Auto Executives Predicting Increased Consolidation

Expecting global capacity to exceed 10%.

Auto executives are predicting that overcapacity issues as well as falling profits will force both vehicle manufacturers as well as Tier 1, 2 and 3 suppliers to consolidate. In KPMG's annual survey, the executives see some companies opting for bankruptcy while others will merge or form alliances over the next five years.

"The majority of the auto industry views this as a time of consolidation, not expansion, as many expect global overcapacity to exceed 10%," said Daron Gifford, National Automotive Industry leader, KPMG LLP. "The reasons for this consolidation are clearly structural and material-cost reduction, as well as revenue growth through new business opportunities." The KPMG survey is based on interviews with 150 senior executives at vehicle manufacturers and suppliers worldwide.

When viewed by region, 81% of Asian executives expect global consolidations and alliances to increase over the next five years, compared with 58% of North American executives and 56% of Eastern European executives. Only in Western Europe were executives less bullish, with 32% of respondents expecting consolidations.

For the fourth consecutive year, slightly more than half of the executives, 57%, agree that alliances will be more important than mergers and acquisitions in the auto industry over the next five years. But 87% think that the rate of bankruptcy in the industry over the next few years will increase or remain the same, and slightly more than half, 56%, believe the rate will increase, as companies choose to file for such protections as a strategic option. Only 10% expect a decrease in bankruptcy activity.

In the survey, 47% of auto execs see non-competitive cost structure as the driving force of bankruptcy. But different regions cite various causes.

  • 70% of European executives cite non-competitive cost structure as the greatest cause of potential bankruptcies in the industry.
  • 28% of North American executives say health care and benefits costs are the key drivers of possible bankruptcy.
  • 17% of Asian executives name excess debt as the main reason for potential bankruptcy.

"Our thinking is that this regional difference partly reflects the management reaction of auto companies based in the U.S., to upstream visible cost pressures created from the health-care and pension obligations of their OEM customers, but this remains to be seen," said Gifford.

In terms of profitability, 42% of executives are predicting that industry profits will be flat or generally rise over the next five years, showing marginally high optimism when compared with last year's 39%. Asian executives, 43%, and their European counterparts, 45%, are more positive about profits increasing over the next five years than North American executives, 38%, who feel the industry will continue to be volatile and unpredictable.

Meanwhile, 54% of vehicle manufacturers and 41% of Tier 2-3 suppliers believe profitability will remain flat or rise compared to only 37% of Tier 1 suppliers.

Additional key findings include:

  • 96% of executives expect manufacturing to grow in Asia
  • 60% of executives expect increases in manufacturing in South America and Eastern Europe
  • 62% of executives do not believe the number of vehicle manufacturers will decrease in China
  • 75% of all executives agree that automakers and suppliers will continue to make significant investments in China over the next five years
  • 38% of executives say China and 29% say Japan are best situated to take advantage of the growing Chinese automotive industry
  • 73% of executives cite India as the next region, aside from China, to undergo the greatest growth.

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