Auto industry will rebound in 2013.
The auto industry is passing through a sweeping transition that will see it selling fewer and smaller cars for the foreseeable future, leaving profits squeezed.
John Hoffecker, a managing director of Alix Partners LLP, told the Center for Automotive Research annual Management Briefing Seminar in Traverse City, that sales of new vehicles are likely to recover relatively quickly.
However, sales are very likely to “plateau.” The U.S. market is a growing market but the old sales forecast of around 17 million to 18 million are likely to prove difficult to reach, even though the US population continues to expand and add new households.
“Because of well-known factors earlier this decade, like the housing and stock bubbles, the auto industry skipped what would probably have been a cyclical downturn around 2001 or so, and about 17 million units of sales were ‘pulled ahead,’ Hoffecker said.”
In the last two years, the industry has in turn given back about 7 million units, leaving 10 million units to be foregone before the industry gets back to zero.
“The good news is the indicators we’re looking at say the industry rebound will probably come earlier than some have been, around 2013. The bad news is, when the rebound comes it is quite likely that sales will plateau at 15 million to 16 million per year and that this ‘new normal’ level of demand will last until the peak of the next business cycle,” Hoffecker said.
The Alix Partners study also found that small cars will represent half of global growth during the next decade, greatly challenging the profitability of automakers and suppliers. Meanwhile, carmakers will be under pressure to bring on advanced powertrains, electronics, branding and management system that increase speed to market so they can distinguish themselves in the coming competitive dog fight.
The challenge for automakers will be to make a profit on new, smaller cars while maintaining a strong cash position, he said.
A new study by Alix Partners also found that 24% of suppliers globally are in financial danger, which represents a substantial increase from just a year ago. In addition 41% of the automotive related bankruptcies since the first quarter of 2008 involved private-equity owned companies.
However, the top 25% of North American suppliers are competitive with anyone in the world, Hoffecker said.
“The fact that some North American suppliers can continue to do well, even in this environment, should give hope to other ambitious managements that, by pulling the right levers, there really is hope,” he said.
However, cash should be a strategic concern for companies of all kinds.
“Today cash should be not just king, but supreme leader,” said Hoffecker. In the old days in autos, it was all about the big eating the small. Then it was the swift eating the slow. Going forward, it’s going to be the liquid drowning the illiquid,” he said.
Hoffecker said a key reason for the continuing squeeze is that the industry is that car business is going through a transition that could last another 20 years as it moves from being a “country centric” business to a true global industry where the winners rule in every market around the world.