Is the Global Auto Industry Mending?

January 8, 2008

After years of withering cost-cutting and devastating cuts, the U.S. auto industry may be nearing a turnaround, according to a new study by the consulting firm, KPMG. But that doesn’t mean things are looking rosy, with competitive pressures – and demands for new, environmentally-friendly technology – likely to continue weighing heavy on manufacturers around the world.

“Industry executives are more optimistic than they have been” in a number of years, explained Daron Gifford, KPMG’s national auto industry leader, referring to the findings in the latest of the firm’s annual Auto Executive Survey, being released today. “That’s one of the most dramatic changes we’ve seen from prior years.”

Adding that “there’s a view things aren’t that bad,” the study, which polled 113 industry leaders from around the world, found a general sense that the long and difficult years of bankruptcies and big losses are coming to a close.

The new survey’s results might best be described as “cautious” optimism. Just a year ago, the annual report found 56 percent of the industry leaders anticipating a bankruptcy among major auto companies. This year, the number is down to 36 percent. Meanwhile, 26 percent predict global auto profits will go up this year, but only 16 percent anticipated an increase in 2005, while 19 percent foresaw a decline.

“We think this optimism is driven by the fact there’s so much restructuring been done in the last few years,” said Gifford, “which created a lot of uncertainty and distress. Now there’s some structure in place.”

The survey respondents were particularly upbeat about the new concession contracts approved by the United Auto Workers Union, last summer. Among other things, those agreements permit the Big Three to set up two-tier wage structures and slash labor costs by as much as $20 an hour.

Overall, 58 percent feel the restructuring by the U.S. Big Three will make them more competitive – yet at the same time, less than one in four expect the Detroit-based carmakers will actually gain share.

The survey generated some half-empty/half-full responses. The industry leaders told KPMG that they see plenty of opportunities in emerging markets, such as China and India – far more, in fact, than in well-established markets, such as the U.S. and Europe. At the same time, Gifford says that the survey shows an expectation new manufacturers, like those in China, “will be bringing products here (to the U.S.) faster than we thought.”

So the pressure will remain on – and is likely to increase in some areas, particularly in the search for new and cleaner powertrain technology, emphasized Hans Flick, KPMG’s automotive tax leader. The 113 industry leader said they expect environmentally-friendly systems to require a significant share of their resources, going forward.

“The executives see that as something consumers want,” and not just the result of a legislative mandate, the survey found.

A full 84 percent of the executives said they see fuel efficiency as a key factor in consumer buying decisions. But quality remains another key influence, responded 84 percent.

That will lead to a drop in sales of bigger vehicles, notably said half the survey, large SUVs and pickups.

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