is not yet clear whether these programmes will be substantial enough to bring supply and demand back into balance and to drive improved profitability. Based on our research, we view overcapacity as the most significant issue facing the sector and, in our opinion, the current level of over-capacity is higher than identified in the survey.”
“We believe that the level of overcapacity is still around the 25 percent mark and to reduce this to 20 percent would involve the removal of over four million units’ worth of capacity. The challenge of reducing capacity should not be under-estimated, particularly considering the substantial new investments being made in China. It is not just an issue of global over-capacity but having the right level of capacity in the right geographic location.”
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By GlobalData“In our most recent report on the Chinese industry, we noted that existing and committed capacity had grown rapidly while limited growth in sales was expected to be reported in 2004. Although we expect sales to grow in future years, over-capacity will remain a major issue for the next decade. Even with predicted sales of 3.1 million units in 2007, that would still mean that less than 60 percent of capacity would be utilised.”
Elsewhere in the survey, optimism seems to be waning over European manufacturers’ ability to grab global market share. Over the past three surveys, the number of respondents who believe that European brands’ market share will decrease has risen from nine percent in 2002 to 12 percent last year and up to 25 percent this time round. Looking at it another way, 75 percent of respondents still believe that market share will increase or at least remain the same but this is down from 89 percent in 2002.
The decline in optimism is unsurprising considering the rise of the Asian manufacturers, says KPMG. In addition, 78 percent of respondents agreed that consumers in Asia will become a major source of growth in the global demand for automobiles over the next five years. In this area, European brands can take some consolation in the fact that a quarter of respondents feel that they are most likely to succeed in China over the next five years, placing them ahead of the North American brands in this regard.
Mike Steventon added: “The incredible strides being made by the Asian brands continues to impress. Our survey now shows that the expectations for Korean and Chinese brands to grow are enormous – albeit from a lowly starting position.”
“Manufacturers have principally established operations in China to access the domestic market. However, the potential for China to export significant volumes, given projected future over-capacity, should not be under-estimated. The key challenge for Chinese vehicle manufacturers is to improve quality and drive down costs through a more integrated supplier infrastructure in order to enable it to commercially export vehicles.”
Also in the survey, respondents asserted their confidence that higher levels of profitability may materialise sooner rather than later. In every previous survey, most respondents have pointed three years ahead as the time when profitability would be at its peak. This year’s survey is the first in which that trend has not been continued as respondents maintained that 2006 would still be the industry’s most profitable year. A further 16 percent of respondents plumped for 2005.
Steventon commented: “It’s encouraging to see this belief amongst the survey respondents that more profitable times could be looming. However, it will be interesting to see how they plan to deliver that profitability. We recognise that a number of vehicle manufacturers are restructuring their activities to align with the changing marketplace. However, whether this restructuring and rationalisation will be sufficient to compensate for increased labour, metal and energy costs is still to be proven. In an environment where prices to consumers are not expected to increase, the industry must deliver on this.”
