To satisfy international consumer demand for fuel-efficient, affordable cars, vehicle manufacturers will invest heavily in relevant new models, products and technologies over the next five years, claims Gavin Maile, Africa Chair of KPMG’s Automotive Practice.
That is according to an annual global survey of the international motor industry by KPMG International. In the KPMG survey, which was conducted during late September and October 2008, a total of 200 executives were interviewed representing vehicle manufacturers and suppliers in Canada, the US, UK, France, Germany, Sweden, India, China, South Korea, Japan, Thailand, Brazil, Mexico, Spain, Poland, Slovakia, Russia, the Czech Republic, Italy, Switzerland, South Africa and Australia. KPMG has released an annual survey of automotive executives expressing their views on the state of the industry since 1999.
At the same time, the KPMG survey reveals that only 15% of executives expect profits to increase this year, 24% expect a decline, with 46% indicating that profits will be too volatile and unpredictable to forecast.
“This is a clear indicator of the automotive industry in crisis, with 85% of executives unsure if they would be profitable” said Maile. “And it is extremely likely that the situation has worsened further in the first months of 2009”.
In the latest KPMG survey, 96 per cent of executives interviewed felt that fuel efficiency will be the major factor driving consumers’ purchase decisions, but they also rated affordability (83%) and alternative fuels (70%) highly. These views were expressed even after the price of oil had dropped from its all time high levels in July 2008.
To meet demand, the executives stated for the second successive year that manufacturers were intent on sustaining high levels of investment in new products and technologies. In fact, 91% (versus 94% a year ago) said that investment will increase in new models and/or products in the next two years, and 92% of those surveyed said they expected OEMs will increase investment in new technologies – slightly down from 93%. With limited funds for investment, other facets of the business may decline, including funding for marketing and advertising (down from 72% to 55% this year), and in investment in new plants (dropping from 72% a year ago to 52%).
“The executives clearly understand that even with the sudden downturn in vehicle sales, they can’t take their eyes off investment in technological innovation,” said Maile. “They need to be focused on that end game and cannot be deterred from it as it presents a solution to either keeping ahead of the competition and gaining market share, or falling behind and continue to struggle to be profitable.”
Manufacturing fuel efficient cars was the leading trend cited by the executives, while switching to alternative fuel vehicles and the production of environmentally-friendly cars rounded out the top three trends.
“That demonstrates that manufacturers are recognising the need towards more environmentally-friendly cars and fuels as the world struggles with the impact of climate change,” he added. “The global reliance on oil and the recent high prices of oil have pushed the industry towards alternative, greener sources of propulsion.”
However, investment and focus has shifted from the KPMG survey of a year ago. In the 2007 survey executives quoted hybrid systems, fuel-cell technology, advanced materials and electric and battery technology as the important automotive product innovations over the following five years. This year, however, they voiced much stronger views on hybrid systems, up to 91% from 79%. Furthermore, respondents moved electric and battery technology to a clear number two, up to 82% from 60%.
Maile points out that affordability has become more important in buying preferences owing to the global problems with credit availability and, in South Africa, the relatively high interest rates – which fortunately is now on a decline.
“It is likely that it will take up to 18 months before South African consumers have sufficient disposable income to re-enter the vehicle market to any substantial degree, but it is possible that, in the light of the expected price increases, this will occur earlier as buyers try to buy before prices increase – assuming, of course, that they can get financing.”
According to the responses of executives, manufacturers and suppliers alike would look to manufacturing processes and technological innovations, product materials innovation and low-cost country sourcing for cost savings over the next five years.
In predicting market share winners over the next five years, respondents identified Toyota, Hyundai, Honda and Volkswagen as leaders, with General Motors, Ford and Chrysler on the low rung of market share expectations.
The respondents also indicated that they foresee a dramatic increase in bankruptcies, with 77% expecting an increase in the next few years – up considerably from 36% a year ago. Furthermore, the survey demonstrated that participants projected a significant increase in merger and alliance activity, especially with OEMs and Tier 1 suppliers. In fact, 71% of the executives see increases for OEMs, up substantially from 47% a year ago.
“Merger and acquisition activity is being driven by potential for product synergies, access to new markets and customers and access to new technologies,” said Maile. “And overcapacity continues to loom as an issue for the industry.”
South African OEMs have recently invested significantly in additional production capacity, which was just starting to come on track when the credit crisis started.
“This has led to cutbacks in production and with our export markets in crisis, is likely to lead to further cutbacks. The impact on component supplies is magnified as they have high levels of stock and battle for profitability.
“A number of South African component suppliers have also already ceased operations and others may follow, which could result in local merger and acquisition activity in order for OEMs to secure component suppliers. In addition, job losses will continue,” he added.
As far as the global picture is concerned, the markets or regions expected to see the greatest growth of consumer demand in the next three years – apart from China and India – include Eastern Europe (up from 4% last year to 43%) and Central and South America (up to 29% from 4% last year).