Even After Cuts, Auto Execs Fear Over-Capacity

Jan. 7, 2010
Survey finds automakers are still positioned for too much production and feel consolidation is likely to occur.

The challenge that bears down on the U.S. auto industry in many ways reflects what has happened to General Motors. For the past three decades, GM has been bleeding customers, losing almost one percentage point of market share each year. In 1980, it sold 45% of new vehicles in the U.S. In 1990, that number fell to 35%, then 28% in 2000, and 19% in 2009.

In an effort to resuscitate a hemorrhaging industry, GM and other U.S. automakers have made dramatic cuts to reduce overcapacity. But a new survey of auto executives suggests the industry is still positioned to produce too much inventory, even despite years of cutbacks.

According to KPMG's 2010 Global Auto Executive Survey, which queried 200 senior leaders at automakers and suppliers from around the world, 88% of respondents said overcapacity is still a problem despite numerous closures and tens of thousands of layoffs in recent years.

Research firm Wards Automotive has estimated that recent plant closings made by the respective reorganizations of General Motors and Chrysler, along with additional closings by Ford and Toyota, reduced North American capacity by about 1.5 million vehicles in 2009, down to 18 million units. But even those cuts might not be enough.

"I'd say right now, coming into 2010, North American still probably has 10% more capacity than it needs," said Haig Stoddard, an auto industry analyst with IHS Global Insight. "We'll be in an overcapacity situation until 2012. I think we'll see some OEMs start to make some money this year, but on the whole, the industry will be very shaky. We're going to see probably four assembly plants worth of capacity to be cut within the next two years."

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Auto sales inside the U.S. dropped 21% last year alone to 10.4 million vehicles. According to IHS estimates, auto sales are estimated to improve by a million units in 2010. That's a far cry from a decade ago, when the U.S. auto industry averaged 16.7 million sales a year.

"Despite the fact we've taken out capacity, if volumes remain low we will continue to be in an overcapacity situation," said Betsy Meter, automotive audit sector leader with KPMG.

The survey also suggests that consolidation is likely to occur within the global automotive industry. Nearly three-quarters of executives polled believe Chinese and India-based OEMs are going to be among the big winners in the market over the next five years, followed by Korean (Kia and Hyundai), Japanese (Toyota and Honda), and German automakers.

Substantial majorities also think the number of alliances, mergers and acquisitions will increase, not just for primary automakers, but also for tier one suppliers (just over 70%), tier two suppliers (56%) and dealers (52%).

According to the survey, the specific global drivers of alliances, mergers and acquisitions include too much debt and risk of bankruptcy (89%), access to new technologies and products (84%), potential for product synergies (83%), and access to new markets and customers (82%).

"The silver lining is that things look like they are going to get better," said Stoddard. "A lot of the manufacturers, especially the ones who are in the most trouble, GM, Ford and Chrysler, have done an immense amount of cost-cutting in the last couple years. A lot is going to depend on pricing power and what kind of incentives they can offer to keep volumes going this year. I think it will be possible for GM and Ford to make money this year."

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