According to a new report by PricewaterhouseCoopers, the automotive industry needs to rationalise further to secure long-term sustainability.
With consolidation and the accompanying net rationalisation absent, the sector is highly volatile when compared with other global industry sectors.
Overcapacity continues to dominate the industry in 2005, while global price wars and the general inability to return capital costs are also burdening this troubled industry.
A spokesman said: “The industry needs to rationalise its production capacity in order to earn its cost of capital. It is hard to see how this can happen without consolidation and significant labour co-operation.”
The report is a summary of financial data, trends and practices reported by leading global vehicle manufacturers and suppliers. It is an in-depth examination of over 30 annual reports as well as additional financial information such as ad hoc disclosures and letters from chairmen to shareholders.
The spokesman said: “Financial reporting practices provide a guide to better understanding of global automotive OEMs and suppliers. However, without a more complete understanding of legacy costs, sustainability issues and the low-cost country cost base, investors will not have a complete picture of a company’s results and prospects.”
Additional key findings include: by 2012, 15 countries are expected to rationalise capacity from their current levels. Yet at least 12 countries will actually increase capacity – China being the most notable – hence net global capacity will remain relatively unchanged.
The Chinese automotive industry looks set to see increased growth of 14% by the end of 2005, due to consumer confidence that prices have stabilised. This increase follows a slowing of growth to 11% in 2004 due to exhausted market demand and a shift in consumer preference to the more modest vehicle segments.
The latter part of 2005 is set to witness a restored high level of assembly growth. Although this is not anticipated to be of the record-highs of 2002 and 2003 – growth should be around 14%, surpassing 2004 levels.
Growth in the Indian market in 2005 is currently 17%, a slowing from 27% in 2004, a year dominated by high levels of consolidation. Notable factors to high growth are the stabilising macro environment and policy liberalisation which are proving highly attractive to foreign investment; the increasing availability of purchasing on credit; and a shift towards compact cars as customers replace mini-cars. Both fall into the small car sector, which continues to dominate with a 58% share of the market.
Across all sectors, growth looks set to steady to a consistent 7.5% over the next five years as the Indian market stabilises.