How Many Automakers Survive the Long Haul?

Once the reorganizations of GM (GM) and Chrysler are done, the companies comfortably back producing automobiles and all apparently right with the world, we may then have to get down to the real business of rationalizing the U.S. auto industry.

A new report from A.T. Kearney featured in the WSJ Real Time Economics blog suggests that we probably need only three major auto companies. Right now they count seven — Ford (F), GM, Chrysler, Toyota (TM), Honda (HMC), Nissan (NSANY) and Hyundai (HYMLF.PK).

Among the other things mentioned in the article are:

• Vehicle sales are expected to be around 10 million this year but they see pent up demand pushing the annual rate back up to 16 million by 2012.
• Suppliers are burning through cash and should exhaust their cushions by year end. Kearney predicts they will need cash infusions between $17 billion and $33 billion from 2010 to 2012.
• If the market rationalizes down to three major manufacturers they would expect them to control 70% to 90% of the market. Those most at risk now are the companies that control 5% to 10% of the market.

I’ve left a link at the bottom to Kearney’s site at which these numbers are presented graphically. I couldn’t find any detail on the actual study so I have no way of validating their methodology. The numbers might be off but I don’t necessarily see any reason to dispute their overall conclusions. The concentration of sales in a few dominant players is consistent with the evolution of other industries.

I will say that I found the information about the suppliers both surprising and a bit troubling. I suppose if it’s true we shouldn’t be surprised that we haven’t heard a peep out of the auto task force about this, and I’m relatively certain they much have some sort of handle on the issue. Since most of the suppliers are UAW employers it’s probably pretty much baked in the cake that these guys will be next in line for your money.

I guess the big question is how much money we spend to make sure our car companies are the survivors of the shakeout.

more: here (link to Kearney site)

Comments

[ex GM emp:]

Latest calls are for an eight million year for '09. Sixteen million by 2012? A double in three years? GM, Ford and Chrysler will be long gone by then. Forecasters don't know what's going to happen next month let alone three years down the road. Pure Poppycock article.

May 15 02:01 PM

[pwnc:]

I've seen one version of the pent-up demand concept: There are more than 200 million vehicles on the road today. At an 8 million/yr. replacement rate, that means 25 years to replace those vehicles, which is an unrealistic length of time for the vehicles to last, so it is said demand has to climb to at least 15 million/yr. simply to replace existing vehicles, not adding in any additional demand from population growth. Seems logical, but doesn't predict near-term sales. My own car is 13 years old and ripe for replacement.

May 15 02:08 PM

[Tdot:]

Demand at the 15-17 million range in the US was at least partially driven by 2-3 year leases, which virtually compelled vast numbers of buyers to keep coming back to the showroom every other year, or else buying the car as "used" based on the residual. Lease contracts that were made before the collapse (and have not since been voided) will still come to an end in the next year or two. Folks will either turn them in and buy something new, or they will purchase something used (supplies of which will eventually start to dry up).

In any case, there is an inevitable and growing pent-up demand for new cars, which could produce a tsumami of demand if and when the global economy picks back up. According to some external research, something like half of vehicle owners will be looking to buy at least one new one in the next 2-3 years, and if the average age of vehicles on the road is already 8+ years, it sould seem to be sooner rather than later. This could be whipped into a frenzy of buying if the Government legislates more environmental mandates for existing fleets: additional "CO2 taxes" could be easily levied based on the vehicle (EPA gas mileage) and miles driven, or directly from fuel purchases. Such a "use tax" would drive massive demand for small cars and fuel-stingy hybrids and such (not to mention hyper-miling habits).

We have something on the order of 150 million drivers in the US. If half - 75 million (!!) - will need a new (or a gently-used replacement car) in the next 2-3 years, it is not difficult to imagine a huge, massive surge in demand coming, followed by perhaps another slump, since a large percentage of those might be 6-year purchases rather than 2-year leases. One could anticipate a few 6-7 year cycles of surges and slumps until things even out again.

This is what the past 2-year leases sought to even out: the regular slumps in demand as average folks slowly made their way through the 4 and 5 (and now 6) -year payment coupon books.

The only real question is - which car companies will have the capability to rapidly double and triple their production capacity to meet the waves of coming demand, and then settle back to an easier pace in the off-years without going bankrupt (again).

May 15 03:03 PM

[cwhoyt:]

Yes, but we scrap 12M units a year....add that into your calculations.

May 15 03:03 PM

[dw57:]

not sure why you are surprised about the suppliers. that isn't new news. they have been talking about that for some time. because all of the car companies use the same suppliers, if one crashes, it impacts the other car companies. and the time frame for the suppliers crashing is as early as this summer, depending on auto production. and they are already headed there with just the Chrysler and GM shutdown, never mind if they were liquidated. i have heard that same idea of replacement time frame. not sure that it won't eventually happen, it just won't happen for 3-5 years. i suspect the new norm for sales will be in that 9 million or less. and that demand will be a lot lower since the majority of last few years demand was baby boomers, and they are in get ready for retirement (they hope) mode. the follow on generations have had very little interest in cars (maybe cause they make a lot less?)

May 15 03:13 PM

[optomist1:]

Malaise Made in Motown....overcapacity has been an issue for years, the perspective from D'town is.....its about time to roll out the "Buy American" band wagon or did I say the "Buy American only when it protects UAW and big three management jobs". The Hypocrisy in Detroit is only exceeded by the skewed belief that if not for the credit/finance reboot the big three would rise like a phoenix and overtake the competition, or that the Lions are Super Bowl bound. After thirty years, such a thought is pure fantasy.

Under the title of "Hard To Believe" 1) Saturn has yet to turn a profit, 2) during the time Ford owned Jaguar it never turned profit, purchased for approximately $6-7B at least as much invested in it and along with Land Rover sold for $3B...approximate numbers, but no less offensive...keep buying that Ford stock, pump it up.

May 15 03:27 PM

[zagrebzagreb:]

Sorry, but the idea that the US market ‘needs’ only three major auto manufacturers is ridiculous. This consolidation idea has fascinated so-called experts for decades, and the evidence continually proves them wrong… but still they persist.

A few years ago the Economist was openly wondering if poor little BMW could survive, along with Porsche and other ‘niche’ manufacturers. (Only in the auto industry could these giant manufacturers be considered niche.)

Interestingly, doubts about these companies survival hinged not on profitability – as they were very profitable at the time – instead the issue was simply ‘size’. Yes, the same disproven market-size fixations that helped seal the fate of GM. (As a side note, why again is it better to be a big company losing billions than a small company making millions?)

Fiat’s CEO says real gains in economies of scale can be made only when platform sharing surpasses 1 mil units per year - worldwide. Even with that huge 1 mil number, the US can still support a huge number of manufacturers, as long as they have a global footprint, which most manufacturers do.

Today, Porsche has the best operating margin in the industry (never mind that they sell nowhere near one million cars per year), and Porsche’s holding company now owns majority shares in the Volkswagen Auto Group… in other words, the baby ate the parent. And although these companies are now interlocked financially and will no doubt share more resources, they still remain distinct manufacturers, as the market demands.

So the question again… Why do we ‘need’ only three auto manufacturers in the US?

May 15 03:45 PM

[Fact Check:]

There are well over 7 major auto companies. You've left off Porsche Auto Holdings (Porsche, Audi, Volkswagen, SEAT, etc.), Mitsubishi, Fiat, Daimler, Mazda... I could go on.

May 15 03:50 PM

[Mr. Stupid:]

I hold 25k shares of Siri XM so if this demand doubles Siri will go to the moon.

Siri XM is here to stay.

Frank

May 15 06:54 PM

[redbaron:]

'I couldn’t find any detail on the actual study so I have no way of validating their methodology. The numbers might be off but I don’t necessarily see any reason to dispute their overall conclusions.'

I have no particular expertise on the US auto industry, but I did find the statement above more than a little troubling. AT Kearney may, or may not have credibility here, but I sure would want to start with dependable numbers before extrapolating out any conclusions. The comments on the article above show a wide variation of possible outcomes for this industry, so what gives this particular estimate more credibility than any other estimate?

ATK were the consultants who helped liquidate my former cash-rich employer, and when the cash was mostly sucked up and gone, so was ATK. I point this out only to suggest that ATK may have more at stake here than meets the eye, and if they have clients, or investments, within the industry, than that may well influence their prognostications. I would see no reason to believe their reporting or the 'facts', any more than others.

May 15 09:58 PM

[john s. gordon:]

rationalizing -

the history of the automobile business in u.s.a since 1927 has been one of rationalization. in that year there were about 122 companies in this country building cars and stutz motor co. was the darling of wall street.

in england rationalization after 1950 has proceeded at a slower pace & there are still niche manufacturers (ginetta, marcos, morgan, ...

look at the domestic airline industry for an example of how companies lose money & get rationalized. the result is, among other things, pilots formerly paid 129,000 now get paid 16,000 by a nonunion startup (whose lifespan is problematical).
> jack

May 16 09:19 AM

[Mister Jimmy:]

GM has designers, engineers, and planners as creative and smart as any in Europe and Asia. Its leadership did not address spiraling legacy (health care and pension) costs long ago and failed to use its global footprint to compete effectively in key segments. Yes, the new Malibu is a formidable competitor to Camry and Accord, and GM builds an awesome truck, but there is no excuse for a 100-year-old company not to have a vehicle competing effectively with the Corolla and Civic. Emerging markets gravitate to that vehicle class and smaller, something GM should have recognized long ago. Look for the new GM board to replace Fritz Henderson with a visionary outsider, much as Bill Ford brought in an outsider to run his firm. This iconic old firm will never be what it once was, and that's undoubtedly a good thing.

May 16 10:31 AM

[a. palmer jr.:]

Can you imagine how junky and gas guzzling the cars here would be if we had never imported the first car from Europe? Back then the automakers dictated what cars we drove, not us. There were only a few models from each manufacturer and we decided which one we wanted.

May 16 12:40 PM

[Mr. Stupid:]

Yep, cars like the surburban and avalanche have destroyed GM. Just good for guzzleing gas and polluting the environment.

It's PAST TIME to make up use for alternative energy sources.

Stupid people want to drill more to bring the price of oil down. Please, keep the price of oil UP. Maybe then we will all see more totally electric or other alternative use.

I love seeing some fat chic at gas station, driving her sport utility, and whining about the price of gas. Or some dumb redneck cussing out loud how the environment doesn't matter and what's a few more oil fields.

Wow, how stupid of a country are we????


Frank


On May 16 12:40 PM a. palmer jr. wrote:

> Can you imagine how junky and gas guzzling the cars here would be
> if we had never imported the first car from Europe? Back then the
> automakers dictated what cars we drove, not us. There were only a
> few models from each manufacturer and we decided which one we wanted.

May 16 12:49 PM

[User 410980:]

uaw basher..don't you really know how many members the uaw has lost over the past 10-20 years? didn't make a hoot to you when these people who got up everyday, went to work, built something we could sale, and paid their taxes & made tons of money for the man, lost their jobs then. NOW with over half the workforce gone you want to kick the only thing that will bring our economy back in the teeth, & support another countries economy.you can't bring it back by pushing paper around or getting paid for nonproductive comments, (you have to make something we can sell or grow something we can eat) or were all toast in the end. so grab a pair of coveralls, get your hands dirty and try to pitch in instead of trying to talk your way out which isn't working.leave that to the politicians & lobbyists seems they get paid for nonproductive work & sending our jobs over.

May 16 06:05 PM