Almost Nothing Positive to Say About the Auto Industry

Our prevailing overview for the automotive industry going forward can be summed up with one word: negative.

OPPORTUNITIES

The industry is very concentrated, with the top 8 global auto companies having more than 90% of global revenues and the top 50 global auto parts companies having 80% of global revenues (the top 4 US tire producers have 75% of the US market). There is a focus on automation and simplifying product lines to lower costs and benefit from economies of scale. The average car now needs only 15-25 man-hours per vehicle and this drops 2% annually.

Hybrid/alternative cars represent a source of growth in the future. Market share gains by hybrids/alternatives will be slow, and they are now only 4% of cars on the road.

Automakers were denied $15 billion by the Senate, but we believe they will access the $15 billion needed from the TARP fund at the Treasury. A more permanent solution will be found when the Obama Administration is in place.

WEAKNESSES

Earnings are below expectations and have been for some time. Some of these companies may be bailout candidates, which would leave equity holders with no value.

Demand for autos is down 15% due to a weak economy and weakening real estate market. Demand is also hurt by weakening employment. The recent credit crunch is crippling to auto sales, and this has a trickle-down effect throughout the industry. Furthermore, there is a slowdown of SUV sales, which are 55% of sales (cars are 45%). Imports have also been more competitive, as they tend to have better gas mileage.

Costs for domestic producers is much higher than seen for foreign producers, and this is creating a loss of market share in the US. The presence of unions has led to costs being much higher than seen in other countries.

Pricing averages -2% in this sector annually. Incentives are increasing as the industry is trying to increase sales. Overcapacity is about 20% in this sector. Raw material prices are elevated and can be up to 70% of the cost of a car. Pension deficits are rising due to a weak stock market, lower interest rates and less pension funding.

We have many Sell-rated auto industry stocks in the near term. Among them are Autoliv (ALV), AutoNation (AN), American Axle and Manufacturing (AXL), Ford (F), General Motors (GM), CarMax (KMX) Lear (LEA), TRW Automotive (TRW) and Visteon (VC).

Comments

[eddie6442:]

Instead of speculating on "what's wrong in Detroit", why not simply focus on the successful auto manufactures IN AMERICA, WITH AMERICAN WORKERS????????? Well designed and engineered, high QC, fuel efficient and competively priced......... and oh yeah.......profitable!...
Imitation is the greatest form of flattery................. but seems to be resisted "at all costs" when the "players" have a different AGENDA!!!!!!!!

2008 Dec 16 09:24 AM

[CLH:]

The US auto firms have the second most expensive wages. Germany is number one. The unions run the German firms. In both cases this can be changed by outsourcing. The unions will fight this but they will lose. The iron curtain didnt work.

2008 Dec 16 09:35 AM

[ECW:]

Hmmmm, interesting question. Which auto maker is this talking about?

"why not simply focus on the successful auto manufactures IN AMERICA, WITH AMERICAN WORKERS????????? "

I was not aware there were any successful American Auto makers.

2008 Dec 16 10:05 AM

[TB3:]

Another author with a terrific grasp of the obvious. Notice how these "analysts" don't seem to have a clue what actions the auto makers are taking to turn their situation around. All they do is carp about the evils of the past. I think I'll suffer the "big one" if I ever read an article which focuses on all the actions that the auto companies have taken over the past five or so years to improve their profitability and product quality. It's so much easier just to criticize.

2008 Dec 16 10:30 AM

[User 320572:]

Ford stock continues to rise no matter what the economy is doing. They said the only reason they wanted some of the bailout money was because they were afraid a sudden large acquisition of money would give their competitors an unfair advantage.

2008 Dec 16 10:43 AM

[303820:]

CLH... YOU MUST BE ONE OF THE BRAIN DEAD EDUCATED A..HOLES THAT THING THAT BY OUTSOURCING OUR GOOD PAYING JOBS WILL SOLVE OUR PROBLEMS..WHEN IN FACT THE ONLY THING THAT IT DOES IS TAKE PEOPLE BUYING POWER AWAY...I HOPE YOUR CHINESE OR MEXICAN SLAVE WAGE WORKERS CAN AFFORD THE PRODUCT THAT YOU'RE OUTSOURCING.... MORONS LIKE YOU IS THE REASON WE'RE IN THIS MESS.

2008 Dec 17 09:50 PM