AlixPartners Global Automotive Review and Outlook 2013
Flat is the new up - for Western Europe automotive industry, according to AlixPartners study
• Global industry forecast demonstrates a “three-speed world”
• BRIC countries and recovering US market drive global industry growth
• An alarming 58% of European plants are operating below break-even level in 2013, a sharp rise of 50% within just two years
• The most profitable automotive players extend their lead; value and premium segments gain market shares at expense of volume segment
• Global modular platforms account for more than 88% of anticipated industry growth through 2018
The automotive industry has essentially become a ‘three-speed world’ with China, Russia, Brazil, India and the United States engaging “overdrive” to account for 75% of global growth through 2018. Meanwhile Western Europe and Japan will remain stuck in “reverse” gear; and other markets in “low gear”.
The troubles in Europe continue to deepen as a flat market outlook has become a realistic scenario due to structural changes in vehicle demand. With 58% of the top 100 European assembly plants being under-utilized, the issue of overcapacity has increased at an alarming pace.
For the European manufacturers, the players that will emerge stronger from the crisis will be premium brands, have a significant share in growth markets, right-size their industrial foot-print, achieve cost leverage from modular global platforms and invest in future technologies at the same time.
Western Europe: “Flat is the new up”, the downturn appears to be structural
In Western Europe, car sales for 2013 are expected to remain in “reverse gear” for the sixth consecutive year, says the study. Going forward, it says, a flat market outlook has become a realistic scenario, as changes in demand appear to be structural rather than cyclical. At the same time, significant state-aid programs to stimulate demand are unlikely to be put in place due to well-known budget constraints in the euro zone, it notes.
Several developments, says the study, are converging to stifle automotive demand in Western Europe: unemployment among young people has reached record levels, disposable income is stagnating or even declining and aging demographics are likely to lower the demand for new cars. In addition, the decline of cars as status symbols with younger people losing interest in cars and decreasing vehicle density in cities, in conjunction with an increasing trend towards urbanization, is also contributing to a flat outlook, says the study. Meanwhile, on the supply side, constantly improving vehicle durability and rising new-car prices to meet emission and safety requirements are also contributing to these developments.
“Flat is the new up in Western Europe; with no opposing trends, we believe that Western Europe is most likely to experience a flattish market for quite some time to come”, said Stefano Aversa, Co-President and Managing Director of AlixPartners. “Our models show Western European auto sales will reach a low point of 12 million units in 2014, and largely remain there for the foreseeable future – far away from the historical peak of 2007, when 16.8 million units were sold. On the other side, Central and Eastern Europe will continue to grow adding about 2m vehicles in the next five years.”
Global Industry Forecast – the ‘three-speed world’
Globally, the industry is likely to experience a growth of 3% this year, says the study, before entering into a period of over 4% growth per year between 2014 through 2018. Compared with 2012, the global market is set to grow by 28%, or 23 million units, reaching 102 million units 2018, up from last year’s 80 million units.
Despite its recent cooling off, China is still expected to be the powerful engine of this global growth, says AlixPartners. China’s market is expected to grow to 29 million until 2018, a staggering increase of 10 million units in relation to 2012 and accounting for almost 50% of global industry growth. India should be following suit, says AlixPartners, with 2.6 million vehicles estimated to be sold in 2018 – a 79% increase compared to last year.
European production capacity: under-utilization up to 58%
The number of under-utilized assembly plants in Europe has increased at an alarming pace, notes the study. To achieve a break even, approximately 70% to 80% plant utilization is required. Last year’s AlixPartners study noted that an already-discomforting 40% of the top 100 plants across Europe were operating below 75% capacity utilization. In 2013, the number of plants operating below this level is forecasted to increase to 58%. The situation is most critical in Italy, where the average plant utilization has fallen to 46%, France is at 62% and Spain at 67%. Russia, which has an average utilization of 60%, represents a special case, notes the study, as several older plants probably need to be taken out of production to make way for new plants which are needed to prepare for an expected total market growth of 28% between 2012 and 2018.
“The under-utilization of plants in Europe has reached a critical level, and the announced capacity cuts to date will most likely not be enough to cure the situation”, said Stefano Aversa Co-President and Managing Director at AlixPartners. “In order to adjust production to what appears to be low sales expectations for many years to come, capacity would need to be cut back by three million units.”
Pressure Increases on Volume Segments
The AlixPartners study, which segments car brands into “premium”, “volume” and “value”, predicts that the volume segment will continue to be attacked by both premium and value brands. Between 2012 and 2018, it says, the volume segment globally is set to lose two percentage points of its market share. Nonetheless, it notes, the volume segment is still likely to remain the largest segment, with a 59% share of total car sales globally.
Meanwhile, says the study, premium brands are set to improve their market share from 9% to 10% in that period, possibly breaking the 10 million-unit barrier in 2018, up from 7 million in 2012. Value brands are expected to move up from 23.0 million vehicles sold in 2012 to 31.1 million by 2018, an increase of 8.1 million units.
Dynamic growth will also be seen in the super-luxury market, says the report. While North America is likely to remain the most important super-luxury market, at 31,000 units in 2018, the Middle East and China will account for the largest growth of the segment. Within only 15 years, between 2003 and 2018, these regions could experience a 21-fold and a 133-fold demand increase respectively, says the study.
Gaps between Companies to Widen
In terms of financial performance, the study notes a widening gap between automotive companies, especially in Europe. Some successful companies are generating high earnings and investing heavily in R&D, while others are only managing to spend a fraction on these necessary measures.
“There is a clear link between the financial strength of a manufacturer and the investments made in developing new technologies and new products”, said Stefano Aversa Co-President and Managing Director at AlixPartners. “Some players simply cannot afford to spend more than the bare minimum in the current market conditions, and, hence, are increasingly in danger of losing even more ground in the future.”
The study also shows, however, that the global industry has reached a high degree of collaboration and integration, as it has become common practice to source technologies, engines or even entire platforms from competitors. Today, it notes, there are more than 15 joint ventures and 25 alliances among automotive companies, covering almost every imaginable aspect of the production process - from collaborative development projects to shared production facilities to sales partnerships.
In response to cost pressures in the industry and to the need for investments in new technologies, the study notes that companies around the world must intensify their focus on partnerships and joint ventures in areas ranging from purchasing to R&D to production. Also, it notes, with a total of 152 deals in the last five years, private equity firms continue to be active in deals involving auto suppliers, with increased interest in the last year.
“Global modular Mega-Platforms”: Opportunities for Some, Challenges for Others
According to the study, one of the main factors which will determine the winners and losers of the future will be platform modularization. Platforms of the future will be increasingly modular and global, and more “mega” – with some able to accommodate up to 10 vehicle families. In other words, these new kind of platforms will be able to field everything from SUVs to sports cars, from entry-level to luxury and from conventional-power trains to electric drives, while also allowing for significant geographic adaptions in order to respond to local requirements and enable local parts sourcing.
Vehicle production using global platforms is set to increase by 63% over the next five years, says the study, and to account for more than 88% of industry growth through to 2018. In that year, it says, 48% of total global production volume, or 50 million units, will be produced on the basis of mega-platforms. By comparison, this was only true for 37% of global production in 2012.
“Only about 10 platforms will generate 25% of global production. The key to success for automakers is to design these new architectures from the beginning in order to be flexible enough to tailor vehicles to local customer preferences whilst maintaining cost advantages”, said Stefano Aversa.
According to the study, doubling production volumes from a given platform allows cost-savings in the range of 10-20% in non-recurring costs and 4-8% in recurring costs. This can translate into several hundreds of euros in cost savings per vehicle, says the study.
Auto Production Continues to Move East
China, despite some cooling down in the past year, is set to continue to be the global pace-setter for the foreseeable future, says the study. In 2012, the study notes, the country produced 18.3 million light vehicles, compared to 10.2 million in the U.S, the second largest production region globally. Chinese production, which was 1.85 million units in 2000 (just one tenth of today’s output), is expected to grow to 28.8 million by 2018, says the report. Two other winners in the emerging markets in 2012 are India, with 3.7 million vehicles produced (now ranked sixth among global automotive producers), and Thailand, with 2.8 million vehicles produced (ranked ninth). Both countries were well below one million vehicles in 2000. Brazil has doubled its annual car production since 2000, to 3.2 million units, thus becoming the world’s seventh largest car producer and the biggest in South America.
Europe has also seen major shifts in car production. France, Italy, Spain and Belgium saw shrinking production volumes ranging from 34% to 62%, while the Czech Republic was able to more than triple its output to 1.2 million units since 2000. Italy, which was ranked 11th in 2000, has slipped out of the top 20, down to rank 22 in 2012. Germany, on the other hand, has been able to hold its ground and slightly increase its car production, by a moderate 16% over the past 12 years.
Complete study available upon request
AlixPartners is a global business-advisory firm offering comprehensive services in four major areas: enterprise improvement, turnaround and restructuring, financial-advisory services and information-management services. Founded in 1981, the firm has offices around the world, and can be found on the Web at www.alixpartners.com.