An global survey by KPMG LLP says the automotive industry worldwide is not expected to return to peak profitability levels until at least 2006. However, automotive executives indicate the worst is behind them, citing 2003 as the worst year for profits in the last five years.
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This fifth annual survey, conducted in October and November 2003, surveyed 100 American, Asian and European automotive executives from 19 vehicle makers and from 49 Tier 1 and 32 Tier 2 suppliers.
In the study, 29% of the 100 executives surveyed said they expect overall motor industry profitability to be at its greatest level in 2006, followed by 2008 (16%), 2005 (15%), 2007 (12%) and 2004 (9%). In last year’s survey, 18% anticipated greater levels of profits in 2004, with 30% forecasting better profits in 2005. Executives in previous years’ studies said 2000 was as the year of highest profitability.
“In a down economy, our survey has found executives always pushing profitability a few years out, and this year is no different,” said KPMG automotive practice national industry director Brian Ambrose. “But the executives are telling us this year they have seen the worst and that the industry is poised for a rebound.”
In previous surveys, automotive executives have said they expect dismal profits in the immediate year ahead, but this year indicated they believe the industry has turned the corner. When asked to cite the worst year of profitability, 36% identified 2003, with 13% expecting it to be 2004. In contrast with the 2002 study, 27% cited 2002 as the worst year of profitability with another 30% expecting it to be in 2003.
“We are seeing the convergence of improved economic conditions, the levelling off of sales incentives and the huge amount of new vehicle launches scheduled over the next few years all playing a factor,” said Ambrose. “During the past few years we saw the executives pointing off into the future in the hopes that profits lay there. Today, the profitability picture is much more clearly coming into focus.”
The survey also found a continued decline in global market share for US brands. Most executives – 53% – said they expect market share to fall over the next five years, the same proportion as has been predicted for the last three years. Only half of the respondents agreed that “US automakers will become more efficient and more competitive” over the next five years, down from 56% a year ago.
Executives are more confident this year that North American brands have the best chance to grow in Asia, especially in China, with 90% agreeing that consumers in Asia will become “a major source of growth” for global vehicle demand over the next five years, up from 66% last year.
Additionally, 85% of the executives surveyed said that Asia will continue to add or expand manufacturing facilities over the next five years, while only 29% predicted such expansion in Europe and just 23% in North America. Overall, 40% of executives said there will be a decrease in the building of new manufacturing facilities in North America.
Expectations for ongoing Asian market share growth continues a three-year trend. 80% of executives expect Asian carmakers to gain market share, up from 74% last year. Executives said greater efficiencies by Japanese carmakers would help them gain market share, with 67% of respondents strongly agreeing that over the next five years “restructured Japanese automakers will continue to leverage greater efficiency into greater market share.” Last year, 70% agreed.
European brands are expected to grow at a slower rate or remain flat. Over three years, executives who feel European brands will gain global market share has fallen from 51% in 2001 to 38% in 2003, while those who think the European share will hold steady rose from 36% to 49%.
“With regard to market erosion, Asian brands are definitely going to continue to gain market share in North America,” said Ambrose. “However, North American carmakers are launching many new and diverse model offerings and we may see less of a need for sales incentives.”
In the KPMG survey, only 38% of respondents expect an increase in the use of sales incentives in the near future, down significantly from 63% in 2001, and from 48% in 2002.
