“Auto industry profit will increase by approximately 50 per cent by 2020”
The automotive industry is in pretty good short-term shape, judged by the new cars being paraded at the Detroit car show, but lift your eyes to the medium and long-term horizon and prospects are a bit more complicated.
The only cloud on the U.S. horizon now is the fear that as sales growth slows this year, manufacturers might feel forced to cut prices and splurge on discounts to keep their production lines running. This would undermine profits and reawaken the nightmare scenario that saw General Motors and Chrysler humiliated into bankruptcy and a state bailout.
According to a report from consultants McKinsey, the global automotive industry’s current profits have exceeded pre-crisis levels by 34 per cent but automakers face four major challenges which will require investment of more than $3 trillion over the next 10 years. McKinsey describes these challenges as “complexity and cost pressure”, which includes the need to invest in a wide range of engines to meet tightening fuel consumption rules, “diverging markets”, as third world buyers want cars, “evolving demands” like internet connectivity, and “shifting industry landscape”, which includes emerging competition from Chinese manufacturers and the need to bailout some of the financial basket cases in Europe.
McKinsey senior partner Hans-Werner Kaas said because of the huge investments required, some automakers won’t have the resources to stay competitive.
“Those that will need to focus their efforts on implementing a tailored strategy to manage four key drivers: growth, margins, capital productivity, and market expectations,” Kaas said, declining to identify the strugglers.
“Profit pools are shifting dramatically,” the report said. Emerging markets and North America will see the fast growth in profit pools, while Europe, Japan and South Korea will not be as profitable. Auto industry profits will increase by approximately 50 per cent by 2020,” the report said.
Possible threats to future profits include regulations in China which might batter profit margins, and the costs for electric and other alternative vehicles, as countries like the U.S. force fuel consumption up to meet the 2025 goal of 54.5 miles per gallon.
“Certainly, the tighter U.S. and European future regulations will require a pursuit of multiple technologies, including lightweight solutions as demonstrated in the extensive aluminum usage in the F-150, but also further improvements in the electrification of the power-train centered on cost and range primarily and the conventional power-train technologies, “ Kass said in a e-mail exchange.
Ford unveiled the 2015 F-150 pickup truck at the show, which has saved up to 700 lbs from much use of aluminium instead of steel.
“This will drive further radical innovations, though they will likely be adopted in clearly defined steps and we may see further continued collaboration between (manufacturers) and auto suppliers,” Kaas said.
Turning to current prospects in the U.S., Kaas reckoned the industry has learned its lessons.
“Certainly there are potential latent dangers in increased price competition given slower growth rates, continued aspirations for growth by all auto (manufacturers) and increased renewal frequencies of the product lineup and further extensions of the product line. That said, we believe that most (manufacturers) have learned lessons in the last few years and will monitor a reasonable balance between demand and supply/production capacity to avoid a return to former bad habits. In any case, competitive intensity will increase,” Kaas said.