Given the impact of China on the global automotive industry, it makes sense to use one of their well-known Chinese curses to describe the state of auto right now: "May you be blessed to live in interesting times". You would be hard pressed to find more interesting times in automotive than what is happening today. While the last few years have been challenging for OEMs and suppliers, 2008 appears to be the year when many of the macro trends are converging coupled with the worst economic environment in the United States in over 20 years. The result? 2008 will be looked back on as a watershed year in the North American automotive industry.
In December of 2007, new CAFE standards were passed that will require a 35-mpg fleet average by 2020 for all OEMs in North America. This new standard, coupled with the rising cost of oil and other raw materials, is leading to a fundamental re-thinking of how to propel a vehicle. Why does this matter? Because it may change every aspect of vehicle design, including the use of electronics, types of materials, and how a vehicle is assembled. We are entering a period of significant creativity and experimentation. This holds both opportunities and risks for current industry participants.
But well before that mandate goes into effect with consequential results throughout the supply chain, it is evident that it would be difficult to find a previous period with more stress for automotive suppliers than that which exists now. Consider:
- 2008 will be a very soft year for automotive production
- A significant fall off in most light truck production
- The shut down at GM due to the American Axle strike
- Continued volatility in material prices
- Low cost country pressures from OEMs
- Good suppliers being sucked into the dysfunction of their customers (e.g., sub suppliers of Plastech)
There is no question that 2008 will be the year that some suppliers will not survive this turmoil. For the first time we are going to see a lot of Chapter 7 filings (liquidation) vs. Chapter 11 (reorganization) and there will clearly be some winnowing out of excess capacity in some sectors. But you will not see the massive consolidation in the industry that so many have predicted. Why? Because:
- There are major barriers to exit in this industry. Many small to medium suppliers will continue to exist even though they are marginally profitable. While their balance sheets are weak, they are not so bad that they cannot survive the current environment.
- There are a lot more new entrants than many people realize due to the growing presence of electronics and the changes in powertrain technology previously mentioned. This will become a bigger phenomenon over the next 10 years.
- At over $950 billion in revenues in 2007, the automotive supplier industry is one of the largest industrial segments in the world. So while there may be some consolidation at the top of the food chain (i.e., the Tier Ones) many suppliers will just move to a different position in the chain vs. go away.
The good news for the strong suppliers is that they've become stronger over the last few years, and the power equation between suppliers and OEMs has begun to equilibrate. What is not clear is whether OEMs can learn to work with suppliers as peers rather than as subordinates.
The State of the OEMs
While production and sales will clearly be significantly down this year, it is the competitive position of the major car companies that illustrates the perpetually changing state of the auto industry.
Ford: While we remained concerned that the turnaround at Ford may not be fast enough, we are very encouraged by many of changes they have made in the last year. From better designed products to significant improvements in their organizational design and decision-making processes, Ford appears to be headed in a much more positive direction. The only question is whether they can stabilize their market share soon enough to give them the opportunity to survive as an independent player.
General Motors: Given their significant position in the light truck segment, 2008 will be a tough year for GM. But overall, they have become the one domestic OEM that is likely to survive and prosper over the coming decade. They are one of the world leaders in vehicle drivability and their quality and vehicle design continues to improve. They are also one of the stronger global OEMs and they will likely start to see their prospects improve in North America.
Chrysler: It would be difficult to find an OEM position that has deteriorated more rapidly than Chrysler's since the Cerberus purchase last year. While they were clearly going to be challenged as a regional OEM trying to compete with global brands, many of their current problems have been self-induced:
- Robert Nardelli keeps personally trashing the Chrysler brand. After having been quoted in numerous publications (including the front page of the Wall Street Journal) about the inferiority of many of the current products (e.g. the Sebring), he makes current Chrysler owners question their judgment and potential owners stay away.
- While the idea of reducing the number of brands to improve quality and economies of scale (a.k.a., the Toyota model) makes perfect sense, don't announce that you are planning on cutting your product line in half but are not going to determine which ones for 6 to-12 months. Why would suppliers continue to support advanced development work if they are uncertain that the product they are working on will be one of the survivors?
- From the debacle at Plastech to the current purchasing focus on "global sourcing regardless of the complexities involved," the current leadership at Chrysler demonstrates a naiveté on the complexities of the automotive industry supply chain.
The bottom line? Chrysler has replaced Ford as the OEM we are most worried about in terms of surviving as an independent entity.
Toyota: While Toyota remains the strongest car company in the world, even they have had a few stumbles of late. From some very public quality problems in 2007 to continued struggles with gaining share in the light truck segment in North America, Toyota has proven that it is hard for any OEM to maintain consistent performance. Still, we anticipate that Toyota will continue to grow in North America as they bring production on at new facilities.
Honda: Honda is well positioned to continue to grow in North America and globally. They appear to be the most systematic in leveraging a global platform strategy, and they will be well served by their core competency in engines and powertrains. From variable valve timing to clean diesel to hybrids, Honda is likely to be at the forefront of all of the technological changes in powertrain over the next decade.
Nissan: Nissan benefits from a more free-wheeling approach to design (that serves them well with American consumers) and an expanding vehicle line up. While they will clearly continue to be one of the major OEMs, they have yet to demonstrate that they can truly compete outside of the mid- and small-size car segment. How Nissan/Renault deepen their global presence will be a key to their success over the next decade.