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Automaker Industry Winners & Losers: Quarterly Earnings Report

Apr. 28, 2011 12:18 PM ETVWAGY, HMC, F, GM, TM
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By IBISWorld Senior Analyst Casey Thormahlen

Industry Overview
Faced with a plethora of problems and unfavorable demand conditions, automakers have struggled to make ends meet since 2005. Consumer confidence has fallen since 2006 because of the subprime mortgage crisis that is the leading factor for the current global recession. Credit availability and disposable income similarly contracted during the recession, making it difficult to finance a new car.
In 2011, consumer confidence is expected to make its first meaningful gains following the recession. Credit availability is recovering (though depressed by 2007 standards) and disposable income is rising, increasing the Car and Automobile Manufacturing industry’s revenue by 8.5% to $83.2 billion, and boosting the Light Truck and Sport Utility Vehicle Manufacturing industry by 14.9%, to $108.8 billion.

The sharp rise in gasoline prices between 2004 and 2008 shifted preferences from sport utility vehicles (SUVs) and other gas-guzzling automobiles to smaller and greener cars. Light truck and SUV manufacturers have struggled to make a profit since 2004. Expensive labor contracts and idle production capacity led to years of losses in the 5% range, as truck and SUV sales slowed. Industry companies have engaged in restructuring plans and aggressive union negotiations to get costs under control and revive profit. Of the US-based automakers, Ford was the first company to successfully return to profit in 2009 (on a 2.3% margin), and it did so without bankruptcy restructuring or government loans. IBISWorld estimates that the industry’s overall profit will be 3.9% in 2011. This newfound enthusiasm for small vehicles is not permanent, though. More efficient engines in trucks and SUVs have mitigated the financial penalty for driving these vehicles.

Major Industry Players

Toyota Motor Co. (TM): Industry Loser
The past two years have been especially difficult for Toyota. In 2009 and 2010, the US National Highway Transportation Safety Administration (NHTSA) investigated alleged defects in a range of Toyota vehicles that supposedly caused unintended acceleration. Ultimately, the NHTSA investigation found no defects, suggesting driver error as the primary cause, but Toyota was found guilty in the court of public opinion. The scandal has put crushing weight on the company’s US sales. In the first quarter of 2011, Toyota is on pace for a US market share of 14.0%, an astonishing drop from its 2009 peak of 17.0%. The lasting effects of the Sendai earthquake and Fukushima nuclear disaster will only deepen the hole in Toyota’s sales. The disaster, which began March 10th, did not affect first quarter sales, but it is expected to cause supply shortages in the second and third quarters of 2011. Thus far, the company’s truck and SUV sales have led the decline, falling 13.8% compared with the same period of 2010. Toyota’s full-year 2011 market share will almost certainly continue falling. IBISWorld expects that Toyota’s fiscal year 2011 results (for the 12 months ending in March 2011) will show revenue decline and a net loss, amplified by the expense of massive recalls.

General Motors (GM): Industry Average
The saga of “Government Motors” finally ended in November 2010 with GM’s new IPO. The company’s stint in chapter 11 bankruptcy trimmed a lot of the fat that slowed the behemoth manufacturer, particularly with its debt and pension obligations. Better still, GM negotiated less expensive contracts with the United Auto Workers (UAW), reducing production expenses and paving the road for more sustainable union benefits. New contract negotiations are expected to take place in 2011, with a resurgent UAW under the leadership of President Bob King. These factors will be a critical determinant of GM’s continuing performance. For the first quarter of 2011, GM’s sales were up a healthy 9.9% over 2010, to about 206,600 vehicles. While any growth is a positive sign, GM’s sales growth is still far slower that what other manufacturers have achieved, causing the company’s market share to continue declining. Furthermore, GM has outspent other manufacturers on vehicle incentives lately, cutting into profit. Incentive spending has been somewhat ineffective, because GM’s first quarter sales put the company on track for a market share of 16.8%, its lowest in decades. For its first quarter 2011 earnings release, IBISWorld expects the company will display modest revenue growth and a slimmer profit margin.

Major US Automakers Benchmarked Against Industry Average

Ford Motor Co. (F): Industry Winner
Ford is still the industry darling and a clear turnaround story. As the only one of the Big Three to avoid chapter 11 bankruptcy and large government bailouts, Ford also benefits from extraordinary goodwill in the eyes of the public. Under the leadership of Alan Mulally, Ford was the first of the US automakers to take steps to turn the company’s operations around back in 2005. While Ford’s turnaround has been slower than GM’s or Chrysler’s, the company’s head start allows it to sell more recently refreshed vehicles. Ford’s 2010 profit margin, at 5.1%, edged ahead of rival GM even with GM’s shrunken liabilities. Ford is continuing to outperform in 2011 and is on pace to grab a 17.4% market share, its best showing since 2006. Ford’s truck and SUV sales are soaring, rising 20.8% from Q1 2010 to Q1 2011. Ford is expected to post solid revenue and profit growth in its first quarter earnings release.

Honda Motor Co. (HMC): Industry Average
Honda has always done business differently than its larger rival, Toyota. Honda never made the aggressive push for sales volume that Toyota pursued for the last decade. As a result, Honda’s performance has been less volatile. The company’s US market share peaked in 2009 at 11.0% and is on pace for 10.6% in 2011. Honda has not suffered the reputation damage Toyota has, but it has similar supply chain vulnerabilities that emerged from the aftermath of the Sendai earthquake. Supply chain disruptions are expected to plague Honda in the second and third quarter of 2011. IBISWorld expects that Honda will post modest revenue and profit gains for fiscal 2011 (ending in March 2011).

Volkswagen AG (VLKAY): Industry Winner
Volkswagen remains an automaker in the US market, but the company has ambitious expansion plans. On a global basis, Volkswagen is the largest automaker and the largest foreign automaker operating in China. In 2010, Volkswagen took the first steps in its US expansion plans, opening new plants in Tennessee and Puebla, Mexico, to pursue local production. High labor costs and unfavorable exchange rates have historically put a “German premium” on Volkswagen models in the United States. The launch of the redesigned 2011 Jetta, its bread-and-butter compact sedan, is a taste of what local production and design changes can achieve for the company: the 2011 Jetta starts at just $14,995, compared with $17,335 for the 2010 model. During the first quarter of 2011, Volkswagen’s small car sales rose 22.7% compared to 2010. Overall Volkswagen’s market share dipped to 2.9% for the first quarter, from 3.1% during the full year of 2010. Volkswagen’s US market share is expected to build momentum as the company continues to expand local production and lowers prices, which has proven effective with the 2011 Jetta. Volkswagen is anticipated to post solid revenue and profit growth in its first quarter earnings release.

US Automakers Market Share Over Time (2006-2011)

Industry Outlook
Through 2016, automakers will find the light at the end of the tunnel, with uninterrupted growth in the forecast. The consumer sentiment index is expected to rise 4.3% annually over this period, reaching 95.0, up from 76.8 in 2011. Continuous improvements in credit availability and disposable income will encourage spending on new vehicles. Rising oil prices, which are expected to increase 5.9% annually through 2016, will have mixed effects on the industry. Higher oil prices will temper growth in demand for new vehicles, but they will also make smaller cars more appealing relative to trucks and SUVs. During the five years to 2016, industry revenue is expected to rise annually by 4.2% to $102.2 billion for the Car and Automobile Manufacturing industry and 5.3% to $140.6 billion for the Light Truck and Sport Utility Vehicle Manufacturing industry. In 2012 specifically, IBISWorld anticipates revenue to grow by 8.5% and 6.0%, respectively.

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